Mr. Minister, ladies and gentlemen: We bid you a cordial welcome to this luncheon meeting of The Empire Club of Canada.
Lawyers have always had difficulty with money and particularly the meaning to be attributed to that word when used in a will. In origin it was restricted to coin of the realm, but in 1725 in Shelmer's case the meaning was extended to include money on deposit and this became its settled legal meaning. Needless to say, much harm was wrought by this and, indeed, the rule was said to be a blot on English jurisprudence because in many cases the intention of the testator was thwarted by the court's application of the strict rule. Then in 1943, in a decision of the House of Lords, the matter was put right. Two hundred years of jurisprudence was reversed by the Court holding that money had no prima facie meaning but took its meaning from the particular will in which the term appeared and, in some circumstances, it ought to be construed to include the whole of a man's estate. It was in this connection that there fell from the lips of Lord Atkin, one of my all-time favourites in legal literature, when his Lordship said:
I anticipate with satisfaction that henceforth the group of ghosts of dissatisfied testators who, according to a late Chancery judge, wait on the other bank of the Styx to receive the judicial personages who have misconstrued their wills, may be considerably diminished. It will be a relief to the whole legal profession that at last what the Master of the Rolls called a blot on our jurisprudence has been removed.
Our distinguished guest and speaker today knows a lot about money. Though his biographical profile does not fit exactly that portrayed by Arthur Haley's Money Changers, still he has had an interesting and successful career.
Nicholas L. Deak was born in Hungary. He studied in Switzerland where he received his Ph.D. degree in International Finance from the University of Neuchatel.
In 1942, he joined the U.S. Army and subsequently served with the Office of Strategic Services as well as the State Department in various parts of the world. He was discharged in 1946 with the rank of Major. Mr. Deak is immediate past President of the Veterans of OSS.
Since 1946, Mr. Deak has built up a network of what is today the largest and oldest foreign exchange operation in the United States, with offices in Canada, the Far East and Europe. He is President of both Deak & Co., Inc., and Perera Company, Inc. The organization under his control has 57 offices in the United States and abroad.
Mr. Deak is also President of Deak National Bank in Fleischmanns, New York, and his organization has controlling interest in Swiss and Austrian banks.
He is Chairman of the International Commercial Lending Committee of the American Bankers Association, and he is an Adjunct Professor in Law at the New York Law School, teaching International Banking.
It is a privilege to introduce our distinguished guest and to call upon him to address you on "The Monetary Muddle".
Mr. Minister, honoured guests: First of all, I'd like to call your attention to a mistake on the invitation of the Empire Club. The text reads that I jog every morning six miles before breakfast. It is not true. I jog only three miles.
Not long ago I had the pleasure of introducing the Finance Minister of South Africa at a monetary conference in Lausanne. When he finished his speech he said, "Ladies and gentlemen, now that I have finished my speech, I would like to say something!" Before I start my speech, let me say something. I asked your distinguished President how long I should speak. He said, "Mr. Deak, you can speak as long as you want, provided all the members and guests can get away by 1.45."
I prepared a speech, because I wanted to clarify in my mind what I am going to tell you, but I have learned through bitter experience never to read a speech. Once I planned to read a speech and dictated it to my secretary for transcribing. She handed me the folder just before I left. I opened the folder and read the first page. When I got to the second page I found a note: "Dear Mr. Deak. I have difficulty in transcribing your dictation. I cannot understand your accent. I am resigning." That taught me a lesson!
Since our time is limited, and since you want to hear something about money, let's talk about money. The most important money is the dollar, and the most important dollar is the U.S. dollar, with all due respect to the Canadian dollar. Nothing has replaced the U.S. dollar as a medium of international exchange, despite the difficulties which we went through and despite the difficulties we now find ourselves in.
You can look at the U.S. dollar from two angles. What is the value of the U.S. dollar internally, in the United States, and what is its value externally, outside the United States?
Let us talk about the value of the U.S. dollar in the United States. The value does not depend upon the wage demands of the working class or the wage earners. It does not depend on the production schedule of industry. It does not depend on the interest rate that all those nasty bankers are charging. It depends, almost exclusively, on the deficit spending of the government. Since our government is engaged in deficit spending, and we have had deficits every year for the last fifteen years with the, exception of 1969, we must have inflation. The inflation is created by our own government. Our government is created by us. So let us not blame certain segments of industry, labour, banking, finance. Let us blame ourselves because we keep sending representatives to our governments who approve deficit spending. As long as our government is engaged in deficit spending we will have inflation. The size of the inflation will depend on the deficit. If the deficit is large, inflation will be high. It is that simple.
There are fluctuations. There are certain effects which labour, industry and finance can exercise on inflation, but basically inflation depends on the deficit spending of the government.
Why is the government engaged in deficit spending?
Because our political system is such that the members of the House of Representatives and the Senators have to do favours for their electorates. They want to be reelected. They have to approve certain expenditures.
The federal deficit in the United States in 35 years went from $40 billion to $700 billion. There is no doubt in my mind that this debt can never, never be repaid. The interest which our federal government has to pay on federal debt increased, in the last 35 years, from $1 billion to $45 billion per year. Spending by government agencies, federal, state and local, in the United States amounts to $2000 per person per year. I believe that it is even higher in Canada.
Why can we not avoid deficit spending? I'd like to give you a few figures. In the United States, the number of people collecting social security is 32 million. Medicaid benefits are collected by 23 million. People receiving food stamps total 18 million. People helped under Medicare (which is different from Medicaid) number 13 million. Children in school lunch programs, very worthwhile, are 27 million. Railroad retirement benefits go to one million people. There are twelve million members of families receiving aid for dependent children. There are over eleven million workers receiving unemployment compensation. Half a million disabled coal miners receive aid, as well as one and a half million civil service retirees and over two million military personnel, and one million military retirees. The aged, the blind, the disabled, a total of four and a half million, almost three million government workers, five million veterans and survivors--all collect pensions or compensation.
This money has to come from somewhere. It comes from us. At the present time 38% of the gross national product of the United States goes into taxes, federal, state and local. At the rate at which taxes are increasing, in the next 25 years it will be 75 or 80% of our earnings. That means that we will have to give up our economic liberty, and if we do that we will also have to give up our political and social liberties.
The remarkable thing is that members of the cabinet in Washington are aware of this. Just yesterday, our Secretary of the Treasury, Mr. Simon, made the following statement: "A government that taxes away more than half of what they earn has robbed them of a great part of their economic freedom. Can there be any doubt that when our economic freedoms are destroyed, our political and personal freedoms will not long survive."
We cannot hope and we cannot expect that the inflationary trend will reverse itself. We live in a period where we know that our money will buy less tomorrow, less next month, and less next year. It is just a question of how much less.
Where is it going to lead? In my opinion, it must lead to disaster. In a world of grave inflation, there is always one part of the population which benefits. These are the people engaged in business who are intelligent enough and knowledgeable enough to see what is happening to the money. The majority of people, relying on fixed incomes or on past incomes, will suffer. There will be a great shifting in the social structures of the country.
Since the United States of America is the largest economic unit in the world, whatever happens there greatly affects the world. It cannot isolate itself from the world. Little Switzerland is trying, as much as it can, but even the Swiss cannot live by themselves.
That is the situation within the United States. We have to live with that situation because the government is not strong enough and cannot be strong enough to refuse to sign a social security cheque, an unemployment cheque. They have to help somehow. How do they help? By printing money. But by printing money, they do not increase the wealth of the country. If you have a bottle of milk, and you add water to it, you might get two bottles of liquid, but you don't get more nourishment. By printing more money, to enable it to cope with all the expenditures which the government is engaged in, you create more money but you don't create more purchasing power.
Let us take a look now at the value of the dollar outside the United States. Outside the United States, the dollar is a commodity--like copper, silver, grain, or anything else. When you have a surplus of these commodities, the price is bound to go down. When you have a shortage, the price goes up.
When our balance of payments is negative, that means that we are spending more dollars abroad than we take in. Hence, there is a surplus of dollars outside the United States. I am oversimplifying it, but basically this is the situation. If you look at the balance of payments figures, you can determine what the future value of the dollar will be. Conversely, if you look at the value of the dollar outside the United States, you know what the balance of payments situation is.
The balance of payments of the United States has been negative for many years. What happens to those excess dollars which the United States has exported?
Do not confuse the balance of payments with the balance of trade. In your country, the balance of trade, your exports, is more than 20% of your production. You export more than 20% of whatever you produce. In the United States, we export only 7% of whatever we produce. The western European countries, depending on which country, go as high as 50% of their total production being exported. When in the United States we have a balance of trade which is positive, that is not of great significance, as far as our balance of payments is concerned, because it is only a small segment of our economy. The foreign trade segment in Canada is larger, proportionately, than in the United States.
When we export a few billion dollars more, from the United States, than we import, and the headlines tell us that the balance of trade is positive, this is almost meaningless as far as our balance of payments is concerned. It is the capital movement which is important.
But it is interesting that in most countries, when people see these headlines about our positive balance of trade, they think in their own terms because a positive balance of trade is important for them. They think that if the U.S. balance of trade is positive, then internationally the United States must be in a good financial position. That is not so. As far as the balance of payments is concerned, that is very fluid. No country, not the United States, Canada, or any other country, can determine exactly what the movement of capital is. We just do not have the statistical skill or information to list all transfers. Not all transfers go through those channels which can be analyzed and listed in statistical releases. If the dollar abroad weakens, we know that our balance of payments has weakened. If the dollar strengthens, we know that our balance of payments, at least temporarily, is better.
As other countries develop deficit spending problems, maybe our balance of payments is better than theirs. Maybe. So the strength of the dollar does not depend only on the strength of the United States. It depends also on the weakness of other countries.
There was a period when Far Eastern and South American depositors in U.S. banks lost faith in U.S. dollars, seeing from year to year unfavourable balance of payment figures, seeing from year to year the new restrictions which were introduced concerning capital investment abroad (which now have been cancelled). They transferred their funds from the United States to western European countries. This resulted in an increase in the deficit of the balance of payments, and added further headaches to our economic problems in the international field.
At the beginning, some of the foreign countries were cooperative and accepted our dollars as a reserve currency, and they issued in exchange their currencies. They bought our dollars, they piled up our dollars, because the dollar in the past was "as good as gold". They added our dollars to their gold reserves as reserve. By doing that, they created inflation in their own countries, because they issued additional bank notes, additional currencies against our dollars. When they discovered the havoc which this had played in their own countries, they discontinued accepting U.S. dollars. The central banks today, in western Europe, as a rule will not take dollars from the commercial banks, certainly not at the fixed rate. They take them only if they temporarily want to smooth out the fluctuations.
So the value of the dollar of the United States depends greatly on the faith of the world in our economy, or the lack of faith in their own economies.
Our economy is the strongest in the world but it is built on dollars. You measure your performance in dollars. You measure the value of your production, your labour, in dollars. But if the dollar is not something stable, if the dollar loses its value, there is no more measure. Our system is bound to collapse, and with it the whole world, because other economies lean on the strongest economic unit in the world which is the United States.
That is a sad picture which I have presented. Let me tell you that it is not going to happen tomorrow. We all have a few more years to enjoy life. Well, let's do it!
Somebody asked me, what should I do under such circumstances? He is living on his income from past savings. One of my friends suggested that he build a factory to manufacture handkerchiefs Everybody will need handkerchiefs! I repeat. In this inflationary world, there is always some group of people who will live very well. We have seen that in the past, as for example in the European inflationary periods.
What we don't realize is that right now, in these years, societies are collapsing because of inflation. Look at Chile and Argentina. Their problems are not only political. Their economic problems, inflation, brought political upheaval. Societies are being wiped out. We have seen this in Indonesia, a tremendously large country. India and Pakistan are not very well off. There are always inflations going on in some countries, but often they are so local that they don't affect the world. The smart people there, before the inflation gets out of hand, have already put their money into better currencies, or in gold or silver or some other form of investment.
I mention gold and silver. Is it worthwhile for us to put our savings in gold? I don't know. I only know that in many thousand years of history, gold always survived paper money. I also know that history repeats itself. And I also know that there is nothing new under the sun. The "new" is only something we have not learned from history, but it has always existed.
If you put your money into gold, you don't earn interest. If the gold price goes up, you lose interest. If the gold price goes down, you lose money on your investment. The price has been going down during the last year, but we all forget that over the last five years the gold price went up and up and up. Gold is very vulnerable at the present time, because immense quantities are with the International Monetary Fund, and they have stated that they intend to sell.
I have an unkind word for the International Monetary Fund, not because they want to sell gold but for another reason. The Fund is run by ministers of finance, and we know that ministers of finance cannot maintain financial order in their own countries. How can we expect that the same people can maintain financial order in the world? They have stated that some of the gold must be sold, and they might or might not reach the point when they will really sell. But just the announcement that they wanted to sell depressed the gold price. Whether the gold price will be further depressed when they do start to sell, I do not know. I think it may have already been discounted. Maybe it would be a good idea for those who hold gold to stick with it, and for those who don't to wait a little, because we really don't know what either the International Monetary Fund or the U.S. government will do. The U.S. government also has large quantities. I believe that Secretary Simon is a very levelheaded gentleman who knows exactly what is going on in the world, but I don't think he can help us. He is swimming with the stream.
As the chairman of the Hungarian National Bank said: "Three hundred economists and politicians want to convince three billion people that gold has no monetary value." And that is a Communist chairman!
I believe that gold has a monetary value, whether we like it or not. There is nothing to replace it. It is not a metal which I love. Actually it is rather silly. People go down, deep in the earth, and bring it up to the surface. Then we go to Fort Knox and put it deep down in the earth again. But nothing else has been found to replace it.
How about silver? There are no government stocks to speak of which would be a load on the market. The government cannot interfere with the silver market. The United States government, which had many years of world production of silver in stock, sold it out some eight years ago. When they sold out some five years of gross production of silver in two years, the silver price went up. The same thing might happen with gold! I don't know.
Silver has the advantage that governments cannot interfere in its price, except by taxation, and it is hard to grab it. A lot of people believe that since silver is not exposed to political decisions but only to economic trends, maybe silver investment is a wiser investment than gold. It is also bulkier, which is not an advantage. Silver consumption is far in excess of silver production. Production cannot catch up with consumption. That lies in the nature of silver production. At the present time, there are still some private stocks of silver which are coming on the market, and the price has been strong. In my opinion, it is an investment which some people should consider.
How about the Swiss franc? Switzerland is a fabulous country. I do not say so just because I studied there and I have many friends there, or because we have a bank there, but because it is a country which sometimes voluntarily creates a depression, it intentionally creates unemployment. I believe they have now 10,000 Swiss unemployed. They are in a situation where they can export unemployment, because of foreign labour. Some 25% of the labour force is foreign. If foreign labourers become unemployed, they just do not renew their working permits. They have to leave the country.
The Swiss want to control their own economy. They may reduce building permits. They may create a crisis in the real estate market, intentionally. They try to maintain a healthy economy, but they cannot isolate themselves because they are part of Europe and they have to take into consideration the situation in the surrounding countries. Switzerland has very little deficit spending, unlike Germany and France where deficit spending has now become common practice. The Swiss franc has been going up and up in relation to the dollar. Those who bought Swiss francs five years ago find that the Swiss franc has appreciated, in relation to the dollar, some 40 to 50%.
Whether this will continue, I don't know. The Swiss are a bit concerned that if they out-price themselves with a strong Swiss franc they might lose their tourist trade and that trade is a very important income for them.
But lots of people feel more comfortable with the Swiss franc than with any other currency, even though on Swiss francs you earn very little interest. You even have to pay or are charged with so-called "negative interest" if you have a Swiss franc deposit in Switzerland. That is why many people have Swiss franc deposits in Austrian banks or in banks in other countries, where they can avoid the negative interest and the withholding tax which Switzerland imposes on interest and dividends.
These are all things to which you might give some thought or some study. I have expressed to you my uncertainties concerning Swiss francs, silver, and gold. But in one area I am not uncertain, and that is that the dollars which you carry today will not buy the same quantity of goods and services next year.
I would like to read a quotation from Patrick Henry, who delivered a famous speech in which he said, "Give me liberty, or give me death." In 1775 he also said: "It is natural to man to indulge in the illusion of hope. We are apt to shut our eyes against a painful truth. For my part, whatever anguish of spirit it may cost I am willing to know the whole truth, to know the worst and prepare for it.
Our distinguished guest and speaker was thanked by Mr. Michael A. Stevenson, C.A., a Director of The Empire Club of Canada.