197408hr Intpetrodollar PDF

INTERNATIONAL PETRODOLLAR CRISIS
HEARINGS
BEFORE T H E
SUBCOMMITTEE ON INTERNATIONAL FINANCE

OF T H E
COMMITTEE ON BANKING AND CURRENCY

HOUSE OE REPRESENTATIVES
NINETY-THIRD CONGRESS
SECOND SESSION
JULY 9, AND AUGUST 13, 1974
Printed for the use of the

Committee on Banking and Currency
U.S. GOVERNMENT PRINTING OFFICE

37-211 O WASHINGTON : 1974
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C O M M I T T E E O N B A N K I N G A N D C U R R E N C Y
W R I G H T PATMAN, Texas, Chairman

W I L L I A M A. BARRETT, Pennsylvania W I L L I A M B. WIDNALL, New Jersey
LEONORK. (MRS. J O H N S . ) SULLIVAN, ALBERT W. JOHNSON, Pennsylvania
Missouri J. W I L L I A M STANTON, Ohio
HENRY S. REUSS, Wisconsin BEN B. BLACKBURN, Georgia
THOMAS L. ASHLEY, Ohio GARRY BROWN, Michigan
W I L L I A M S. MOORHEAD, Pennsylvania LAWRENCE G. W I L L I A M S , Pennsylvania
ROBERT G. STEPHENS, JR., Georgia CHALMERS P. WYLIE, Ohio
FERNAND J. ST GERMAIN, Rhode Island MARGARET M. HECKLER, Massachusetts
HENRY B. GONZALEZ, Texas P H I L I P M. CRANE, Illinois
JOSEPH G. M I N I S H , New Jersey JOHN H. ROUSSELOT, California
RICHARD T. HANNA, California STEWART B. McKINNEY, Connecticut
TOM S. GETTYS, South Carolina B I L L FRENZEL, Minnesota
FRANK ANNUNZIO, Illinois ANGELO D. RONCALLO, New York
THOMAS M. REES, California JOHN B. CONLAN, Arizona
JAMES M. HANLEY, New York CLAIR W. BURGENER, California
FRANK J. BRASCO, New York M A T T H E W J. RINALDO, New Jersey
EDWARD I. KOCH, New York
W I L L I A M R. COTTER, Connecticut
PARREN J. MITCHELL, Maryland
WALTER EL FAUNTROY,
District of Columbia
ANDREW YOUNG, Georgia
JOHN JOSEPH MOAKLEY, Massachusetts
FORTNEY H. (PETE) STARK, Jr.,
California
L I N D Y (MRS. H A L E ) BOGGS, Louisiana
P A U L N E L S O N , Clerk and Staff Director
C U R T I S A . P R I N S , Chief Investigator
BENET D . GELLMAN, Counsel
J O S E P H C . L E W I S , Professional Staff Member
D A V I S COUCH, Counsel
O R M A N S. F I N K , Minority Staff Director
HENRY B. GONZALEZ, Texas, Chairman

HENRY S. REUSS, Wisconsin ALBERT W. JOHNSON, Pennsylvania
W I L L I A M S. MOORHEAD, Pennsylvania J. W I L L I A M STANTON, Ohio
THOMAS M. REES, California P H I L I P M. CRANE, Illinois
R I C H A R D T. HANNA, California B I L L FRENZEL, Minnesota
WALTER E. FAUNTROY, JOHN B. CONLAN, Arizona
District of Columbia CLAIR W. BURGENER, California
ANDREW YOUNG, Georgia
FORTNEY H. (PETE) STARK, JR.,
California
ROBERT G. STEPHENS, JR., Georgia
(II)

CONTENTS
Page
Hearings held on
July 9, 1974 1
August 13,1974 75
Background material on the "International Petrodollar Crisis" prepared
by the staff of the Subcommittee on International Finance 123
Statements
Bennett, Hon. Jack F., Under Secretary of the Treasury 5

Grant, James P., president, Overseas Development Council 12
Kurtz, Victor, E lvie Import Corp., New York, N.Y 62
Wallich, Hon. Henry C., member, Board of Governors of the Federal Re-
serve System 77
Additional Information Submitted for the Record
Board of Governors of the Federal Reserve System, statement presented

by Hon. Henry C. Wallich, member of the Board 77
Gonzalez, Hon. Henry B., excerpts from articles appearing in:
Foreign Affairs, July edition, by Walter Levy 76
Washington Post 76
Grant, James P., prepared statement 20
Kurtz, Victor:
"Controls Put On Currency Mart Trade," article from the Journal of
Commerce of July 11, 1974 70
"Foreign Exchange Abuses by Some Banks Alleged at Convention,
Spurring Debate," article from the Wall Street Journal of
April 11,1974 69
Letters from:
Chairman Wright Patman, dated August 16, 1969 72
Hon. William Proxmire, U.S. Senator from the State of Wisconsin,
dated:
May 5, 1971 72
October 4, 1971 73
Joseph A. Califano, Jr., former Special Assistant to President
Lyndon B. Johnson, dated February 5, 1968 72
"Pricing Impact Called Global," article from the New York Times of
January 17, 1974 68
Overseas Development Council, statement presented by James P. Grant,
president 12
Treasury Department, statement presented by Hon. Jack F. Bennett,
Under Secretary of the Treasury 5
Wallich, Hon. Henry C., prepared statement 83
(in)

T U E S D A Y , J U L Y 9, 1974
H O U S E OF REPRESENTATIVES,
SUBCOMMITTEE ON I N T E R N A T I O N A L FINANCE,
OF T H E COMMITTEE ON B A N K I N G AND CURRENCY,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:10 a.m., i n room
2128, R a y b u r n House Office B u i l d i n g , the Honorable H e n r y B. Gon-
zalez [chairman of the subcommittee] presiding.
Present: Representatives Gonzalez, Rees, Hanna, Young, Johnson,
Crane, Frenzel, and Burgener.
M r . G O N Z A L E Z . T h e subcommittee w i l l come to order. I am going to
announce f r o m the outset that unfortunately many of the members of
this subcommittee are also members of the Housing Subcommittee, of
which I am also a member, and today the conferees on the housing
b i l l are meeting to see i f they can reconcile their views. I am sure t h a t
we w i l l be getting additional members as they leave the conference.
B u t under the rules, the subcommittee is permitted t o proceed. I
believe t h a t the first t h i n g we should mention is i t is a very happy
occasion because Secretary Bennett w i l l be f o r m a l l y inaugurated at
noon, he tells me, to replace our f r i e n d P a u l Volcker as the Under
Secretary f o r Monetary Affairs, and so this is really an auspicious
occasion i n more ways than one.
I t h i n k we ought t o explain t h a t one of the i m p e l l i n g reasons f o r
this projected series of meetings goes back to what some of us have
f e l t very keenly f r o m the beginning, and t h a t is t h a t i n this area or
sphere o f action, the Congress sits sort o f as a reacting body. The
President makes an announcement, and subsequent to t h a t we are
asked t o consider intricate monetary matters i n v o l v i n g monetary
legislation, the question of our continuing obligations w i t h respect t o
the international financial institutions, the consequent impact on the
domestic matters, and so this has relegated to this subcommittee a new
area o f responsibility. I was a member of this subcommittee f r o m the
first pionth t h a t I came to the Congress i n 1962, and t o give you an
idea of how the emphasis has changed, between January 1962 and
1971, this subcommittee met f o u r times. B u t between 1971 and today
we have met almost 20 times. So we have a relatively obscure and inac-
tive subcommittee now confronted w i t h some pretty heavy responsi-
bilities i n a very intricate and complex area, and one i n which the
Congress does not have the primacy o f i n i t i a t i n g policy, and yet we
feel very keenly t h a t we have a d u t y and a responsibility t o discharge.
A t this particular time we are very much concerned w i t h what has
developed since the o i l crisis and the very heavy outflow of our moneys
because of the tremendous increase i n the price of the oil t h a t we must
import.
(l)

2
I n these hearings we w o u l d like t o cover the f o l l o w i n g topics, spe-
cifically: (1) what oil-producing countries w i l l do w i t h t h e i r new
f o u n d wealth as i t would have an impact on our international policies,
and consequently domestic policies: (2) the potential damage t o the
I n t e r n a t i o n a l Monetary System and t o the w o r l d economy as a result
o f a petrodollar g l u t ; (3) the v i a b i l i t y of the proposals f o r recycling
petrodollars. W e pick up the newspaper and we find t h a t we have f o r -
eign news stating t h a t the President i n his recent trij> t o the M i d d l e
East either made o r i m p l i e d some commitments i n this respect. I f i t
is possible, the Congress w o u l d like t o know at this t i m e the details of
any commitments so t h a t we can provide at least a sympathetic back-
ground, i f such becomes necessary, instead o f w a i t i n g u n t i l i t develops
into a crisis, and then we would have knockdown and d r a g out legis-
lative fights similar t o the ones we had recently w i t h I D A .
I m i g h t mention by way of parentheses here t h a t the f u l l committee
has created an ad hoc subcommittee chaired by the Honorable T o m
Rees f r o m C a l i f o r n i a t h a t w i l l go specifically into the o i l deficit prob-
lems o f the developing w o r l d .
F o u r t h , w h a t the U n i t e d States should be doing about the petro-
dollar problem and its l i k e l y detrimental effects.
A s background, I w o u l d like to f o r the record cite a few facts and
opinions t h a t contribute, at least i n part, t o the c a l l i n g o f these hear-
ings. H o b a r t Rowen, i n the Washington Post, says, and I quote :
Everything done so far in the wake of the oil crisisfor the industrial or the
developing countriesincluding the steps taken at the C-20the group of 20
countriesis inadequate or spineless. Untold hazards lie ahead unless there is
some alteration in the vast shift of funds demanded by the oil producing and
exporting nations. That requires lower oil prices.
D r . A r t h u r Burns, Chairman of the Federal Reserve Board, who
w i l l appear before t h i s subcommittee early next month, i n a recent
letter t o me said " f o r the longer run, I see no viable alternative t o a
reduction i n the price o f petroleum."
W o r l d renowned o i l economist W a l t e r J . L e v y , w r i t i n g i n F o r e i g n
A f f a i r s , warns t h a t we are witnessing an erosion of the world's o i l
supply and financial systems, comparable i n its potential f o r economic
and p o l i t i c a l disaster t o the Great Depression or the 1930's.
T h e respected Economist magazine said, a n d I quote:
The world's rich countries are digging the foundations for a major world de-
pression. The rich are almost doing everything possible to insure a trade war
and a slump.
I n M a y , the M a n a g i n g Director o f the I n t e r n a t i o n a l Monetary
F u n d said:
I t is no exaggeration to say that the world presently faces the most difficult
combination of economic policy decisions since the reconstruction period follow-
ing World War I I .
P r o f . M . A . A d e l m a n o f Massachusetts I n s t i t u t e of Technology, i n
a speech before the National Press C l u b said:
My opinion is that what's bad for the cartel is good for the United States. The
burden for paying for oil imports has been exaggerated but is still very great.
For most of the underdeveloped countries, it is ruinous. There is no way they
can pay, and we will need to bail them out. We are embroiled with our friends
and trading partners in attempts to shove the burden of higher prices on each
other. Our Government denounces bilateral deals of armaments or other goods

3
for oil, while we, ourselves, negotiate one of the biggest bilateral deals of all.
The cartel is making the world a much more dangerous place. A vast arms
buildup is just beginning in the Persian Gulf.
What do the oil prices and their increases mean to the less developed
countries? These countries face an additional import bill approaching
$10 billion, a figure roughly equivalent to their total official develop-
ment assistance. For the industrialized world, Italy is reported to be
nearly bankrupt and France and Great Britain may not be far
behind.
The oil producing nations will, this year, run up a trade surplus of
$65 billion, compared with $7 billion last year. Bankers have expressed
fears that this petrodollar glut will wreck the Eurodollar markets and
cause havoc in the foreign exchange markets.
The fact is that the oil producing and exporting countries form a
group that consists, and in reality is. an international oil monopoly
which has quadrupled prices i n a period of less than a year and
threatens to do something in the way of an increase every 3 months
as regular as a clock. I n the Mideast, the oil prices are 70 times the cost
of production. By no stretch of the English language can this be de-
scribed as anything but price gouging.
I have read about the plans for recycling the oil producers' revenues
through the I M F and other institutions and I feel that such plans at
least are certainly necessary to be formulated, but more importantly,
I have watched as we scurry about trying to find ways to channel some
of this oil money back to the less developed countries. How long can
the world tolerate such a situation in which we must beg the extor-
tionist to aid his victims. I cannot see any other way to describe the
poor countries but as victims. None of the proposed aid programs can
even make a dent in the increased burden on the less developed
countries.
Where is there a country today which would permit within its
boundaries the operation of a monopoly which cruelly manipulates
supply and gradruples prices ? Even the most laissez-faire government
in the world would have to try to cope with such a monopoly. Yet
OPEC and the Secretary General threaten us when we talk about
getting together with other consuming nations. The Arab oil producers
make no pretense about their continuing willingness to use their oil
and new found wealth as political blackmail.
OPEC points out that the prices of wheat and other goods have
risen substantially, and therefore, i t is all right for oil prices to go up.
But the United States, Canada, and the other wheat exporters have
not colluded to raise the price of wheat to a price 70 times its cost.
By exercising monopoly power over a vital commoditypower
which we have never thought to be morally righta small group of
people may control by 1980, 70 percent of the world's total monetary
reserves.
Here is clearly the new generation of robber barons. I feel that the
oil producers are engaged in economic warfare no less serious to the
continued peace and prosperity of the world than armed warfare.
The staff of this subcommittee has prepared background material
which has been placed before each member. I wish to place this mate-
rial in the record at this time with unanimous consent.

4
[ T h e background material referred to appears at the end o f the
hearing, and may be f o u n d on page 123.]
M r . G O N Z A L E Z . W e can proceed w i t h witnesses, t o whom I wish to
express a profound note of thanks f o r their willingness to take time
t o be w i t h us, and also, as I said to those who were absent at the time,
today coincides w i t h M r . Bennett's swearing i n as the replacement and
our new U n d e r Secretary f o r Monetary Affairs.
I t h i n k i t is a happy occasion and we wish you complete success and
assure you o f our cooperative interest and willingness t o do w h a t we
can on our level and f o r our pant t o w o r k w i t h you.
M r . Bennett, would you proceed, unless a member of this subcommit-
tee wishes t o make some p r e l i m i n a r y remarks a t this time. M r . Hanna.
M r . H A N N A . M r . Chairman, since I have t o go t o the H o u s i n g Sub-
committee meeting, I would appreciate i t i f I m i g h t put on the record
about 5 minutes of observations.
M r . G O N Z A L E Z . W i t h unanimous consent, and there being no objec-
tions, so be it.
M r . H A N N A . I apologize to M r . Bennett f o r t a k i n g this time, but I
would like t o summarize f o r the record of this subcommittee m y own
extraction of i n f o r m a t i o n f r o m m y visits to the finance ministries
of both Saudi A r a b i a and K u w a i t . I t h i n k t h a t at the outset one sees
the history of the investment of the A r a b oil countries as h a v i n g t w o
prime principles: One, l i q u i d i t y , and the other, anonymity.
T h e Arabs have sought this over the years. I n this new f o u n d
wealth they realize t h a t they have to go beyond that, and they indi-
cated t o me that they had three basic desires f o r the use of t h a t money.
The first was t o invest i n the extension of petrochemical and other
related industrial activities w i t h i n their own lands and f o r the better-
ment of their own people on the basic community facilities level.
T h e second t h i n g they wanted to do was invest i t i n other A r a b
countries who d i d not produce oil, t o make investments i n industrial-
ization activities, agricultural activities, and i n the general improve-
ment i n housing, education, and so f o r t h .
The t h i r d t h i n g they wanted to do w i t h t h e i r money was to invest
i t i n the M u s l i m countries of A f r i c a , and they had i n m i n d some k i n d
of an A r a b f u n d f o r underdeveloped M u s l i m countries. They indicated
to me that they were w i l l i n g t o include underdeveloped countries who
were not M u s l i m so that they would not preclude some of the countries
who are suffering because of the h i g h price of oil.
T h e other t h i n g they t o l d me was their attitude t o w a r d the price of
oil. They said they were p r i c i n g oil on this basis, first, to discourage
the h i g h use of i t i n industrialized countries, which they f e l t was to
some degree wasteful; second, to find a competitive price to any al-
ternative to o i l and consider that as one of the hallmarks of pricing.
The other t h i n g that they were looking at was the problem of convert-
i n g oil i n the ground to some other k i n d of asset t h a t would be equal
i n value and i n safety to the o i l i n the ground.
They indicated to me that the transfer of oil i n the ground t o the
currencies t h a t they saw around the w o r l d d i d not look too attractive
because those currencies were subject to float. I was there r i g h t after
the French had floated down 5 percent and they had just sold a large
cargo of oil to the French and they could not understand w h y they

5
should take the 5 percent rap by h a v i n g picked up the French cur-
rency. So they said as long as currencies are subject t o these kinds of
float and unless there were some k i n d of quick investments i n the
Western W o r l d or preferably they would like to see their oil, i n terms
of the Western W o r l d , coming back as the needed materials, technolo-
gies, manpower, machines, t h a t would do the three jobs t h a t they
sought i n terms of industrializing t h e i r own country, i m p r o v i n g the
non-oil-producing A r a b countries, and i n doing the w o r k they hope
t o be able to do i n the underdeveloped countries.
I t seems to me t h a t the U n i t e d States has been somewhat derelict i n
not finding where the A r a b m i n d is i n these matters, and i n t r y i n g to
w o r k out a cooperative program. The most promising t h i n g , as you
have indicated, M r . Chairman, that I have seen is the willingness on
the p a r t of the Arabs to use the I M F and the W o r l d B a n k and some
of the others f o r the purposes t h a t they have described, and particu-
l a r l y i n the underdeveloped countries. I t r i e d to point out to them
that i t is not easy t o get into -the business of investment i n improve-
ment, that you have t o have a developed expertise i n the f u n d t h a t is
going to hold the money and you have to have a developed expertise
i n the borrowers who are going t o use the money. T h a t has not been
demonstrated yet i n any of the places i n which they have talked about
doing their investments. B u t I personally feel very strongly, M r .
Chairman, that you are doing a great service to this Congress and to
the country by these hearings, and I want to j o i n you i n welcoming
M r . Bennett to his new post and assure h i m t h a t this subcommittee
w i l l take an interest i n his position and h i m personally, as we have his
predecessor. I thank you, M r . Chairman. I thank the subcommittee.
M r . G O N Z A L E Z . T h a n k you, M r . Hanna. W e deeply appreciate your
keen interest and your strong support and membership on this subcom-
mittee. I t h i n k the members of the subcommittee have had a sense of
frustration when events happen and then we have to come i n after the
event, and we like to feel t h a t the Members of the Congress w i l l have
some direct i n p u t and some immediate responsibility w i t h respect to
some of these issues.
M r . Bennett, you may proceed as you wish. I thank you once again.
I f you have a prepared statement, you can use your option of either
reading i t or summarizing i t . A g a i n , I say t h a t we are very grateful
f o r you t a k i n g time out, especially r i g h t before you are about to be
sworn in.
STATEMENT OF HON. JACK F. B E N N E T T , UNDER SECRETARY

OF T H E TREASURY
M r . B E N N E T T . M r . Chairman and members of the subcommittee, I

appreciate your k i n d words of welcome. A s you note, these hearings
are particularly opportune f o r me. A t any time i t would be a challeng-
i n g assignment to succeed Paul Volcker. B u t i t has not escaped m y at-
tention any more than i t has escaped yours t h a t conditions i n the for-
eign exchange and financial markets and i n rates of g r o w t h of prices
and production are not entirely satisfactory around the w o r l d today.
So i t seems p a r t i c u l a r l y fitting t h a t I be subjected to some cross-ex-
amination as I enter i n t o these new duties. B u t I am p a i n f u l l y aware

6
t h a t the oath w h i c h Secretary Simon w i l l administer to me today w i l l

not make me an instant expert i n a l l aspects of economics.
I n t r y i n g t o understand our present difficulties, I could perhaps
make m y position clear. I tend to t h i n k t h a t p r i m a r y attention should
be given t o t w o m a j o r developments over the recent years:
F i r s t , the shortfalls and cutbacks i n previously anticipated levels of
production of i m p o r t a n t basic raw materials, most i m p o r t a n t l y oil.
Second, a widespread tendency f o r governments t o p r i n t more
money and more government I O U ' s than were appropriate i n such
conditions of supply stringency around the world.
I n m y prepared statement this m o r n i n g I propose to concentrate on
the first of these developments, and p a r t i c u l a r l y on the impact o f the
reduction i n the anticipated levels of o i l production. T h a t impact con-
tinues to be large, and our difficulties are exacerbated by the uncer-
t a i n t y as to just how large the cutback w i l l be i n the future.
Last September, before the outbreak of f i g h t i n g i n the M i d d l e East,
the production o f o i l i n the non-Communist w o r l d was just short of
48 m i l l i o n barrels a day. B y November, certain governments i n the
Mideast and A f r i c a had cut production back by about 5 m i l l i o n barrels
a day, and this large cutback was n a t u r a l l y followed by a large in-
crease i n prices on new short-term o i l sales. Even now, some of those
producing countries are continuing to cut back production f a r below
the levels o f last September.
B u t elsewhere production has grown, so the total w o r l d production
is probably now about at least September's l e v e l w i t h i n 200,000 or
300,000 barrels a day one way or another. B u t i t is i m p o r t a n t to note
t h a t the level o f actual production today s t i l l reflects restraints b y cer-
t a i n governments w h i c h are h o l d i n g total production roughly at 4 m i l -
l i o n barrels a day below the level which could be produced efficiently
w i t h existing capacity i n place.
New contract o i l sale prices have fallen f r o m the temporary peaks
of early t h i s year, b u t some producers are s t i l l attempting t o charge
e x t r a o r d i n a r i l y h i g h prices. I n view o f these h i g h prices, consumers
both i n the U n i t e d States and abroad have continued to h o l d t h e i r
consumption well below the levels predicted earlier, and i n fact, below
the levels o f a year ago. O n a worldwide basis consumption has been
less t h a n production f o r some time. Inventories have been b u i l d i n g u p
and are now approaching the spillover point.
U n d e r these circumstances, o i l prices today are clearly under strong
pressure t o decline f u r t h e r on international markets, though not on the
b u l k o f U.S. production, which remains under severe price control.
Y e t there are those i n the producing countries who are u r g i n g their
governments to make sharp new cutbacks i n production i n order t o t r y
t o m a i n t a i n today's h i g h o i l prices, or even to t r v t o increase them
again. T h e producing governments are being urged to raise prices on
t h a t p o r t i o n of the o i l production being sold directly b y the govern-
ments and to renege on long-term contracts t o make some o i l available
on the basis o f agreed specified payments o f royalties and taxes t o the
governments.
I n m y view, any new cutbacks i n o i l production b y anv government
at this time should clearly be regarded by the U n i t e d States and b y
a l l other consuming countries, both more developed and less developed,

7
as a counterproductive measure. Moreover, even apart f r o m the p o l i t i -

cal and security implications f o r the producers, I am convinced t h a t
any such cutbacks w o u l d t u r n out to be economically h a r m f u l t o the
producers f o r t w o reasons. I n the first place, the price effects o f such
cutbacks w o u l d inevitably lead to such f u r t h e r intensification o f re-
search and investment relating t o alternative sources of energy and
to alternatives t o energy use that the effect would be to reduce the total
value w h i c h the exporters would receive f o r their o i l over the l i f e of
their producing fields. Cutbacks m i g h t b r i n g a higher price f o r a short
period, but they w o u l d b r i n g a more t h a n offsetting reduction i n rev-
enues f o r a long t i m e thereafterin view of the importers' increased
commitment t o alternatives.
I n the second place, maintenance o f present costs o f export o i l
even w i t h no increaseswould threaten severe economic and i n some
cases political damage to a large number of consuming countries t o an
extent which could not help but cause damaging backlash t o the pro-
ducers as well.
T h e damage to consuming countries i n the first instance w o u l d be
simple but realthe result of an increase i n the costs o f t h e i r o i l im-
ports f a r greater t h a n the increase i n the prices of t h e i r exports. I n
this regard, I realize t h a t some officials of oil-producing countries have
attempted t o j u s t i f y f u r t h e r o i l price increases by reference t o in-
creases i n the prices of goods imported into those countries. P r o v i d i n g
the producers w i t h this argument has undoubtedly been one additional
damage we i n the developed nations have inflicted on ourselves by our
miserable performance i n relation t o inflation. B u t we should not lose
our sense of proportion.
Since 1970, f o r example, the new contract F O B export dollar price
of Saudi A r a b i a n l i g h t crude has increased approximately 730 percent,
whereas the average cost o f imported goods and services i n t o the pro-
ducing countries has increased only about 70 percent over the same pe-
riod. Clearly, the increase i n o i l prices has been about 10 times as large.
O n a similar calculation, the oil price increase has been about seven
times as large f r o m 1960 to the present.
T h i s large and sudden adverse change i n their terms of trade finds
different nations w i t h widely v a r y i n g capabilities t o adapt. F o r most
i m p o r t i n g nations, including the U n i t e d States, the impact is reducing
our standard o f l i v i n g and is reducing our rate of economic growth,
but our lives and our institutions are not seriously threatened. I n a
number of other nations, however, nations whose standards o f l i v i n g
were already at the literal m a r g i n and whose hopes f o r economic ad-
vancement were f r a g i l e i n any case, the sudden increase i n the cost of
oil and consequently of fertilizer as well could be catastrophic unless
there is emergency assistance. Even i n some countries whose standards
of l i v i n g are f a r above the subsistence level the new prices could, i n
the absence o f farsighted international cooperation, threaten the col-
lapse of existing institutions.
Such severe damage to the consuming countries would create a back-
lash on the producersapart f r o m political dangersthrough under-
m i n i n g the economies t o which the o i l producers must export i f they
are t o derive the m a x i m u m value f r o m their l i m i t e d resources; and
t h r o u g h undermining the economies i n which the o i l producers must

8
temporarily invest i f they are to sell their o i l at the most r e w a r d i n g

time and spend the proceeds on equipment and services f o r t h e i r own
diversified development at the optimal, nonwasteful pace.
M r . Chairman, you w i l l observe that, i n discussing these implica-
tions o f actual ancl potential o i l production cutbacks, I have stressed
the u n d e r l y i n g and real economic effects. I do this because I t h i n k they
are serious, because I t h i n k the w o r l d should be aware of the contrast
between the deliberate cutbacks by some o i l producers on the one hand,
and the determined efforts being made, on the other hand, by the
U n i t e d States and other nations t o increase t o the m a x i m u m t h e i r
production o f agricultural and other commodities to supply w o r l d
markets.
W h i l e I stress these basic effects, I do not wish t o ignore the impacts
of the o i l cutbacks on the financial institutions and arrangements of
the free w o r l d . The indirect effects have been serious and well publi-
cized f o r a small number of banks, f o r example. Yet, i n m y judgment,
our financial institutions and international monetary arrangements
are not l i k e l y t o be basically threatened by these developments i n the
commodity field. Current problems are real f o r some individuals, f o r
{>articular companies, and f o r entire countries, b u t they are the prob-
ems o f reduced supply o f goods; they are not l i k e l y to be intensified
by f a i l u r e of our instruments o f financial cooperation.
Neither do I feel t h a t current developments pose a serious threat of
w o r l d depression. Those who concentrate their w o r r y i n g today on the
possibility o f w o r l d depression have brought t o my m i n d the picture
of a m a n immobilized i n the face of a charging b u l l by the fear t h a t
i f he t r i e d t o escape the animal by j u m p i n g sideways he m i g h t possibly
brush u p against an unseen rattlesnake. Certainly, rattlesnakesand
also inadequate demand f o r our economic productionare always con-
ceivable dangers; but, r i g h t now, the clear and present danger before
us is not inadequate demand, but f a r too much monetary demand fac-
i n g existing capacity t o produce. E f f o r t s t o d r a w a parallel between
today's circumstances and the early 1930's seem to me farfetched. The
problem then was too l i t t l e demand facing large amounts of unused
capacity.
T h e developments i n the commodity markets have resulted i n large
changes i n previous patterns o f financial flows. Consumers a n d con-
suming nations are choosing to borrow a l o t more t h a n before i n order
t o ease t h e i r t r a n s i t i o n t o a w o r l d of higher cost energy. Some of the
o i l producers are choosing t o export a large p a r t of t h e i r o i l i n ex-
change f o r I O U ' s f r o m the consuming countries.
There have been various estimates t h a t the oil-producing countries
i n combination w i l l increase t h e i r investments abroad by $50 b i l l i o n to
$60 b i l l i o n d u r i n g this year. I do not place confidence i n any precise
estimate, f o r i t is now unclear, not only what the price of o i l w i l l be
d u r i n g the rest of this year, b u t even what i t was f o r the first h a l f of
this year, since various negotiations on this subject are s t i l l underway.
Furthermore, at any particular price, i t is unclear how much o i l any
particular i n d i v i d u a l consuming country w i l l choose t o buy, t o what
extent i t w i l l choose t o r u n current account deficits by l i g h t e n i n g its
current economic burdens t h r o u g h b o r r o w i n g and burdening its f u t u r e
w i t h repayment obligations. I t a l y and France, f o r example, have re-

9
cently taken forceful domestic measures t o reduce t h e i r o i l consump-
t i o n and their reliance on o i l imports, and many other nations w i l l
probably take steps i n the same direction.
Forecasts of the rate o f f u r t h e r accumulation o f foreign investments
by the oil-producing countries i n f u t u r e years are even more tenuous.
M y o w n expectation, however, is t h a t the rate w i l l decline each year,
not only because o f the lower o i l prices w h i c h I anticipate, but also
because over t i m e the development plans o f the producers w i l l have
progressed so t h a t they are using u p increasing proportions of current
revenues. I t has been estimated t h a t this year o i l exporters w i l l be
spending around 40 percent o f t h e i r receipts f o r current i m p o r t s ; I
would expect this percentage to be much larger i n f u t u r e yearsand
ultimately, i t w i l l exceed 100 percent.
Meanwhile, however, the o i l producers have been accumulating
what, by any standards, are large investments. B y now, they quite
probably exceed $30 b i l l i o n ; and m the early months o f this year the
accretions were being largely placed i n short-term bank deposits con-
centrated i n the foreign branches and foreign currency accounts which
comprise the so-called Euromarket. This concentration had begun to
raise questions about capital adequacy i n the banks and about their
vulnerability t o sudden large withdrawals. More recently, strong
counterpressures have begun to exert themselves. T h e banks have be-
gun to reject additional short-term deposits and t o insist on terms
more i n line w i t h the relending opportunities available t o them. The
oil-producing countries, themselves, and other depositors, have become
more careful to insure they were not r i s k i n g their funds i n institutions
w i t h an adequate capital base. There has accordingly been increased
interest i n investing i n U.S. Treasury securities and i n other longer
term securities, i n c l u d i n g U.S. corporate equities. Secretary Simon
and I hope t o discuss these possibilities f u r t h e r d u r i n g our t r i p to the
Mideast starting Thursday. I suspect the time may also be coming
when there w i l l be increased interest both by foreign and b y domestic
investors i n offering new equity f o r selected private banks. W i t h the
expanded b a n k i n g business t o be had, there w i l l be those who wish to
take advantage of the profitable investment opportunities which
should exist. Obviously, new equity is the answer i f banks have more
business t h a n they can handle w i t h their existing equity base.
Secretary Simon, i n his recent speech to the International Monetary
Conference i n W i l l i a m s b u r g , also recognized a governmental respon-
sibility i n this area. W h i l e n o t i n g t h a t :
Governmental regulation and emergency facilities can never substitute for
prudent financial management,
he nonetheless emphasized t h a t :
I n the United States, it is clear that the authorities do have a responsibility
to supervise U.S. banks in both their domestic and international operations, and
a major part of that responsibility is to insure that they are in a sound position
to meet their total liabilities.
A l l of this recent attention to possible massive w i t h d r a w a l of funds
should not lead anyone to conclude t h a t the oil-producing countries
have been s h i f t i n g t h e i r funds about i n a volatile manner. I n fact,
their officials have shown themselves to be very conservative invest-
ment managers, well aware of the loss i n the value of t h e i r investments

10
w h i c h would result f r o m any sudden effort t o unload a large amount
of t h e i r securities on a capital market or to transfer a large amount
of t h e i r funds f r o m one currency t o another.
M r . H a n n a described, I thought, quite clearly the current trends of
t h e i r t h i n k i n g i n this respect.
I n relation t o the foreign exchange markets, the situation must be
monitored carefully, b u t i t should be recognized t h a t any instability
w h i c h may be caused by the large holdings of the o i l producers are
l i k e l y t o nave arisen not f r o m sudden shifts o f these funds f r o m one
investment t o another but rather f r o m swings i n market expectations
as t o where t h e i r new accretions o f funds would ultimately be invested.
I n view of the uncertainty on this subject, i t is fortunate t h a t before
the question arose there had already been so much progress t o w a r d
greater flexibility i n our international monetary arrangements. I n this
period o f change i n trade and investment patterns, and i n the presence
of widely d i f f e r i n g rates of inflation i n different countries, an attempt
to m a i n t a i n a framework of r i g i d exchange rates w o u l d probably have
led, i n practice, to explosive instability. There would have been sub-
stantial changes i n exchange rates since the u p w a r d spurt of o i l prices
began last October. Y e t , these have been handled w i t h o u t serious in-
t e r r u p t i o n to the world's trade and investment transactions. A small
number o f banks d i d get i n t o trouble i n their foreign exchange deal-
i n g d u r i n g t h i s period, b u t t h e i r difficulties seem to have been focused
i n f a u l t y internal procedures and i n involvement i n foreign exchange
speculation out of p r o p o r t i o n to the size o f the institutions. Regret-
table as t h e i r experience was, i t probably has had the salutary effect
of b r i n g i n g other institutions t o examine their foreign exchange prac-
tices more carefully. The recent Lochouse-Herstatt case i n Germany,
i n particular, is leading banks t o consider whether changes are desir-
able i n interbank clearing procedures to reduce unintended r i s k ex-
posure i n what were intended to be essentially riskless simultaneous
exchange transactions.
I n recent weeks, the U n i t e d States and other governments have also
given consideration t o the possibility o f setting u p a new intergovern-
mental agency w h i c h w o u l d be designed t o borrow large amounts of
money f r o m the o i l producers on commercial terms and then to relend
those funds i n other countries again on commercial terms. T h a t type
of agency remains a possibility, i f i t should be needed, but at the
moment the consensuswhich I t h i n k is wiseis t h a t i t w o u l d be
better t o rely basically on the many different channels provided b y
existing institutions f o r h a n d l i n g the large, new investment flows
among nations.
Governments, nonetheless, have an i m p o r t a n t supportive role. I n the
U n i t e d States, we recognized t h a t earlier this year by removing the
controls on the outflow o f capital f r o m the bilateral swap agreements
b y w h i c h governments stand ready t o help each other i n case of short-
r u n exchange market disturbances. W e and other governments recog-
nized i t b y a wide range o f cooperative international initiatives. A t
the recent final meeting of the " C - 2 0 " M i n i s t e r i a l Committee, there
was a renewed dedication t o international monetary cooperation and
agreement on a new pledge t o avoid restrictive trade measures f o r bal-
ance o f payments purposes. A new f a c i l i t y was created i n the I M F t o

11
provide 4- to 7-year credit assistance t o a i d nations i n adjusting to

higher o i l prices, and there was agreement t h a t i n some cases
t h r o u g h a so-called extended F u n d f a c i l i t y t h e I M F should be able
i n special cases t o provide credit o f longer m a t u r i t y to less-developed
countries undergoing major structural changes. There is also an under-
standing t h a t governments i n need may sell some p o r t i o n of their gold
holdings i n t o private markets or use t h e i r gold as collateral f o r
borrowing.
A l l these actions were constructive responses w h i c h have strength-
ened our international monetary system. B u t we must recognize that
f o r a small number o f particularly h a r d h i t countries these measures
are not l i k e l y t o be enough. I am sure t h a t J i m G r a n t w i l l later this
m o r n i n g be f a r more eloquent t h a t I can be on the prospective p l i g h t
o f those countries whose standards of l i f e were already abysmally low
and now have the distinction of being the "most seriously affected" by
the new o i l prices. These are among the countries w h i c h have reason
to be g r a t e f u l to you on this subcommittee f o r securing passage o f the
I D A authorization a few days ago. Yet, those funds were intentionally
clearly earmarked to be used on specific long-range development p r o j -
ects t o raise t h e i r people f r o m the sink o f poverty. Those I D A iunds
w i l l not be, and should not be, available to help pay any o f the tre-
mendous increase i n the costs of o i l and fertilizer f o r the immediate
use of t h e i r s t r u g g l i n g economies. F o r this purpose, these^ countries
w i l l be pleading, before this year is over, f o r some nonproject funds
on a concessional basis. There is no likelihood, however, t h a t such
funds could be repaid w i t h i n a few years; they w i l l have to be on a
long-term, low-interest basis. I n most cases, the lack o f these funds
is probably not a matter of l i f e and death this week, but that time is
probably not many months away. The total sums i n question f o r this
year are not immense. I doubt t h a t i t w i l l ultimately be decided t h a t a
large amount is appropriate i n this calendar year f r o m a l l sources
i n new forms of aid above those t r a d i t i o n a l forms of aid already
scheduled.
S t i l l , there is an organizational urgency i n reaching a consensus on
some analysis o f the factual situation i n these countries and i n insuring
t h a t there is an adequate response f r o m those countries of the w o r l d
who are i n a more-favored position.
Some of the oil-producing countries have begun t o respond w i t h
isolated bilateral arrangements. There have also been appeals f o r
funds b y the U , N . and there have been discussions of various possible
j o i n t initiatives by some of the o i l exporters, as M r . H a n n a mentioned,
but l i t t l e has actually been committed at this time specifically to allevi-
ate the near-term distress of the "most seriously affected."
The oil producers have agreed to purchase additional amounts of
W o r l d B a n k bonds and to lend about $3 b i l l i o n t o the I M F , but these
investments are at approximately market terms and they are effec-
t i v e l y guaranteed as to repayment b y the major developed nations, in-
c l u d i n g the U n i t e d States. They do not represent provision o f the con-
cessional funds appropriate f o r the "most seriously affected."
F o r them, the rescue operation, i n large p a r t , remains to be or-
ganized. F o r this purpose, i t may well be t h a t no new financial institu-
t i o n is needed; but there must be a group which is charged w i t h being

12
sure the job gets done. F o r t h i s purpose, I am placing great hope on
the new ministerial development council t o be set u p along the C-20
lines, i n accordance w i t h a decision taken by the ministers when they
were i n Washington last month f o r the final C-20 meeting. I certainly
hope t h a t this new g r o u p representing o i l producers and o i l con-
sumers, both developed and less developed, w i l l be small enough to
f u n c t i o n effectively and w i l l have the competence and the conscience
f o r the job.
T h e problems which t h a t new council w i l l face and the problems
w h i c h a l l of us face w i t h the new o i l prices are real. T h e appropriate
remedy is t o lower those prices. Meanwhile, we must cooperate in-
ternationally t o mitigate the real problems as much as we can. I f we
continue t h a t cooperation, i f we stay alert, those real problems w i l l
not be made worse b y any freezing u p of the world's financial
mechanisms.
T h a n k you, M r . Chairman.
M r . G O N Z A L E Z . T h a n k you, M r . Bennett, very much.
I f i t is O K w i t h the members of the subcommittee, I w o u l d suggest
t h a t we proceed to hear M r . G r a n t , and then we can direct questions
to both gentlemen at the time we reach the questioning period. I f
there is no objection, we w i l l proceed t h a t way.
M r . Grant, thank you very much f o r being w i t h us this morning,
and w i t h o u t any f u r t h e r ado I recognize you t o proceed as you see
best. I notice you have circulated your prepared text. I f you wish t o
read i t t h a t is fine. I f you wish to summarize i t , t h a t is fine, too.
STATEMENT OF JAMES P. GRANT, PRESIDENT, OVERSEAS

DEVELOPMENT COUNCIL
M r . G R A N T . M r . Chairman, i t is a great privilege to be w i t h you here
today and w i t h the members o f this subcommittee, and I w i l l take you
u p on y o u r offer o f inserting the f u l l statement i n the record i f I may
and then proceed to summarize i t .
M r . G O N Z A L E Z . W i t h o u t objection, we w i l l enter y o u r prepared
statement i n t o the record.
M r . G R A N T . A S we consider today the impact of the petrodollar crisis
on the w o r l d and p a r t i c u l a r l y on developing countries and our policies
t o w a r d them, i t is i m p o r t a n t t h a t we recognize t h a t this crisis is occur-
r i n g i n a much broader context of a newly emerging international
economic and political order. T h e crisis is a result of the very r a p i d
g r o w t h of the past 25 years. T h i s is a s h i f t t h a t was symbolized w e l l
before the o i l crisis by the soaring food prices t h a t we saw i n early
1973. A s you may remember this led t o a soybean embargo by the
U n i t e d States and led to a fertilizer embargo on new export sales i n
October t h a t has been i n effect u n t i l very recently. O i l prices soared
f o u r f o l d resulting i n the embargo, and a series of other shortages
fertilizer, cotton, and rubber. T h i s basic set of scarcities results f r o m
t w o factors. O n the one hand are short term and cyclical factorsthe
unprecedented, simultaneous boom of a l l o f the i n d u s t r i a l countries o f
the early 1970's; the unprecedented drought t h a t went t h r o u g h Russia,
I n d i a , Sahelian A f r i c a , and other parts of the w o r l d i n 1972 and 1973;
the war i n the M i d d l e E a s t ; and the inadequate use of w o r l d i n f orma-

13
tion systems, w i t h the result t h a t we paid nearly $2 b i l l i o n to our f a r m -
ers not t o produce food i n fiscal year 1973 at a time when the Russians
were depleting the w o r l d global food stocks.
B u t even more fundamental i n our opinion are some long t e r m
secular trends which indicate that this is not just another peaking of
prices as we saw after W o r l d W a r I I t h i s really is the tremendous
increase i n demand. The gross global product of the w o r l d i n the late
1940's was about $1 t r i l l i o n . This year i t w i l l be about $4 t r i l l i o n .
I n constant dollars i t is roughly a threefold increase i n global demand
i n 25 years. W h e n we began t o move into the t h i r d t r i l l i o n of demand,
we began to see system overloads emerging at every corner i n the late
1960's. W e could see i t ecologically when there was the problem of
pollution i n the cities, and i t began t o reach unmanageable propor-
tions ; the problem of purification of the lakes; and i n the last 2 or 3
years we have seen the overharvesting of the w o r l d fish catch, which
after t r i p l i n g i n 25 years has declined the last three.
W e have seen i t i n the ever-tightening food situation. Despite the
world's largest crops i n history last year, w o r l d food reserves actually
went down again. The w o r l d food system is h a v i n g trouble staying
up w i t h an increasing demand, which is double that of 20 years
ago. W e have seen i t i n the s h i f t f r o m buyers' t o sellers' markets
f o r goods t h a t are not i n physically scarce supply but have become suf-
ficiently t i g h t t h a t the sellers have become dominantoil, coffee, and
other commodities.
T h a t this is p a r t of a long term trend was brought out by the
fact t h a t the W o r l d B a n k was estimating that the o i l prices o f $8 a
barrel we saw last f a l l and winter, would come i n due course i n
the 1980's. They were brought u p much sharper as a result o f these
short term cyclical trends.
Basically this increase f r o m demand results f r o m t w o long-term
circumstances t h a t w i l l probably be w i t h us f o r some time. One is the
population increase which is double what i t was 20 years ago, an in-
crease of 2 percent a year. Second, affluence around the w o r l d has in-
creased about 3 percent a year f o r the last 7 or 8 years. T h i s is double
the rate of increase of affluence that we had 20 years ago. These two
forces together have been the basic surge behind increasing demand.
F o r some commodities, such as food, 70 percent o f the increase i n de-
mand comes f r o m population increase, only 30 percent f r o m increase
i n affluence. F o r other goods l i k e oil the soaring increase i n demand
has come p r i m a r i l y f r o m affluence and only secondarily f r o m popula-
t i o n increase.
A s we move closer to the $10 t r i l l i o n gross global product that is
projected f o r the end of this century, w i t h each t r i l l i o n coming i n
ever-shorter time periods, I t h i n k we can predict a series of con-
sequences f r o m t h i s :
Competition f o r l i m i t e d resources w i l l become considerably more
intense, and there w i l l be more and more of a linkage effect when there
is a shortage i n one area. As we have seen recently, the shortage of
energy leads to a shortage of f e r t i l i z e r ; the shortage of fertilizer leads
t o a shortage of food. The "quick f i x " and product substitution w i l l be
much more difficult i n the next 25 years than i n the last 25 years. A n d
finally, as we w i l l see, there w i l l be a sisîificant s h i f t i n economic as
37-211 O - 74 - 2

14
well as political power to the raw material suppliers of the w o r l d away
f r o m the processors. W h a t this means as we consider the petrodollar
crisis and what to do about the current issues, is t h a t we need t o look
at this crisis i n the broad framework and t h a t we need a whole new set
of rules, institutions and approaches t o our problems i n the next 25
years.
I t is clear, f o r example, t h a t the whole issue o f access t o supplies w i l l
become as important i n the next 25 years as the key issue o f access
to markets was i n the last 25. I n other words, i n the last 25 years the
things t h a t concerned the G A T T , the U N C T A D , the T r a d e R e f o r m
A c t of 1973, the Kennedy Round of negotiations, were a l l access t o
markets, and now we have a new set of problems, access t o supplies
oil, fertilizer, food.
Second, i t is very clear t h a t there w i l l need to be increased global
efforts and machinery t o increase production of goods t h a t become i n
t i g h t supply, whether i n oil, as was indicated by M r . Bennett, where
we need t o somehow cope w i t h the restraints more effectively, or i n
food, where there is need f o r a global effort to increase the supply.
F i n a l l y , i t is clear t h a t we need t o begin t o t h i n k o f ways of reducing
demand i n certain areas. W e have seen i t most notably i n the area
of the use of energy i n t h i s country. B u t clearly, there is a global
shortage of fertilizer l y i n g ahead. G r a i n farmers i n many parts of the
w o r l d cannot get even h a l f of the fertilizer they got last year, w h i l e
other parts of the w o r l d are s t i l l using indiscriminate amounts f o r
lawns and other purposes.
A l l o f these trends t o w a r d a new w o r l d o f t i g h t supply were w e l l
along when the energy shock came i n the f a l l , and were f a r t h e r
along when the second shock came on December 22d w i t h the addi-
tional sudden doubling of prices. T h i s has dramatized these trends
very sharply and has accelerated f o u r m a j o r trends w h i c h I w o u l d
l i k e t o discuss:
One is the energy price shock on developing countries; second,
the worsening w o r l d food problem; t h i r d , its aggravation of the global
recession; and f o u r t h , its acceleration of the power s h i f t away
f r o m some o f the major manufacturing, i n d u s t r i a l countries, l i k e the
E E C and Japan and the populous countries l i k e I n d i a , t o w a r d the
O P E C countries and the N o r t h American raw material-rich as well as
i n d u s t r i a l powers.
T u r n i n g first to the energy shock dislocations f o r the developing
countries, as the chairman mentioned i n his introductory comments,
the f o u r f o l d o i l price increase added $10 b i l l i o n to the i m p o r t b i l l of
these countries. The aggravation of these increases was compounded
as a result of the fact t h a t i n the preceding year the prices o f other
goods t h a t these developing countries had t o i m p o r t f r o m the indus-
t r i a l countries had already risen substantially. They already faced a
$5 b i l l i o n increase i n their i m p o r t bills f o r food and fertilizers before
this $10 b i l l i o n overload was added, f o r a total of about $15 billion.
O n t o p o f this increased i m p o r t b i l l they faced the dangers o f an
economic slowdown i n the West, which has already affected very sub-
stantially the tourism earnings of countries. I n the Caribbean and the
Mediterranean, the flow of workers f r o m many developing countries

15
to the European countries, and the prices of some but not many raw
materials. T h e impact of these price rises has varied very greatly on
the developing countries.
Obviously, the O P E C countries have benefited greatly, and, while
we t h i n k normally of the A r a b nations as the O P E C countries, there
are 260 m i l l i o n people i n this aggregation of O P E C countries.
A m o n g the n o n - O P E C countries, there are a group of developing
countries t h a t are net beneficiaries of the changes of the last 2
years. These are those countries which are minor o i l exporters, like
Tunisia and Bolivia. There are other countries such as Malaysia that
w i l l be beneficiaries of major price rises i n the products they sell
and they are largely self-sufficient i n oil. There is a whole group of
countries, i n c l u d i n g most of those i n L a t i n America, which are not too
badly h u r t i n a fundamental sense by the changes of the last couple of
years. They should be able t o ride out the difficulties assuming there is
no major global recession, continuation of the I M F o i l f a c i l i t y over a
several year period, continued access t o Eurodollar marketsthis is a
new feature f o r many developing countries, the access to the Euro-
dollar marketsand finally, continued access to supplier credits. There
is no question but that a suspension of activities by the E x p o r t - I m p o r t
B a n k would create a whole new set of crises f o r the Brazils, the
Mexicos, the Colombias, this category of developing countries.
A n d finally, this assumes an expansion o f W o r l d B a n k lending t o
these countries on its regular terms.
There is another category of countries which fits somewhat this same
category. T h i s category includes the industrial developing countries
Korea, Taiwan, H o n g K o n g , and Singapore. These countries have a
tremendous immediate adverse impact. Korea, f o r example, has to pay
an extra b i l l i o n dollars f o r o i l and food. B u t these are flow-through
economies t h a t can pass on the prices i n the goods they export, so there
again, i f they can have a short term f a c i l i t y , i t should tide them over.
T h i s leads us t o the hardest h i t countries, w h i c h Secretary Bennett
was describing as the most severely affected. W e at the Overseas De-
velopment Council call them the newly emerging f o u r t h w o r l d of
some 30 to 40 of the poorest, slowest moving countries. These countries
have been h i t b y both very large rises i n the price they have t o pay f o r
o i l and f o r food, while getting no comparable offsetting increases i n
the price o f the goods they sell.
F o r these countries, as Jack Bennett brought out, there is need f o r a
substantial amount of emergency assistance to tide them over the short
run, t o keep them f r o m going under d u r i n g the next 3 to 4 years.
They w i l l need some $3 b i l l i o n a year t o keep f r o m going under over
the next several years, a n d these are countries t h a t really cannot have
access to the Eurodollar market. The I M F special f a c i l i t y rates are
too h i g h f o r them t o borrow any large continued amounts. The sup-
pliers' credits are not available to them since the Eximbanks of the
w o r l d do not lend to these countries.
These countries, however, need more than the short t e r m emergency
assistance o f $3 b i l l i o n a year. They also need additional assistance t o
get their economies back on sufficient keel so t h a t they are not so de-
pendent upon food and energy imports f r o m the outside, and this w i l l
require another b i l l i o n to $2 b i l l i o n a year.

16
The prospects of these countries are not at a l l hopeless. I f one
takes I n d i a , f o r example, i t has a great potential f o r increasing
food production at low cost. L i k e the U n i t e d States, i t has great re-
serves of coal. B u t these countries have a particular capital problem
which is t h a t they pay out additional money f o r o i l and f o r food, and
the O P E C countries which have a money surplus have no incentive t o
lend i t back t o them at the current time. Whereas i n the U n i t e d States
we pay out increased amounts f o r o i l and the O P E C countries take the
capital surpluses and reinvest them i n the Western countries. W e have
a problem between us, but the capital comes back to the West. T h i s is
not t r u e f o r the poorest developing countries.
T h i s immediate o i l crisis is coming i n conjunction w i t h a very serious
worsening w o r l d food situation. I t has been apparent f o r some t i m e
t h a t there is a basic change i n the w o r l d food situation f r o m the sur-
plus state of the 1950's and the 1960's t o an era of t i g h t demand.
W o r l d food reserves have gone down f r o m a supply of some 69 days
i n 1970 t o 36 days a year ago, and 26 days now, and this is despite the
world's largest g r a i n yields i n history. I n effect, we are i n a very peril-
ous situation, and, as I said earlier, this is due to the r i s i n g demand
f r o m population and f r o m affluence. The increase i n w o r l d demand f o r
food 60 years ago was 3 or 4 m i l l i o n tons a year. Then i n the mid-1950's,
i t went up to 15 m i l l i o n tons a year. Now i t is over 30 m i l l i o n tons a
year.
T h i s increase is coming at a time when the response capacity o f the
w o r l d to increase food is slowing. I d l e land is no longer available,
water is scarcer, and the benefits f r o m the use o f fertilizer are declining.
W h e n the first 40 pounds of fertilizer is put on an acre of corn, the
increased y i e l d is something like 27 pounds per acre. B y the time you
get t o the t h i r d 40 pounds i t is down to 8 or 9 pounds of increased y i e l d
per acre.
W e have seen an overharvesting of the world's fish catch, and
there has been no technological breakthrough i n either the produc-
tion of soybeans or beef. So t h a t w h i l e the w o r l d food situation
has been tightening, along comes the petrodollar crisis. T h i s has
greatly aggravated the problems o f the poorest developing countries,
first because of the fact t h a t faced w i t h serious dollar shortages they
have cut back on o i l imports, and on imports of spare parts, so
their whole^ economies are w o r k i n g more poorly. Second, there is a
w o r l d fertilizer shortage o f 2 or 3 m i l l i o n tons a year t h a t w i l l continue
t h r o u g h at least the next 3 o r 4 years, and the way the w o r l d system is
w o r k i n g the developing countries are b y f a r the worst h i t f r o m this.
Japan and Western Europe have both cut back on t h e i r f e r t i l i z e r
exports. So has the U n i t e d States. W e have had an embargo on new
export sales f r o m October through June 30, and the F E O now esti-
mates t h a t the developing countries w i l l have a s h o r t f a l l o f about 2
m i l l i o n tons o f fertilizer nutrients i n the coming crop year. T h i s
means t h a t they w i l l lose the production o f 16 t o 20 m i l l i o n tons o f
food, food w h i c h w i l l now cost them some $4 b i l l i o n t o i m p o r t i n place
of producing themselves.
W e can see the impact of this on I n d i a , f o r example. C u r r e n t l y , I n d i a
is r o u g h l y a m i l l i o n tons short on fertilizer over what she was prepared
to b u y and was unable t o get because o f contract cancellations, slow

17
supply f r o m the U n i t e d States and elsewhere. T h e I n d i a n wheat crop

harvested this M a y , o r i g i n a l l y estimated to be at 30 m i l l i o n tons, was
finally harvested at 22 m i l l i o n tons.
The main reason f o r the shortfall was the shortage of fertilizer, b u t
also contributing was the shortage of oil, which i n one province alone
led t o a shortfall, according t o the U S D A , of about a m i l l i o n tons.
W h i l e we were w a i t i n g i n our cars f o r an hour at gas stations t o get
gasoline i n February and March, Norman Barlaug, the Nobel Peace
Prize winner i n the food area, was reporting t h a t i n the Punjab, f o r
example, people had been w a i t i n g f o r 2 days at r u r a l gas stations, l i t t l e
farmers w i t h their 5-gallon tins w a i t i n g to get o i l to r u n their i r r i g a -
tion pumps w i t h o u t which they could not grow their wheat. The im-
pact of the o i l shortage was much worse, i t seems to me, on those coun-
tries than here.
So, i t is quite clear now t h a t at best the g r a i n crop i n Asia this year
w i l l be m i d d l i n g ; t h a t Asia w i l l need to i m p o r t more g r a i n i n the
year ahead t h a n any region i n the w o r l d has ever imported i n its his-
t o r y and that the prospects of disaster are s t i l l very close.
Last year China imported as much g r a i n as I n d i a d i d at the height
of the famine. The i n i t i a l reports are that weather i n China is poor
again this year. F o r I n d i a , as I have t o l d you, the wheat crop is way
down this spring. T h e main crops, however, come this f a l l , dependent
on the monsoon. A s of the weather reports a week ago, the monsoon
was several weeks late i n h i t t i n g most of I n d i a .
So, there is a significant prospect of tremendous demand f r o m these
countries, f o r food next year. T h i s is coming at a time when I t h i n k
we can say t h a t the U n i t e d States no longer has even a semblance of a
global food policy other than to maximize the profits resulting f r o m
the export of food.
Secretary Kissinger has taken a commendable i n i t i a t i v e i n u r g i n g
a W o r l d Food Conference, but specific action is now needed. U.S. food
aid i n fiscal year 1974, just past, dropped t o 40 percent of fiscal year
1972a year i n which we earned an extra $7 b i l l i o n f r o m our food
exports, i n c l u d i n g more than $6 b i l l i o n f r o m the higher prices received
f o r g r a i n we sold. Fiscal year 1974 has also been characterized by the
fact t h a t f o r most of that year, the U.S. Government had an embargo
on fertilizer sales, which p r i m a r i l y affected the developing countries.
I t is very clear that a new food policy is needed, not only t o affect the
lives of millions of people i n these F o u r t h W o r l d countries t h a t are so
badly h i t by the petrodollar and food crisis, but also, i f we are ever t o
cope w i t h the 2-digit inflation t h a t we have. I n the next 10 years the
w o r l d w i l l have to grow or increase its food production by some 400
m i l l i o n tons, f r o m the present level of 1.2 billion, t o 1.6 billion.
I f we have t o increase most of this production i n the developed
countries, i t can only be done by going t o much higher priced land,
and much higher priced use of inputs because of declining yields f r o m
more and more fertilizer, and f r o m a higher cost of water. The p r i n -
cipal source of low cost production f o r the w o r l d i n the next 10 years
is i n the developing countries. A responsible expert has estimated t h a t
the amount of fertilizer needed t o get the next 100 m i l l i o n tons of food
out of the developed countries would be 24 m i l l i o n tons of fertilizer.
O n the other hand, to get 100 m i l l i o n tons of increased production i n

18
developing countries, w o u l d take only 10 m i l l i o n tons of fertilizer. I n
other words, the comparative advantage is very clearly i n terms o f
increasing production i n developing countries. B u t meanwhile, what
has happened is t h a t the Japanese and the U n i t e d States have restricted
fertilizer exports, so they would be p r i m a r i l y used on the least effi-
cient sources i n the developed countries as a whole. A t the same time,
there has been no appeal to the American people t o cut back on the use
of fertilizer f o r n o n f a r m uses. A t a t i m e when the developing coun-
tries face a 2 m i l l i o n t o n fertilizer shortage t h a t is really critical, the
U n i t e d States w i l l use some 3 m i l l i o n tons on lawns, cemeteries, and
g o l f coursesfertilizer which is desperately needed by American
farmers t o produce food at a time of w o r l d food shortage.
A s I mentioned earlier, the o i l crisis has also greatly accelerated the
power s h i f t . O n the one hand, i t has given the O P E C countries a much
larger capital surplus, <and the issue o f what they do w i t h t h e i r capital
surplus is now much more acute t h a n the slow accumulation we saw
6 months ago. T h i s creates a real problem w i t h the o i l countries, one
I t h i n k warrants the attention of this subcommittee. There really has
not been i n m y judgment, an effective dialog on this w i t h the O P E C
countries. The focus o f the U.S. Government has been on the com-
mendable objective o f t r y i n g t o reduce the price of o i l ; but the focus
has been so heavy on this, t h a t u n t i l really only very recently, has there
been serious attention i n a sustained major way by the U.S. Govern-
ment to how one gets more contributions out of the o i l countries to
meet, shall we call i t , damage control requirements. T h i s raises issues
which really have not been discussed yet. W h a t is a f a i r share f r o m the
O P E C countries? The U n i t e d Nations has a standard f o r assistance of
.7 percent Q I G N P .
I f we f o l l p w the .7 percent of G N P formula, the U n i t e d States is
roughly one-h^lf of that. I t is clear t h a t t h i s would b r i n g out of the
O P E C countries less than a b i l l i o n dollarsfar less than is needed f o r
damage control purposes.
O n the other hand, i f , because o f their l i q u i d i t y , they should prop-
erly p u t u p a larger amount, the issue then is what is the larger amount
and f o r how long. T h i s whole question of really what our f a i r share is,
is very much at issue.
F i n a l l y , I would say, looking at the elements of a solution, first and
foremost is the need t o avoid a global recession. A s I indicate i n m y
statement, we are considerably more worried about this, I t h i n k , t h a n
Secretary Bennett's statements w o u l d indicate. A s p a r t of this, i t is
clear t h a t an o i l price rollback w o u l d be valuable; b u t i n m y j u d g -
ment, the prospects o f a really m a j o r o i l price rollback are sufficiently
slight t h a t we should not allow i t t o completely preoccupy our atten-
t i o n at the expense of other damage control measures.
O n the establishment o f recycling facilities, quite clearly^ as I i n d i -
cated earlier, f o r the advanced developing countries there is the need
f o r an expansion o f the present special o i l f a c i l i t y , b u t also a very
i m p o r t a n t need t o keep existing channels openthe E u r o d o l l a r , the
supplier credit, the W o r l d B a n k channels.
F o r the F o u r t h W o r l d , first and foremost, there is the need t o sup-
plement I M F and W o r l d B a n k channels w i t h an emergency assistance
of at least $3 b i l l i o n f o r the year t h a t lies ahead.

19
A s y o u know, the U n i t e d Nations Secretary-General has appealed
f o r a special emergency fund, and has asked D r . R a u l Prebisch to be
his agent i n r o u n d i n g this up. T h e European Economic Community
has now volunteered a contribution of $500 m i l l i o n t o w a r d this f u n d i f
the t o t a l reached is $3 b i l l i o n and i f the O P E C countries w i l l p u t u p
h a l f , or $1.5 billion, of the amount. Canada has indicated a willingness
to provide $100 m i l l i o n ; the Netherlands, $30 m i l l i o n . Reports are t h a t
Venezuela and I r a n are prepared to provide $100 m i l l i o n each f o r this
purpose. The Secretary-General of O P E C has stated, but without any
substantiating detail, t h a t the O P E C countries as a whole w i l l provide
1 percent of G N P f o r assistance. A t this moment of time, the U n i t e d
States has stated i t w i l l participate i n the f u n d ; but unlike the Euro-
pean Community, the Canadians and the Japanese, we have not in-
dicated yet at what scale we m i g h t participateat $100 m i l l i o n or a
b i l l i o n or $1.4 billion. T h i s is badly overdue.
M r . G O N Z A L E Z . M r . Grant, pardon me. I very reluctantly interject at
this point the fact that Secretary Bennett is going t o have to leave us
soon because he is going t o get sworn i n at about 12:30. I f i t is a l l r i g h t
w i t h you, we w i l l insert at this point i n the record y o u r complete pre-
pared statement, and we w i l l recognize members of the subcommittee
f o r some brief questions.
[ M r . Grant's prepared statement f o l l o w s : ]

20
Statement of James P . Grant*

President, Overseas Development Council
Submitted to the Subcommittee of the
House Banking and Currency Committee on International Finance
July 9, 1974
The International Petrodollar Crisis .

and the Developing Countries
M r . Chairman and Members of the Committee:
I welcome this opportunity to testify at your Invitation before the
House Banking and Currency Subcommittee on International Finance on the
consequences and Implications of the International petrodollar crisis that
the world recently has been experiencing and on its implications for the
developing countries and for U.S. policies. My comments might be sum-
marized briefly as follows:
F i r s t , any meaningful assessments must take Into account the fact
that although the oil and petrodollar crises took place earlier than anticipated
as a result of major short-term factors such as drought and w a r , they
nevertheless are primarily a consequence of the unparalleled economic
growth of the past quarter century within the constraints of a largely finite
physical system and of relatively inflexible political and economic structures.
This long-term trend is shifting economic and political power toward com-
modity suppliers and creating a new International economic and political
order; It requires the development of new International systems, structures,
and rules.
The views expressed In this statement are those of the Individual, and do
not necessarily represent those of the Overseas Development Council, or of
its directors, officers, or staff.

21
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Second, better means must be found for recycling funds in adequate
amounts from the foreign exchange surplus nations (notably the OPEC
countries, the United States, Canada, Germany) to the most seriously in-
jured industrial and developing nations.
a. For those currently able to pay commercial rates, such
as Italy and Korea, the Eurodollar market may serve this purpose
in the short term. Over a several-year period, however, there is need for a
greatly expanded version of the "oil facility" recently established by the
I M F to assist hard-hit countries meet financial difficulties resulting
from recent price increases, and for monetary and trade adjustments
to enable the hard-hit countries to increase their earnings f r o m the
surplus countries.
b. The most severely affected developing countries require
special help immediately on highly concessional terms in amounts
totaling $4-$5 billion annually if they are not to go under and if they
are to gradually regain their economic stability and growth. In
addition to pressuring the richer, capital-surplus OPEC countries!
for major contributions toward meeting these needs, the United
States, whose higher food prices and fertilizer export restrictions
are also a significant contributing cause of the current disastrous
predicament of these poorest nations, should respond affirmatively
to Secretary General Waldheim's appeal for emergency assistance by
providing at least $1.25 billion of additional assistance. This can be in the
form of food as recommended in House Resolution 1155, as w.ell as by making

22
-3-
available additional assistance for food production and r u r a l develop-
ment, in response to President Nixon's request for an increased
authorization under the Foreign Assistance Act for FY 1975.
The Newly Emerging International Order
The emergence of the new international order was symbolized in
1973 by a growing list of shortages, including fuels, and by jolting price
increases and other developments on many different fronts. Food prices
soared in the United States (wheat prices alone increased more than three-
fold) to the utter surprise of most American economists, who had failed to
anticipate the acceleration of global interdependence in food. The quadrupling
of oil prices by the oil-producing countries and the implementation of an
A r a h oil embargo against the most powerful nation--the United States-- were
an even greater surprise to many. Soaring prices for soybeans led the
world's principal producer, the United States, to embargo their export,
creating a major new crisis with Japan and dramatically undermining the
major American effort to reduce the protectionist agricultural policies of
the European Economic Community. F e r t i l i z e r shortages have led the
fertilizer-exporting industrial nations to restrict shipments to the developing
countries, leading already to dramatic reductions in some of their crops,
with the threat of more to follow. These changes have already brought shifts,
many not yet fully perceived, in economic power--and therefore political
power--not only among the developed countries, and between developed
and developing countries, but also among the developing countries themselves.

23
-4-
The changes the world has experienced in the past year, have resulted
from two quite different sets of circumstances--short-term and cyclical
factors on the one hand, and longer-term and more permanent ones on the
other. With respect to the short-term circumstances, the early 1970s w i t -
nessed an unprecedented business boom caused by the simultaneous expansion
of a l l the industrial economies for the first time since World War II. Other
major but short-term factors have included unprecedented droughts in the
case of food, and the Middle East conflict in the case of oil. I believe,
however, that, viewed from the perspective of ten years hence, the shortage
crises of the past yearwhile of course accelerated by such short-term
factorswill be seen as essentially the product of major long-term trends:
continuing rapid economic growth taking place within the constraints of an
often finite physical system and of inflexible political and economic
structures.
As the global scale of economic'activity has expanded--from roughly
$1 trillion in global production in the late 1940s to some $4 trillion in 1974--
it has begun to push the global system increasingly to the limits of its
adaptive capacity. There was relatively little strain on the world system
25 years ago, but as the world approached the attainment of its third trillion
dollars of global production in the late 1960s, signs of stress began to appear
in many areas. We began experiencing an ecological overload, ranging from
massive environmental pollution in cities everywhere to an over-harvesting
of the world catch of table-grade fish, which appears to have led to a decline
in the world fish catch oyer the past three years. Global increases in

24
-5-
population growth (averaging 2 per cent a year) as w e l l as increasing
affluence (as measured by a 3 per cent average rise in per capita income
a year) have doubled the annual increase in demand for food f r o m some
15 million tons each year in the mid-1950s to 30 million tons now, thereby
straining the productive capacity of the world agricultural system. Even
in the case of many commodities for which additional productive capacity
exists, for example oil and coffee, soaring world demand is bringing about
shifts from the buyers' market circumstances of the last 25 years to those
of a new sellers' market.
It bears remembering that the period since World War I I was charac-
terized largely by material surpluses. The central economic i^sue of the
period was producer access to the markets of consuming nations. The
international rules developed under the General Agreement on Tariffs and
Trade (GA.TT), the Kennedy Round of trade negotiations in the 1960s, the
key resolutions by the developing countries at the past three UNCTAD con-
ferences, and the proposed Trade Reform Act of 1973 have a l l taken place
or been developed in this context of seeking to safeguard and to increase
access to markets. Recent events indicate that an equally important, or
even more important, set of issues is taking shape around the question of
assuring consuming nations reasonable access to essential resources--such
as energy, minerals, grain, fish, and soybeans--and on the associated need
to develop global approaches to the new worldwide problems arising f r o m
scarcity in the market place. The shift from traditional buyers' markets

25
-6-
to global sellers' markets for an ever lengthening list of commodities is
bringing a host of profound changes, many of which are still only remotely
sensed.
Economists and foreign offices (other than those in the OPEC world)
have been slow to recognize the fundamental character of the change in
progress, a change which in a period of less than 12 months has resulted
in energy shortages throughout much.of the world, soaring food prices
everywhere, a host of related shortages, and widespread speculation about
the possibility of more OPEC-type situations in store ahead. At present the
trend has been toward each country looking out for itself--the law of the
jungle--rather than toward cooperation with pthers.
As a result, many countries are suffering unduly, and the resource-
poor countries are suffering the most. A doubling or trebling of grain
prices is for most Americans a bearable inconvenience, but for those in the
cities and towns of South Asia or Northeast B r a z i l who have been spending
80 per cent of their income on food, it means more malnutrition and the
prospect of an earlier death.
As the world moves toward more than a $ 1 0 - t r i l l i o n gross global
..product by the end of the century, one can safely predict that:
Competition among countries for the earth's limited resources

will, intensify;
A. linkage effect w i l l frequently set in, with shortages in one

field limiting production elsewhere (as when energy shortages
result in f e r t i l i z e r production cutbacks, which, in turn, l i m i t
food production);

26
-7-
Product substitution w i l l become more difficult;
Economic and, therefore, political power w i l l continue to
shift markedly f r o m buyers to sellers.
In retrospect, it can be said that these trends were w e l l advanced
by early December 1973. The doubling of oil prices by the O P E C countries
on December 22, 1973--which raised oil prices in 1974 to levels most econo-
mists had not anticipated until 1980--has introduced a "system overload"
which may be beyond the capacity of the international order to absorb
without major chaos. It has also accelerated and brought into stark relief
other important trends which must now be taken into account. Four trends
in particular merit special attention: the economic dislocations resulting
f r o m the oil price rises; a worsening world food situation; a deepening of
the global recession already in prospect; and major shifts in the economic
and political power of nation states.
Energy Shock
The "energy shock" which many developing countries are experiencing

u
comes f r o m two quite different factors: (1) the increase in o i l prices, and
(2) higher prices for essential food and f e r t i l i z e r f r o m developed countries.
I f prices remain at current levels (which are four times those of 1972), the
l_/ 1972 1973 1974 (est. )

A l l oil imports f r o m OPEC (c. i . f . ) $20. 0 billion $36. 0 billion $100. 0 billion
Developing country oil imports 3 . 7 billion 5.2 billion 15.0 billion
O P E C governmental oil revenues 14. 5 billion 22. 7 billion 85. 0 billion
(Of which Venezuela's share) 1. 9 billion 2. 8 billion 10. 0 billion
OPEC current account surplus 1.6 billion 6. 1 billion 66.0 billion

27
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non-oil-exporting developing countries w i l l have to pay $10 billion more for
necessary oil Imports in 1974 than in 1973. Moreover, it is likely that
most of this money w i l l be "recycled"in the form of purchases and in-
vestments by countries--not into the economies of the hardest-
hit jion-oil-exporting couiiLx Les,' but into tfcî'j >2 developed countries.
At the same time, the increased cost of the food and fertilizer impart* A
the non-oil-exporting developing countries from the developed countries
w i l l exceed $5 billion. With wheat and nitrogenous fertilizer prices more
than double those of 1972, the increased import bill of the non-oil-exporting
developing countries for these two commodities alone (both imported p r i -
m a r i l y from the United States) w i l l be over $3. 5 billion.
As a consequence of these price rises, the developing countries w i l l
need to pay some $15 billion more for essential Imports in 1974. The
massive impact of these price increases is indicated by the fact that they
are equivalent to nearly five times the total of net U. S. development
assistance in 1972, and are almost double the $8 billion of a l l development
assistance that the developing countries received from the industrial coun-
tries in the same year.
Equally important, many developing countries would be further
damaged if the present worldwide economic slowdown were allowed to drift
into a major global recession, further reducing their export earnings.
Those countries which depend heavily on workers' remittances and on
revenues from tourismfor example Mexico and the Caribbean countries--
would suffer additional harm. Whether a global depression can be avoided

28
-9-
depends on how the developed countries (notably the United States) react to
the new situation.
Effects of the Price Increases on Particular

Developing Countries
Beyond these general effects on a l l of the developing countries,
however, the impact of price increases, as already indicated, varies greatly
among individual developing countries. The major oil exporters are one
category of developing countries which obviously benefits. These countries--
whose combined population of more than one quarter billion is greater than
that of North America, the European Community, or Latin A m e r i c a w i l l
be in a greatly improved position to accelerate their economic .growth.
However, as shown in Table I attached to this statement, the degree of
benefit varies sharply among the countries within this group. Thus
Venezuela's increased earnings from oil alone w i l l in 1974 more than
triple its total imports of $2.4 billion in 1973. Indonesia, which is an
extremely poor country within this category, now benefits only to the extent
of $20 per capita from the oil price hikes; but even in this case, the addi-
tional oil earnings--in combination with the good prices it is getting for its
other raw material exports--will remove foreign exchange as a major con-
straint on its development effort.
It must be noted, however, that increased foreign exchange avail-
ability does not remove, although it may alleviate, other major development
constraints--the many social problems faced by most oil-exporting countries.

29
-10-
Thus in such disparate countries as V e n e z u e l a , N i g e r i a , A l g e r i a , and
Indonesia-, the serious unemployment and income m a l d i s t r i b u t i o n p r o b l e m s
w h i c h a r c l a r g e l y a consequence of their economic and s o c i a l s t r u c t u r e s and
policies have not been solved, and m a y only be eased, by growing a v a i l -
a b i l i t y of f o r e i g n exchange. D j a k a r t a ' s vast u r b a n slums and its recent
r i o t s a r c v i v i d r e m i n d e r s that growing s o c i a l p r o b l e m s can exist side by
side w i t h a c c e l e r a t i n g economic growth and i n c r e a s e d f o r e i g n exchange
earnings. Saudi A r a b i a and the P e r s i a n Gulf E m i r a t e s also face m a j o r
problems of transition f r o m feudal to m o d e r n structures. These countries,
t h e r e f o r e , w i l l need continued technical cooperation in solving their develop-
ment problems, although they c l e a r l y no longer r e q u i r e any capital financing
on highly concessional t e r m s .
A second category of developing countries consists of those non-
O P E C countries which, on balance, either have not been significantly injured
by the p r i c e trends of the past two years or appear to be net beneficiaries
because their advantages in other areas w i l l l a r g e l y offset the net effect of
the p r i c e changes of 1973 or their balance-of-payments. Some of these coun-
t r i e s a r e n e a r l y self-sufficient in oil or a r e m i n o r o i l exporters; some benefit
substantially f r o m their exports of other raw m a t e r i a l s whose prices a r e
increasing (see Table I I I ) ; and some enjoy both of these advantages.
37-211 O - 74 - 3

30
- l i -
y
China, Colombia, Mexico, B o l i v i a - - a n d , shortly, P e r u as w e l l - - a r e in
the f i r s t sub-group; while M a l a y s i a , Morocco, Z a m b i a , Z a i r e , and p r o -
bably also B r a z i l belong in the second. Tunisia because of its phosphates
and Bolivia because of its tin a r e examples of m i n o r o i l - e x p o r t e r s benefit-
ing under both headings.
Mexico and T u n i s i a , however, also belong to a t h i r d c a t e g o r y of
c o u n t r i e s - - t h o s e which w i l l suiler d i s p r o p o r t i o n a t e l y f r o m any economic
slowdown in the i n d u s t r i a l countries bccause of t h e i r close linkages w i t h
the m a j o r i n d u s t r i a l regions of the W e s t . T h e s e a r e nations w h i c h d u r i n g
t h e past 15 years have successfully c a p i t a l i z e d on t h e i r p h y s i c a l p r o x i m i t y
to the i n d u s t r i a l countries to increase t h e i r earnings f r o m t o u r i s m , workers1
r e m i t t a n c e s , and exports of a g r i c u l t u r a l p e r i s h a b l e s . Greece, Spain,
T u r k e y , Yugoslavia, T u n i s i a , and A l g e r i a a r c a m o n g those who have
benefited' greatly f r o m their p a r t i c i p a t i o n in W e s t e r n E u r o p e a n economic
expansion. Thus in 1973, Yugoslavia and T u r k e y each earned m o r e than
2 / China became a m i n o r o i l e x p o r t e r in September 1973, and i n 1974 is

expected to :<hi.p some.3 m i l l i o n tons, valued at a p p r o x i m a t e l y $200 m i l l i o n .
Its o i l exports may increase . g r a d u a l l y - - t o 5 m i l l i o n tons in 1975 o r 1976 - -
but a r e not oipcetod to increase g r e a t l y in the f o r e s e e a b l e f u t u r e . By the
l a t e 1 970s, tho m a j o r expansion that is now under w a y in its p e t r o c h e m i c a l
i n d u s t r y is -jxpftetod to r e q u i r e l a r g e amounts of d o m e s t i c oil production.
Chi Aft wi.U however, f r o m the. present high g r a i n and f e r t i l i z e r p r i c e s .
China r i v a l s QiOia as the w o r l d ' s l a r g e s t f e r t i l i s e r i m p o r t e r , and its g r a i n
r
i m p o r t s for 1 -7-1--which a r c unusually h i g h - - a r e expected to r e a c h at l e a s t
9 mi.Uion ton:;. In m o r e n o r m a l y e a r s China's grain i m p o r t s have ranged
between 4 a no o raUlior; ions. In 197 Z the Chinese paid $345 m i l l i o n f o r
t h e i r /;.rain import:; nt-lbo nmch l o w e r p r i c e s then p r e v a i l i n g ; in 1974 t h e i r
g r a i n import bill, is expected to be w e l l o v e r $1 b i l l i o n .

31
-12-
$1 billion from workers' remittances, and Yugoslavia earned an equivalent
amount from tourism as well. Mexico and the Caribbean have been the
most conspicuous gainers from proximity to the booming North American
market. Mexico's tourism earnings, for example, exceeded $1 billion in 1973.
A group of countries that are related to this third category, yet
somewhat different, includes countries such as South Korea, Taiwan, Hong
Kong, and Singapore. These countries are closely integrated with the world
economy but almost entirely through the processing of goods. The energy
component of their imports is very large, and they also are substantial food
importers. The combined increase of South Korea's oil and food bills in
1974, for example, is likely to approximate $1 billion. These countries
clearly are affected adversely by the greatly increased prices of the energy
and raw materials they need. However, the crisis period for such countries
may well be of relatively short duration, sinceprovided that there is no
major global recession and the market .continues strong--they should be
able to pass along much of the extra cost to the buyers of their manufactured
exports. An added advantage of these countries is that in recent years,
most of them have developed sizable foreign exchange reserves as well as
established patterns of access to export credits and to the Wall Street and
Eurodollar markets.
Because of the inherent strength of their ties to the industrial
economies, the problems of this third category of countries and its special
sub-group in adapting to the new price structure should not prove impossible

32
-13-
unless the slowdown in the industrial countries is serious and long-lasting.
In 1974 and 1975, many of these countries w i l l need access to funds of a type
which should be relatively easy for the international economic community
to provide if the Western nations wish to accommodate the needs of these
countries. Many of the measures developed for assisting the OECD countries
to adjust to the higher oil prices should be applicable to these countries as
well. It also should be possible to ensure their continuous access to the

3/
Euro-currency markets and export credits despite their s h o r t - t e r m difficulties.
The fourth category of countries consists of the hard core of seriously
affected countries, totaling about forty in number. Most of these countries
a r e in tropical A f r i c a , South A s i a , and the Central A m e r i c a n - C a r i b b e a n
a r e a , but the category also includes Uruguay, and possibly Chile and the
Philippines. It is important to realize that these countries together contain
some 900 million people, or nearly half the population of the developing
w o r l d exclusive of China. F o r this "Fourth W o r l d " group of countries, the
consequences of the changes f r o m 1973 a r e overwhelmingly negative. Most
of these countries not only a r e the poorest in the world at present, but also
3 / I n 1973, developing countries borrowed an estimated $10 billion in the

E u r o - c u r r e n c y m a r k e t s , w e l l above the l e v e l of the preceding y e a r . (See Table I V )
Largsst known borrower:', w e r e O P E C countries in A s i a and A f r i c a , and B r a z i l ,
Mexico, Colombia., and P e r u in .Latin A m e r i c a . Many countries in the second
and t h i r d categories described above borrowed r e l a t i v e l y s m a l l amounts. T h e
impact of the high o i l prices orx E u r o - d o l l a r transactions w i t h developing coun-
t r i e s is uncertain, To the extent that A r a b deposits in E u r o - d o l l a r banks a r e
m o r e than offset by European withdrawals to pay for o i l , t h e r e w i l l not be as
much liquidity in Euro-ciii-rcncies, and that m a y deprive developing countries
of an iimportant i ccvnt source, of finance. M o r e o v e r , much of the $10 b i l l i o n
is c a D ' i H c on .short notice; by Hie lending banks, thus increasing the v u l n e r a b i l i t y
of the developing countries.. Oa the other luuul, if A r a b deposits leave the
E u r o - c u r r e n c y ij.:;rhcst m o r e liquid, 197-1 may yield additional l a r g e t r a n s f e r ,
to the u;:velopiu cou:il;rio.s-~chiefly the. m o r e advanced ones.

33
-14-
have the most dismal growth prospect^ for the future. Their net share of
the identifiable adverse effects of the recent price increases amounts to
some $3 billion. In addition, these countries face imponderables such as
the cost of reduced direct private investtfnent in the wake of these economic
disriptions or the decline in their export earnings due to the global eco-
nomic slowdown in 1974. Finally, if the countries in this category are to
maintain their development momentum, they w i l l need major additional
investments either to increase their food, f e r t i l i z e r , and energy production
to reduce their dependence on these high-priced imports or to establish new
export industries to enable them to pay their vastly higher import b i l l s - -
or both. An additional $l-$2 billion annually is needed for these purposes.
India, the Philippines, and Bangladesh, for example, probably could
double their grain production in less than a decade with greatly increased
research, more irrigation facilities, and wider availability of f a r m inputs
and credit. Sri Lanka and Nepal have unexploited hydroelectric potential,
and India--like the United States and several European countr ies--has
large coal reserves which warrant development given the new high price
level for energy. The poorest countries, however, always have had more
difficulty than the industrial countries in shifting capital and technology
from one sector to another, and this difference is even greater now because
of the higher oil and food prices, which drain f r o m the poorest countries
resources that might otherwise be available for investment.
Extraordinary measures w i l l be needed to assist these countries, as
most of the means suitable for helping the third category of countries

34
-15-
described above are not suitable for this Fourth World category. These
poorer countries are unable to assume large additional amounts of short-
t e r m or medium-term credits on near-commercial terms because of
their already high debt burdens and limited foreign exchange earning capacity.
The new I M F oil facility has, therefore, limited value for them.
Worsening World Food Situation
It has been apparent for approximately a year now that the current
international scarcity of major agricultural commodities and the major
drawdown of world food reserves reflect important long-term trends as
well as the more temporary factor of lack of rainfall in the Soviet Union
and large areas of Asia. We are witnessing what appears to be a funda-
mental change in the world food economy f r o m two decades of relative global
abundance to an era of more or less chronically tight supplies of essential
foodstuffs. This is so despite the return to production of U.S. cropland
idled in recent years. As noted earlier, a major reason behind this shift
is the fact that growing affluence in rich countries has joined population
growth in the poor countries as a major cause of increasing demand for
fbodgrains. At the same time, overfishing has interrupted the long period
of sustained growth in the world fish catch--thus limiting the supply of
another important protein source.
As a consequence of these fundamental changes, as well as of the
additional temporary factor of drought, global food stocks have been dropping
in recent years. Global reserves have dropped f r o m the equivalent of 69

35
-16-
days of consumption in 1970 to some 36 days of reserves by last summer.
Despite the highest grain production and the highest grain prices in history
in the current crop year, global reserves are continuing to fall and had
reached the equivalent of only 26 or 27 days' global supply by June, 1974.
Food production prospects for the developing countries for the crop
year that begins this month are even less hopeful than they were last fall.
Most developing countries w i l l be even more short of foreign exchange as a
result of last December's doubling of energy prices, and hence w i l l be
unable to import energy, fertilizers, pesticides, and other essential f a r m
inputs. In addition, the world is faced with a world fertilizer shortage
which, w i l l last at least for several years. Barring some new governmental
intervention, developing countries can expect their fertilizer supply to be
cut back far more than w i l l be the case in the industrial countries.
In the United States, the combination of new acreage being restored
to production, the greater use of fertilizers because of the much higher prices
for grains, and the increased use of urea for feed, has resulted in an un-
official "quasi-embargo" on U.S. fertilizer exports since last October.
As a consequence of the energy crisis, Japan--in recent years the world's
largest fertilizer exporter--has cut back its fertilizer production severely
to the point where in recent months its output has been largely limited to
meeting the demands of its politically important domestic market and to
supplying Communist China.
Developing countries are hurt the most, as evidenced by the shortfall
of 750 thousand to 1 million tons in India's fertilizer imports during the

36
-17-
past crop year, which w i l l cause a production shortfall of 7 to 10 million
tons of grain. It w i l l be at least several years before adequate new f e r -
t i l i z e r capacity can be constructed, and under the present policies of the
industrial countries the adverse consequences of this shortfall are borne
principally by the developing countries. The FAO estimates the shortfall
of these countries for the present crop year at 2 million tons, which w i l l
necessitate their importing as much as an additional 16-20 million tons of
grain at a foreign exchange cost of some $4 billion.
The extent of global vulnerability is particularly underlined by ex-
amining the degree of global dependence on North America for exportable
food supplies. Over the past three decades, North America--particularly
the United States, which accounts for three-fourths of the continent's grain
exports--has emerged as the world's breadbasket. Of the 95 million tons
that moved in world grain trade between regions in 1973, 88 million were
from North America. This contrasts with the mid-1930s, when North
America provided only 5 million of the 25 million tons then moving in trade
between regions. Exports of Australia, the only other net exporter of
importance, are but a fraction of North America's. Moreover, the United
States now is not only the world's major exporter of wheat and feedgrains
but it is also the world's leading exporter of rice. Thus the United States
and Canada together today control a larger share of the world's exportable
surplus of grains than the Middle East does of oil.
Having embargoed new fertilizer sales because of rising domestic
demand and devoid of the food surpluses on which its food aid (PL 480)

37
-18-
p r o g r a m so long depended, the United States--the food and f e r t i l i z e r center
of the w o r l d - - n o longer is implementing even the semblance of a global
food policy beyond that of m a x i m i z i n g profits for a g r i c u l t u r a l exports. U.S.
food aid this year is o n e - t h i r d its volume of two years ago, and one-half of
this greatly reduced amount goes to Indochina. A t the same t i m e , U.S.
per capita food consumption continues to Trise--amounting to 1, 850 pounds of
grain annually by 1972, as contrasted to 380 pounds per person in most of
A f r i c a and South A s i a - - w h i l e scarce f e r t i l i z e r continues to be used for such
n o n - f a r m purposes as lawns, golf courses, and c e m e t e r i e s in e v e r - i n c r e a s i n g
amounts that already exceed the total f e r t i l i z e r s h o r t f a l l in the developing
countries.
T h e r e is an urgent need for the United States to develop an integrated
global food policy. The new e r a of increasinly tight supplies brings w i t h it
the need for greatly improved global management not only to avoid l a r g e -
scale famine but also to increase food availability so that two-digit inflation
does not become a s e m i - p e r m a n e n t f i x t u r e . Now that idled cropland in the
United States has been returned to production, the opportunity for easily
expanding production in the developed countries has diminished sharply. As
sources become scarce, the comparative advantage in additional food p r o -
duction shifts toward those areas w h e r e the resources can b r i n g the greatest
gains. The increase in food output brought by a given additional amount of
f e r t i l i z e r or energy is f a r higher in the developing countries than in the
industrial countries. Since f e r t i l i z e r s a r e a l r e a d y applied v e r y heavily in

38
-19-
the a g r i c u l t u r a l l y advanced nations of Europe, in Japan, and in the United
States, an additional pound of f e r t i l i z e r applied in these nations m a y not
r e t u r n m o r e than 5 pounds additional grain. But in countries such as India,
Indonesia, or B r a z i l , it w i l l yield at least an additional ten pounds of grain.
Unfortunately and ironically, when w o r l d f e r t i l i z e r shortages emerged in
1973 the m o r e advanced nations acted to r e s t r i c t their f e r t i l i z e r exports to
the poor nations, where the f e r t i l i z e r would have produced much m o r e food.
In some ways, President Nixon's proposal to double U . S . assistance
f o r increasing food production in the developing countries under the F Y 1975
F o r e i g n Assistance A c t m a y be described as one of the lowest cost means
available to the United States for fighting inflation over the longer run. The
w o r l d ' s principal unrealized potential for expanding food production is now
concentrated in the developing countries. Soils in Bangladesh a r e fully
equivalent to those in Japan, yet r i c e yields a r e only o n e - t h i r d of those in
Japan. India's a r e a of cropland is roughly comparable to that of the United
States, but it harvests only 105 m i l l i o n tons of grain while the United States
harvests 250 m i l l i o n tons. C o r n yields in B r a z i l and Thailand a r e s t i l l only
o n e - t h i r d those of the United States.
Power Shifts
The events of recent months have accelerated the shift of economic and
p o l i t i c a l power to two power c e n t e r s - - N o r t h A m e r i c a and the O P E C c o u n t r i e s - -
whose leadership role in the months ahead is uncertain, at the same t i m e that
they have weakened and d e m o r a l i z e d the European Economic Community and
Japan, which in recent years had been providing increasing global leadership.

39
-20-
The o i l - r i c h O P E C countries, w i t h a current account surplus of some
$50-$65 billion annually, a r e an obvious source of new power. Given the
new w e a l t h and the a r b i t r a r y manner in which these countries implemented
t h e i r o i l price increases, it is understandable that many insist that these
countries take the lead in meeting the aggravated financial problems of the
poorest countries. The O P E C countries have tended to react defensively,
however, and most developing countries have been reluctant to press them
hard for a combination of reasons. These include some degree of self-
identification w i t h the o i l producers as fellow developing countries, as w e l l
as the same " p r a c t i c a l " politics that have led many industrial countries to
seek b i l a t e r a l deals w i t h the o i l producers. No m a j o r dialogue, has developed
as yet, t h e r e f o r e , between the oil countries and the industrial countries on
the problems of the poor. The o i l producers in their defensive reactions
have noted that the price of wheat had increased n e a r l y threefold before there
was a p a r a l l e l o i l p r i c e increase, that most of them a r e not so r i c h per
capita as the industrial countries (in 1974, Venezuela's per capita income w i l l
approximate-$1, 500, N i g e r i a ' s $250, I r a n ' s $ 1 , 0 0 0 , and Saudi A r a b i a ' s
$3, 000 versus $5, 000 for the United States, $8, 000 for Kuwait, and $43, 000
for Abu Dhabi), and that they, solely as newly r i c h , should not be asked to
help the developing countries to a greater extent Ln t e r m s of per cent of
G N P than the industrial countries. The dialogue initiated by the I M F and
the W o r l d Bank w i t h these countries is useful, but f a r m o r e needs to be done.
T h e r e should be p a r t i c u l a r opportunities for effective dialogue w i t h Venezuela,
Saudi A r a b i a and I r a n . Venezuela has closer and longer established ties w i t h

40
- 2 1 -
the other L a t i n A m e r i c a n countries than N i g e r i a has w i t h the countries of
its region, or the Middle E a s t e r n countries have w i t h A s i a and A f r i c a .
Saudi A r a b i a appears m o r e concerned than most of the r i c h e r O P E C coun-
t r i e s w i t h the potential adverse effects of high o i l p r i c e s . I r a n , the o r i g i n a l
instigator of high o i l p r i c e s , has been conscious of the need to avoid unduly-
antagonizing the F o u r t h W o r l d countries.
The second power center strengthened as a result of recent events
is the United States and Canada. Canada, w i t h increased earnings f r o m its
o i l exports to the United States to offset its o i l imports for E a s t e r n Canada,
is a m u l t i - b i l l i o n - d o l l a r beneficiary of the recent trend toward higher
prices for raw m a t e r i a l s . A less appreciated, but m a j o r result of r e c e n t
events is the r e l a t i v e l y strengthened position of the United S t a t e s - - a s
reflected in the increasing value of the dollar and the U . S . b a l a n c e - o f -
payments surplus "for 1973. This strengthening is the result of a combination
of factors including high, s c a r c i t y - r e l a t e d prices for many of its m a j o r r a w
m a t e r i a l exports; the at least t e m p o r a r i l y improved U . S . competitive
position in manufactures resulting f r o m the c u r r e n c y realignments that
began in late 1971; and, f i n a l l y , the r e l a t i v e l y m i n o r dependence of the
United States on o i l imports compared to other m a j o r industrial countries.
The o i l imports of the United States represent only some 13. 5 per cent of its
t o t a l energy consumption. M o r e o v e r , the United States r e l i e s on imports
f o r only 30 per c e n t - - c o m p a r e d , for example, to Japan's 9 9 . 6 per c e n t - - o f
its o i l consumption. M o r e o v e r , vast r e s e r v e s of coal and shale ensure f o r
the United States the option of substantial energy independence over the

41
-22-
longer run. A s a consequence, the United States, despite the l i k e l y eco-
nomic slowdown in 1974, is far m o r e a t t r a c t i v e for A r a b (and other)
investment than a r e other countries and currencies and therefore can be
expected to run a l a r g e balance-of-payments surplus in 1974. I n general,
then, the r e s o u r c e - r i c h c o u n t r i e s - - s u c h as the United States, China, Canada,
A u s t r a l i a , and the Soviet U n i o n - - s u f f e r less than do s m a l l e r , resource-
dependent industrial or developing countries when wrenching changes weaken
the international economic o r d e r .
Elements of a Solution
Possibly most important among the various measures required by the
present situation is the need to avoid a serious global recession at a t i m e
w h e n a l l m a j o r economies a r e simultaneously in an economic slowdown.
Ways also must be found to recycle funds in adequate amounts f r o m the
f o r e i g n exchange surplus nations (notably O P E C , the United States, and
Canada) to the most seriously injured industrial and developing countries.
F o r those c u r r e n t l y able to pay c o m m e r i c a l r a t e s , the Eurodollar m a r k e t
m a y serve this purpose in the v e r y short t e r m , but over a s e v e r a l - y e a r
period there is need for a greatly expanded I M F o i l f a c i l i t y and for monetary
and trade adjustments which w i l l enable h a r d - h i t countries such as the United
Kingdom, K o r e a , and Taiwan to increase their export earnings.
Many developing countries, p a r t i c u l a r l y those of the F o u r t h W o r l d ,
w i l l r e q u i r e special help on concessional t e r m s . Considering the stakes
involved, the amounts n e e d e d - - $ 4 - $ 5 billion annually f o r s e v e r a l years to

42
-23-
cover p r i c e rises' and accelerated energy and a g r i c u l t u r a l d e v e l o p m e n t - -
a r e not l a r g e . In addition to helping the most severely affected countries
meet their immediate problems in maintaining the flow of essential I m p o r t s ,
a special worldwide effort should be launched to provide them w i t h the tech-
n i c a l and financial assistance necessary to Increase their food production
and to develop alternate sources of energy so that these countries do not
r e m a i n indefinitely Impaired by these p r i c e r i s e s . The I M F ' s s h o r t - t e r m
capabilities can be effectively employed to help the poorest, h a r d e s t - h i t
countries only If they a r e part of a longer range package which r e s t o r e s the
growth process In these countries. Without other action by the Industrial
countries, the O P E C countries, and the International community In general,
the contribution of the I M F ' s present f a c i l i t i e s Is at best l i m i t e d .
The rollback of o i l prices is s t i l l an issue at the present moment. The
significant price reduction being sought by the United States would c l e a r l y ease
the global readjustment problem by reducing the danger of a serious economic
recession and by lessening the severity of the trade deficits confronting
the great m a j o r i t y of countries in 1974, thereby easing the task of r e c y c l i n g
the trade surplus of the O P E C countries back to those in need. However,
the m o r a l (and logical) position of the United States in pressing for an o i l
p r i c e rollback would be greatly strengthened by a U . S . initiative to (1) ease
the growing burden on the least developed countries resulting f r o m the sky-
rocketing prices of f e r t i l i z e r and grain, and (2) assure t h e m of access to
v i t a l commodities, p a r t i c u l a r l y f e r t i l i z e r . Thus there is an urgent need for
reducing the adverse impact of both sets of price r i s e s , and p a r t i c u l a r l y for
reducing their impact on the poorest countries.

43
-24-
The resolution of the United Nations General Assembly Special
Session on Raw M a t e r i a l s in A p r i l , 1974, is important in this context. It
called on Secretary General Waldheim to r a i s e emergency assistance to
help tide the most severely affected, or F o u r t h W o r l d , countries over the
next 12 months, and outlined a procedure for developing a m u l t i - y e a r
effort to help these countries regain their financial balance and development
momentum. The Council of the European Economic Community has offered
to increase its assistance by $500 m i l l i o n if the other r i c h countries w i l l
r a i s e the balance for a fund of at least $3 billion, of which they would expect
the O P E C nations to provide some $1. 5 billion.
The United States Government has a f f i r m e d to Secretary- General
W a l d h e i m that we w i l l participate in this emerging effort, but without
specifying any amount or share. A f a i r share for the United States total
should be at least one q u a r t e r , probably even a t h i r d , given the fact that
we a r e much less hurt by the recent price dislocations than the Europeans
or the Japanese. A U . S . contribution in the f o r m of increased food and
a g r i c u l t u r a l production assistance totaling $1 billion w i l l be less than one-half
of the m o r e than $2 billion we w i l l receive in 1974 f r o m the developing coun-
t r i e s as a result of our higher food p r i c e s .
The Canadian and Japanese a r e each reported to have offered to put
up $100 m i l l i o n , and the Netherlands $30 m i l l i o n . I r a n and Venezuela a r e
also reported to have each promised $100 m i l l i o n or m o r e , and D r . Raul
P r e b i s c h has been conducting a round of discussions w i t h the A r a b countries
in the past two weeks on behalf of Secretary General W a l d h e i m . The

44
-25-
S e c r e t a r y General of O P E C has stated s e v e r a l times recently,, but without
substantiating detail, that the O P E C countries w i l l provide assistance in
1974 in amounts greater than 1 per cent of their G N P , i. e . , m o r e than
$1.5 billion. This includes, however, assistance to such countries as
Jordan and Egypt which, like U . S. aid to V i e t n a m or Colombia, does not
qualify as aid to F o u r t h W o r l d countries.
I m m e d i a t e Next Steps
The scale of the global problems brought on by the events of 1973 is
such that they cannot be coped w i t h through, a series of belated, uncoo.r-
dinated, and ad hoc m e a s u r e s . The need is f o r a global cooperative effort
to (1) counter the threats of a severe sustained economic slowdown by
maintaining demand, and of inflationary supply shortages by increasing
production; (2) enable the recycling of surplus funds f r o m O P E C investments
to developed and developing countries In need; (3) help m a i n t a i n m o m e n t u m
in the development efforts of the poorest developing countries d u r i n g these
years of transition and adjustment to higher p r i c e s ; and (4) start evolving
a new set of rules for access to supplies.
S e c r e t a r y Kissinger acted w i t h foresight last f a l l in calling for a
United Nations Food Conference (now set f o r November 1974) and in setting
f o r t h general proposals in his w i d e - r a n g i n g speech to the U . N . General
A s s e m b l y on A p r i l 15; however, the F o u r t h W o r l d countries r e q u i r e some
$3 b i l l i o n of emergency assistance i m m e d i a t e l y , before governments and
international agencies deliberate on m e d i u m - t e r m and l o n g e r - r a n g e proposals,
and a specific U . S . response is now overdue.

45
-26-
The Overseas Development Council in A p r i l proposed in its Agenda
f o r Action, 1974, seven possible actions to address the urgent needs of the
hardest-hit poor countries;
(1) A g r e e m e n t by food-exporting countries to set aside a portion of
their food exports for t r a n s f e r on concessional t e r m s to the poorest countries;
(2) A p a r a l l e l agreement by c a p i t a l - s u r p l u s , o i l - e x p o r t i n g countries
to set aside a portion of their o i l exports f o r t r a n s f e r to the poorest developing
countries on concessional t e r m s , or to set aside a s m a l l portion of o i l
revenues f o r development, or both;
(3) A g r e e m e n t on a global system, of increased food r e s e r v e s to
meet future shortages;
(4) A joint effort by the capital-surplus o i l exporters and industrial
countries to help the poorest developing countries w i t h t h e i r i m m e d i a t e and
expanding needs for f e r t i l i z e r ;
(5) A g r e e m e n t to launch a worldwide effort to expand low cost food
production, w i t h particxilar emphasis on the poorest countries and e a r l y action
on IDA replenishment.
(6) A g r e e m e n t on a cooperative effort to help a l l countries find
substitutes for oil, including a) an interchange of information on energy
technology, and b) financing by capital-surplus countries;
(7) A g r e e m e n t on such s h o r t - t e r m financial support for the p r i c e -
distressed poorest countries as debt postponement.
These actions would be mutually r e i n f o r c i n g if a l l or most of them
could be secured. T h e i r total impact would go w e l l beyond dealing w i t h
37-211 O - 74 - 4

46
-27-
immediate problems of the current economic t u r m o i l to hold out the prospect
of accelerated development.
Conclusion
I n many ways, the w o r l d in 1974 is at a watershed comparable to
that of the m i d - 1 9 3 0 s , when the w o r l d chose the wrong direction and p r o -
ceeded on to W o r l d W a r I I , or to that of the mid-1940s when the decisions "
taken led to a new cooperative w o r l d order which, for a l l its obvious i m -
perfections, has taken the w o r l d to unprecedented levels of cooperation and
prosperity. The need in 1974 is for a sense of vision and cooperation c o m -
parable to that of the late 1940s.
The past year has c l e a r l y indicated what can lie ahead i f - - w h e t h e r by
preference or lack of f o r e s i g h t - - t h e law of the jungle r a t h e r than cooperation
remains the response of nations. Many of the new problems of global
scarcity brought on by r i s i n g affluence and increasing populations c e r t a i n l y
should be amenable to alleviation, and possibly even to solution, through
cooperative international action. The United States, the w o r l d ' s b r e a d -
basket and the m a j o r beneficiary (by over $6 billion) of s c a r c i t y - d e r i v e d
higher prices for its food exports, has a special responsibility to help the
hardest-hit countries at least on the food aspects of the w o r l d economic c r i s i s .
By skillfully handling the w o r l d ' s most essential raw m a t e r i a l - - f o o d - - t h e supply
of which it dominates, the United States might also begin to pioneer and f o r -
mulate new ."rules of the game" for access to supplies, for increasing p r o -
duction to meet demand, and for establishing global r e s e r v e s - - n e w rules that
a r e needed for the benefit of a l l in managing the increasingly tight w o r l d supply
of essential resources.

Table I
Estimated Oil Revenues, Per Capita GNP, Population, and

Total Imports of Eleven OPEC Countries
Estimated
Estimated Per Capita Per Capita Popu- Total
Government Oil Revenue Government Oil Revenue GNP lation Imports
($ millions) ($) (S) (millions) ($ millions)
Country .1972 1973 1974 1972 1973 1974" 1971 1973 1971 1972
Saudi Arabia 2,988 4,915 19,400 393 630 2,456 540 7.8 806 1.229
Iran '2.423 3,8S5 14,930 79 123 461 450 31.5 . 1,871 2.410
Kuwait 1,600 2,130 7,945 1,758 2.131 7,223 3,860 1.0 678 797
Iraq 802 1,465 5,900 80 141 551 370 10.4 656 713
Abu Dhabi 538 1,035 4,800 11,700 22,565 43,636 3,150 0.1 n.a. n.a.
Qatar 247 360 1,425 1.941 2,575 9,500 2,370 0.1 n.a. n.a.
Venezuela 1,933 2,800 10,010 176 250 870 1,060 . 11\2 2,301 2.433
Libya 1,705 2,210 7,990 820 1,005 3,631 1,450 2.2 712 1.104
Nigeria 1,200 1,950 6,960 21 33 114 140 59.4 1,506 1,502
Algeria 680 1,095 3,700 45 71 233 360 15.4 1,221 1,760
Indonesia 480 830 2,150 4 7 17 80 124.0 1,174 1.458
8
0DC estimate based on World Bank estimates for OPEC government oil revenues, population (mid-1971), and population growth rate*,
SOURCES: Oil Revenue figures are informal World Bank staff estimates; GNP and Population figures are from World Bank Atlas, 1974 (Washington;
O.C.: World Bank Group, 1974); import figures are based on International Trade, 1972 (Geneva: General Agreement on Tariffs and Trade, 1973),
Publication Sales No. GATT 1973-3. I

Table H .
T
Impact of Oil Pricc Rise on Sclcctcd Developing
^Countries, Ranked by GNP Per Capita
Primary
Changa in Exports Net O D A ' GN?
Estimated Total Estimated Total Total Total o: % of From OAC 'Per
Oil Import BiII Imports Debt Scrvice Reserves Reserves Exports Total . Countries'* Capita
($ millions) <$ millions) (S millions) ($ millions) (per cent) ($ millions) Exports ($ million^ (S)
Country 1972 1973 1074* 1972 1973 1974 1973 b
1970-1973* 1972 1973 1967-1969 1972 1971
Bangladesh 25 35 95 929 807 n.a. 1 200' n.s.. ^..n.a. . i n.a. . . jute, 4 6 J 200 ...70.
Sri Lanka 35 50 150 413 536 48 ; 77 79 . 313 372 tea. 61 65 100
1 . . rubber, 19
1
coconut. I d .
India 265 415 1.350 3,196 4,048 550 1,403h + 40 2.401 2,477 ' Jute. 2 3 606 110
tea. 12
Il
Iron, 7
:
Pakistan 65 85 260 1,144 1,455 278 ; 396 +118 737 1,107; cotton, 11 318 130
Kenya 25 40 115 698 854 30 j| 286 30 364 1 n.a. coffea. 24 160
1I i s tea. 15 I
I '{oil, 9
II
Thailand 125 180 510 1.616 1.737 52 1,267 + 40 1,063 1,503 rice. 2 7 53 210
i . rubber. 14
Philippines 185 265 740 1*662 2,480 128 ; 867 +245 1,105 1,955 wood, 24 164 j 240
( sugar. 17 i
!
Ghana 20 25 70 466 570 49 223 .+284 389 ' 562* . 'cocoa. 55' 60 250
Morocco 50 80 .216 1.057 1,336 102 ! 304* . +117 633 . 985 phosphate, 2 4 9 7
270
I " ' j .
:'food, 17
Korea. South 205 '. 325 1.075 2.715 3.531 332 | 1.034 70 1,624 3,088 ' wood, 13 361 j 290
| fish, 6
'Brazil 425 540 1,425 6,185 7,109 329 6.462 +444 3.991 6.038 1 coffee, 39 94 'j 460
cotton, 7 I
Uruguay 40 60 160 239 369 30 ' j 210 + 20 197 I 338 wool, 4 2 21 ; 750
I _ meat, 3 0 j
Chile . n.a. 147 362 1,211' n.o. 312 Vfca. n.a. 961 || 962. j copper, 7 6 39 j 760
. *T;-.c oi! import bill was calculated cn tho basis of the developing country's projected oil-import' reserve position as of June 1973.
corsurr.piion at approximately S3.C0 per barrel c.i.f. While'an oil import bill calculated in this 'Bas'jd on International Trofe, 1972 (Geneva: General Agreement on Tariffs and Trade, 19731.
fa:hlon may be unrealistic in terms of what many developing countries can afford to pay, it Publication Sales No. GATT 1973-3.
.nevertheless reflects the order of magnitude of the economic difficulties faced by these same
countries.
b
As of September 1973, unless otherwise noted. SOURCES: Oil Import arid Total Import figures ere based on Informal World ftanlt staff
c
The. value of total exports in 1073 are those (or the second quarter of 1973 expressed In estimates; Debt Scrvice- figures are from Bureau for Program and Policy Coordination, U.S.
ar.rvja! rotes, unless otherwise noted. Agency for International Development; Total Reserves'and Total Export figures are from
d
Comp3icd of net bilateral OOA and concessional multilateral flows. * International Monetary Fund, International Finncil Statistics, December 1973; Net Official
'Total reserve position as of July 1973. Development Assistance figures are based on Report by the Chairman of the Development
'Total reserve figure for Bangladesh obtained from U.S. Asency for International Development. Assistance Committee, Development Co operation, 1073 Review (Paris: OECD, 1973); GNP
figures are from World Dnk A tits. 1974 (Washington, D.C.: World Bank Group. 1974).
First quarter exports expressed in annual rates. - -*--*

49
Table I I I
Pricc Changes in Major Commodity Exports

of Developing Countries
'
Percentage Principal Exporters'

Change Per cent of Shares of
Major in Price, Total World World Exports of
Commodities 1972-1974" Trade, 1970 b . Commodity, 1970
Petroleum 355 5.04 Saudi Arabia, 15%

Iran, 13%
Urea 239 c n.a. n.a.
. Rubber 211 .48 Malaysia, 33%
Wheat 196 1.00 United States, 32%
Canada, 21%
Australia, 12%
Argentina, 4%
Palm Oil 147 .06 Malaysia, 44%
Rice 138 .36 United States, 27%
Thailand, 11%
Cotton 137 .76 United States, 16%
Egypt. 14%
Corn 114 .58 United States, 45%
Sisal 113 .02 Tanzania, 33%
Sugar 105 .86 Philippines, 10%
Cocoa 103 J27 Ghana, 35%
Ground Nuts 91 .07 Nigeria, 29%
Copper 90 1.29 Zambia, 24%
Chile, 21%
Soybeans 79* .42 United States, 94%
tin 72 .21 Malaysia, 50%
Bolivia, 16%
Iron ore* 46c 0 Venezuela. 7%
Coffee 36 " ~ .93 Brazil. 32%
Colombia, 16%
Tea 19 .21 India, 31%
Sri Lanka, 29%
JUte 17 .05 Pakistan/Bangladesh, 50%
f "Price change from 1972 (average) to 1974 (January), unless otherwise noted.
bWortd trade equalled $280.4 billion in 1970, $371.7 billion in 1972, and $487.5 billion
in 1973 (second quarter estimate).
c
Price change from 1972 (average) to 1973 (average).
d
. Prlce change from 1972 (average) to 1973 (October).
I *Oata available for developing country exporters only.
SOURCES: Based on International Monetary Fund, Internationa! Financial Statistics,
Occember 1973, and World Bank staff estimates.

50
Table III
Announced Euro-Currency Lending to Non-OPEC

Developing Countries, 1972 and 1973
(S millions)
Country of Borrower 1972 1973
Argentina 236.0 87.3

Bahamas - 30.0
Bahrain - 15.0
Bolivia - 6.0
Brazil 577.4 789.0
Colombia 90.0 115.0
Costa Rica - 11.0
Cuba 23.3 30.0
Dominican Republic 4.0 15.0
. Dubai 18.3 120.0
Guinea 40.0 -
Guyana - 12.5
Haiti - 10.0
Hong Kong 20.0 72.6
India - 10.0
Ivory Coast - 95.0
Jamaica - 35.6
Kenya 15.0 4.5
Korea, North - 51.6
Korea, South 30.0 106.0
Lebanon - 20.0
Malawi - 5.3
Malaysia 76.1
Mexico 490.4 1,247.5
Nicaragua 15.0 102.0
Oman - 35.0
Panama 40.0 251.0
Peru 210.0 633.6
Philippines 61.3 178.5
Senegal - 90.0
Swaziland 3.2 -
Trinidad and Tobago - 38.0
Zaire 90.0 346.9
Zambia 25.0 150.0
Total, Non-OPEC Developing Countries 2.065.0 4,713.9

Total, OPEC Countries 1,023.5 3,080.0
Total. Developed Countries 6,385.0 " "12,889.4
WORLD T O T A L 8.473.5 20,683.3
NOTE: The interest rates vary. Maturities are largely three to eight years, with a six
month rollover period.
, SOURCE: International Economy Division, World Bank Group.

51
M r . G O N Z A L E Z . I n your statement you stated t h a t y o u anticipated a

reduction or a decline i n the cost of petroleum, and I was wondering,
this w i l l necessarily be predicated on the fact that we w o u l d have t o
trust the A r a b producing countries that they would not reimpose an
embargo. D o you see any danger or a possibility of a reimposition of
the embargo ?
M r . B E N N E T T . M r . Chairman, as you know, the embargo o f last year
was imposed after the outbreak o f the war, and had an almost exclu-
sively political content. O f course, I am not the expert butt i t is cer-
t a i n l y m y hope t h a t there w i l l be continued progress t o w a r d a lasting
peace i n the M i d d l e Bast, so t h a t the occasion f o r an embargo w i l l not
reoccur. A general embargo f o r economic reasons seems t o me most
unlikely.
M r . G O N Z A L E Z . W i t h respect t o the possibilities t h a t you say the
Secretary and others w i l l be exploring soon, w h a t mechanism or pro-
g r a m caii be devised t o t r y t o absorb some o f this excess money t h r o u g h
the issuance o f Government securities? C a n y o u t e l l us i f any k i n d
of an agreement has been reached by now ? Whether or not some f i r m
proposition was developed d u r i n g the occasion o f the President's visit
t o tthe M i d d l e East? A n d whether or not, i n case such plans are i n
the works, i t w o u l d be necessary f o r the administration t o come t o the
Congress f o r legislation t o provide f o r t h a t t y p e o f mechanism, or
whether or n o t i t could a l l be done w i t h i n the administrative processes ?
M r . B E N N E T T . There have been no suc,h agreements t o m y knowledge
w i t h foreign countries on new investments i n U.S. Treasury or Gov-
ernment securities. Y o u know, o f course, t h a t we do issue special
securities. F o r example, we have about $26 b i l l i o n outstanding now,
o f w h i c h the largest component is held by the German authorities.
I t occurs t o us t h a t i t could be t o the mutual advantage o f the
U n i t e d States. a,n<J t o some other countries t h a t w i l l be accumulating
large government-held foreign investments t o consider similar special
securities.
There is no reason t h a t I know of w h y we should offer any o f these
investors terms more favorable t h a n we offer other investors, includ-
i n g U.S. citizens. B u t i t is, according t o our experience, l i k e l y that
there w i l l be opportunities t o develop securities w i t h special features
t h a t meet our respective needs. I f , f o r example, a M i d d l e Ea^t country
could give us some assurance o f the dates over a coming period on
which specific large amounts would be invested here, we i n t u r n could
design government-to-government securities. These w o u l d be on terms
comparable t o the private securities b u t w o u l d provide them the op-
p o r t u n i t y o f k n o w i n g i n advance they could invest on a specific day
and t h a t those funds could be recovered by t h e m on the basis o f cer-
t a i n periods of notice t o us, just as we have done w i t h the Germans.
W e have h a d very p r e l i m i n a r y discussions o f t h i s sort o f t h i n g , f o r
example, when the S a u d i A r a b i a n ministers were here recently. W e
agreed to discuss the matter f u r t h e r w i t h them we go out there next
week; but there are no agreements.
M r . G O N Z A L E Z . T h a n k y o u very much.
I n that connection, I am sure t h a t you would want to avoid the situa-
t i o n I understand prevails now w i t h respect t o the W o r l d Bank, where
a country such as I r a n lends to the Bank at a higher interest charge

52
t h a n w h a t the B a n k is lending out i n return. T h i s seems t o me t o be a

questionable policy, and I t r u s t t h a t t h a t k i n d o f situation w i l l be
very carefully studied by the U n i t e d States.
M r . BENNETT. Yes, sir.
M r . G O N Z A L E Z . I f you do not m i n d , M r . Johnson, I am going t o j u m p
over y o u and recognize M r . Orane. H e has been here f r o m the begin-
n i n g and has anxiously been w a i t i n g to ask some questions. I recognize
M r . Crane.
M r . C R A N E . T h a n k you, M r . Chairman.
F i r s t o f a l l , I would l i k e t o congratulate M r . Bennett upon reaching
the position t o w h i c h he w i l l be confirmed very soon, and I appreciate
his testimony before the subcommittee, as well as t h a t of M r . G r a n t .
There is one question I w o u l d l i k e t o p u t t o you, M r . Secretaryit
may be a premature designation, b u t I am sure i t w i l l be flawless i n
another hourand t h a t concerns the paragraph on page 5 o f your
testimony i n w h i c h you indicate t h a t y o u do not feel t h a t the current
situation is nearly as grave as some o f the remarks t h a t we had in-
dicated i n a b r i e f prepared f o r the subcommittee b y the staff. I am
t h i n k i n g specifically o f some o f the quotations i n H o b a r t Rowen's
article on the deepening monetary crisis, as well as some o f M r . Levy's
remarks. Y o u go on t o say, at the t o p of page 6, t h a t the problem you
perceive now is t h a t the clear and present danger before us is not in-
adequate, but instead f a r too much monetary demand f a c i n g the exist-
i n g capacity t o produce. O n the one hand, I can grasp this f r o m the
testimony o f yourself and M r . Grant, b u t on the other hand, i t seems
t o me t h a t w h a t we are t a l k i n g about, i n both your testimony and M r .
Grant's, is t r y i n g t o come u p w i t h a whale o f a l o t o f money. I am
not sure exactly who is g o i n g t o provide i t and h o w p a r t i c u l a r l y t o
help these least developed countries. T h a t does not strike me as surfeit
of money chasing scarce resources, but rather a distinct lack o f money
available, unless we simply crank u p the p r i n t i n g presses a n d aggra-
vate a l l of the existing problems. I w o u l d appreciate i t i f you could
dilate just a l i t t l e b i t on t h a t point.
Mr. B E N N E T T . I n a time o f surplus monetary demand, i t w o u l d
s t i l l be possible f o r the people o f Bangladesh t o be short o f the
a b i l i t y t o buy imports. I may be wrong, but I understood you to say,
M r . G r a n t , t h a t the U n i t e d States indicated t h a t i t w o u l d participate
i n the U . N . fund.
M r . G R A N T . Rig;ht. T h e emergency assistance effort, not i n the f u n d ;
the emergency assistance efforts.
M r . B E N N E T T . Yes, t h a t is the p o i n t I wish t o make. W e wish t o
cooperate, b u t we have not made any commitment t o p u t money i n t o
this U.N", operation.
I t h i n k this also may be clarified. Y o u mentioned t h a t the Europeans
said, conditionally, t h a t they m i g h t be able t o make some money avail-
able. B u t t h a t also is not t o the U . N . f u n d ; i t was t o assistance t o these
most severely affected, i n response t o a U . N . appeal, b u t not necessarily
t o any particular channel. B u t there is no U.S. commitment whatso-
ever to place any given amount i n t o this effort. I t may be i n t i m e t h a t
t h a t w o u l d be appropriate or t h a t some f o r m of food loans m i g h t be,
but there is no such commitment. I t is our hope t h a t a large p r o p o r t i o n
o f this needed assistance w i l l come f r o m those who are today i n such
a l i q u i d position.

53
M r . G r a n t mentioned an estimate of perhaps $3 b i l l i o n a year. I

have a feeling t h a t f o r this calendar year the need w i l l probably not
reach a b i l l i o n dollars. W h a t i t w i l l be i n later years, who knows. W h o
knows w h a t the o i l price w i l l beand i t is h a r d t o estimate a l l o f the
commodity adjustments: the price of tea, the price o f beef, and esti-
mates of t h a t type have t o be rather preliminary.
M r . C R A N E . T h e t h i n g t h a t s t i l l concerns me is this point o f liquid-
i t y crunch. W e have unprecedented interest rates at home r i g h t now.
I understand the balance o f payments deficit f o r I t a l y , i f i t continued
to r u n at this rate t h r o u g h the year, w o u l d be $13 billion, which, even
i f t h e i r gold is revalued u p w a r d t o market price, t h a t would totally
wipe out t h e i r gold supply. E n g l a n d and France have these problems,
though not of the same magnitude. Here are advanced industrial
nations t h a t are undergoing, I t h i n k , really severe wrenches, and then
on the other hand, we have the underdeveloped countries w h i c h I do
not know where they are going t o come up w i t h the money. I f the
O P E C countries buy W o r l d B a n k bonds, what interest rates w i l l they
be p a y i n g on those bonds ?
M r . B E N N E T T . T h e bonds are i n t w o types latelya p o r t i o n denomi-
nated i n their own currency, and a portion i n dollars. I believe the
rates t h a t have been negotiated lately are mostly at 8 percent.
M r . C R A N E . They are going t o have to lend long at low, very low,
interest rates, w i l l they not, t o the least developed countries, t o t r y
and get them t h r o u g h the present crunch ?
M r . B E N N E T T . L e t me distinguish three things. The money that is
going into the I M F f a c i l i t y to help buy o i l has been coming mainly
f r o m the O P E C countries at 7 percent f o r relending at 4- to 7-year
maturities. The W o r l d B a n k bonds w i l l be f o r long-term I B R D loans,
and these are f o r development projects. I D A is financed f r o m govern-
mental contributions, not f r o m the receipts of bonds.
B u t let me get back to your basic question: Where is a l l of the money
coming f r o m ? W e l l , I gîess my answer is there is too much money i n
t o t a l ; t h a t we are pushing up prices and pushing down the value of
money. T h a t does not mean that there may not be a need t o help those
who are p a r t i c u l a r l y h a r d h i t . I t does not mean t h a t some particular
country cannot get into trouble w i t h an out-of-date exchange rate or
by t r y i n g to hold prices that are not consistent w i t h the money supply.
B u t take I t a l y . I t a l y has just p u t i n new measures t h a t w i l l substan-
t i a l l y reduce that deficit forecast you mentioned, and i n fact, i n recent
weeks, I t a l y may not even have had a deficit. They have begun to take
measures.
M r . C R A N E . T h a n k you.
M r . G O N Z A L E Z . T h a n k you, M r . Crane.
M r . Young.
M r . Y O U N G . I y i e l d t o M r . Rees.
M r . G O N Z A L E Z . M r . Rees, then.
M r . R E E S . T h a n k you. Congratulations, M r . Bennett. I hope you en-
j o y traveling.
I have been doing some work i n this field i n terms of the domestic
and international monetary impact of the p r i c i n g of oil, and I noted
that our balance-of-payments deficit f o r the month o f M a y was $776
million. I also notice that there had been a great deal o f overbuying of
agricultural commodities over the past 6 or 7 months f r o m some of the

54
i m p o r t i n g countries, w h i c h actually m i g h t cut down the demand f o r

U.S. f a r m products f o r the balance of the year. W e continue t o i m p o r t
about 30 percent of our oil. W i l l this trade balanceof payments
continue throughout the year, do you believe ?
M r . B E N N E T T . I t h i n k y o u probably p u t your finger on an i m p o r t a n t
component of t h a t large deterioration i n M a y i n our trade position
the previous overbuying i n a g r i c u l t u r a l commodities and the drop i n
a g r i c u l t u r a l prices. O f course, we do not know how much, b u t last
year's $8 b i l l i o n i m p o r t b i l l f o r o i l is going to look p r e t t y small com-
pared t o this year's i m p o r t b i l l .
I t is also w o r t h n o t i n g t h a t the way or accounts are kept, these
investments t h a t have been coming i n here increasingly i n recent weeks
f r o m the o i l exporting countriesthese investments i n U.S. Treasury
securities or on deposit i n the U n i t e d Statesare investments o f
official institutions; they w i l l show u p i n our present method o f pub-
l i s h i n g balance-of-payments statistics as an overall deficit o f the
U n i t e d States. Maybe we ought to consider whether t h a t is not mis-
leading. I t is really an investment; they are not so much f o r e i g n ex-
change reserves i n the usual sense but more investments o f the national
p a t r i m o n y they w i l l be using down the road. They are not current
balance-of-payments deficits i n the old-fashion sense. B u t I cannot at
this point give you a specific prediction of what our trade balance w i l l
be this year t h a t would be of much w o r t h to you. I t h i n k the i m p o r t a n t
t h i n g is t h a t we have t o remain flexible to respond to what i t t u r n s out
to be. A n y prediction I give you w i l l not be w o r t h much.
M r . R E E S . W h a t bothers me, even i n l i g h t of our adverse balance o f
payments and the possibility t h a t this m i g h t continue, is t h a t we are
s t i l l i n better shape than most of the w o r l d because we produce so much
of our energy. I t a l y , I understand, is b o r r o w i n g on the short t e r m
E u r o d o l l a r market t o solve what is basically a long-term problem.
M u c h of the E u r o d o l l a r market today is composed o f short-term
moneymost f r o m the o i l exporting countries. A l l of these various
windows, whether you loan someone 8 percent money to purchase o i l
o r whether you allow I t a l y t o revalue their gold so t h a t they can bor-
row more on the short t e r m E u r o d o l l a r market, a l l of these are j u s t
solutions f o r 1974. W h a t worries me is 1975. Once a country uses a l l o f
its reserves t o i m p o r t the bare m i n i m u m of t h e i r petroleum needs, t h a t
is i t . They do not have any more reserves; they are broke. I t a l y has
revalued t h e i r g o l d ; they cannot revalue i t again. They have already
revalued i t u p t o where they can borrow. M r . C a r l i m i g h t be able t o do
something to discipline the I t a l i a n economyI tend t o doubt i t b u t
what is going to happen i n 1975? W e have taken the i n i t i a l shot, and
we do not have a n y t h i n g to b a i l us out next year.
M r . B E N N E T T . W e l l , let me take the case of I t a l y and illustrate some
of the trends.
F i r s t o f all, I t a l y has been b o r r o w i n g some short term, b u t i n fact,
the b u l k of their E u r o d o l l a r b o r r o w i n g i n the first h a l f o f this year was
long t e r m b o r r o w i n g and not short term. I n fact, they probably bor-
rowed, i n the first h a l f of this year i n t o t a l more t h a n the entire in-
crease f o r the whole year i n t h e i r o i l b i l l . Thus, obviously, there must
be factors i n addition to o i l at w o r k here; factors h a v i n g t o do w i t h
the domestic economy. So appropriate restraint on the domestic
economy does provide hope f o r next year, and the intensity of the prob-

55
lem this year is more than just oil. O f course, they have taken addi-
tional measuresthey just threw the other day another quarter-a-gal-
lon t a x on the price of gasoline. Those to us would seem l i k e rattier
draconian measures, so I t h i n k they do provide some hope t h a t next
year w i l l be better than this year.
M r . R E E S . Just one f u r t h e r question. A r e you going t o the M i d d l e
East w i t h Secretary Simon ?
M r . B E N N E T T , I es. W e are going not only to the M i d d l e E a s t ; we
w i l l be t a l k i n g to some of the finance ministers i n Western Europe on
the way back. Somehow I have some feeling t h a t some o f the subject
matter w i l l be the same as we are discussing here.
M r . R E E S . T h a n k y o u very much, sir.
M r . G O N Z A L E Z . T h a n k you, M r . Rees.
Before recognizing M r . Frenzel, I would like to report t h a t we have
a t h i r d witness, V i c t o r K u r t z , f r o m New Y o r k , and we w i l l listen t o
h i m after awhile.
I recognize M r . Frenzel.
M r . F R E N Z E L . T h a n k you, M r . Chairman.
I do want to congratulate M r . Bennett and wish h i m a long and
successful career.
I t was indicated t h a t we had committed ourselves to the principle
of some sort of emergency aid t h r o u g h the U.N., but you are c r i t i -
cizedor we are criticized, I guessfor not setting f o r t h some sum.
I s i t not true t h a t we could w i n d up by p a y i n g the lion's share o f a l l
of those emergency programs, M r . Bennett?
M r . B E N N E T T . I would like to make clear t h a t we have not agreed i n
principle to contribute to a U . N . fund. W e agreed to w o r k w i t h the
U . N . t o study this problem and to t r y to see that this problem is ap-
propriately recognized. W e have not agreed to make any contribution.
I t is true i n the total postwar period we provided the lion's share.
O f course, there are particular cases. W e have not provided the largest
contribution to the Asian Development Bank, or the largest contribu-
t i o n to the A f r i c a n Development Bank. There are exceptions.
I t is our hope that this new Development Council w i l l be able to do
an objective job of studying what is needed and what appropriate re-
sponses are and where i t should be possible to obtain appropriate help
f o r those who are most seriously affected.
M r . F R E N Z E L . T h a n k you.
M r . G R A N T . M r . Congressman, may I justsince there is a l i t t l e
play, apparently, here on words.
M r . F R E N Z E L . I f you could do i t i n 30 seconds, because M r . Bennett
has to leave, and you can stay, I t h i n k .
M r . GRANT. Yes.
The U n i t e d Nations is asked to w o r k on t w o fronts. One, the Secre-
t a r y General is t r y i n g to raise approximately $3 b i l l i o n of emergency
assistance f o r the most severely affected countries, which could be i n
the f o r m of either contributions to a U . N . f u n d or directly, i n the f o r m
of increased bilateral aid. The U.S. Government has stated t o the
U n i t e d Nations t h a t i t w i l l participate affirmatively i n this effort.
There is a second issue of a f u n d to be established next year that w i l l
be designed to w o r k on a multiyear basis. T h a t is what we have said we
would not participate in, i n its present f o r m , as I understand.
M r . F R E N Z E L . Fine. I f either of you two want to a m p l i f y on these
remarks f o r the record, I would be glad to have them.

56
M r . Bennett, you commented on the fact t h a t our a g r i c u l t u r a l sales

abroad are d o w n considerably this year, and t h a t is m y experience, too.
A p p a r e n t l y , our t r a d i n g partners are eating out of the pipeline, so t o
speak, and t h a t leads me to believe t h a t w o r l d food supply figures are
p r e t t y w i l d guesses, at best. I s this your estimate ?
M r . B E N N E T T . W o r l d food prices have tended t o come down, as you
know, since February. U n f o r t u n a t e l y , they have tended t o go u p the
last few days, because some of these adverse weather reports t h a t M r .
G r a n t mentioned have been coming i n , w h i c h is a clear i l l u s t r a t i o n o f
how difficult i t is to forecast i n this area.
M r . F R E N Z E L . W e have done t o w o r l d food prices w h a t we d i d t o the
stock market. E v e r y time somebody says on television t h a t f o o d m i g h t
be short, w o r l d food prices go up. I t may have no relationship t o grow-
i n g conditions or what the anticipated crop is. I t h i n k W a l t e r Cronkite
raised the price of wheat last year by at least a buck, and the market is
getting a w f u l l y sensitive.
B u t certainly, food prices are down considerably. Does t h a t mean we
are going h u n g r y , or demand is off ?
M r . B E N N E T T . The Russians, of course, are not expected t o be an
importer this year. The Chinese are s t i l l expected to be a very large
one. W h a t the Eastern Europeans and the Indians w i l l be is very much
a difficult t h i n g to guess at this point.
I do not want to pose as a food expert. A l l I would l i k e t o do is agree
wholeheartedly w i t h your suggestion t h a t forecasting the food market
ahead is a very difficult project.
M r . F R E N Z E L . O K . T h e final point I wanted t o make is t h a t y o u r
prime interest i n the t r i p t h a t is f o r t h c o m i n g and your p r i m e interest
w i t h i n the Department has been to convince the o i l producers t h a t
their prices have t o come down. I s t h a t true ?
M r . B E N N E T T . I m i g h t c l a r i f y . T h i s t r i p t h a t I have the honor t o
go on w i t h Secretary Simon is p r i m a r i l y to discuss economic collabora-
tion i n trade and investment w i t h the Egyptians, w i t h the Israelis, and
w i t h the Saudis. I n the case of the Saudis, the p r i m a r y concern w i l l be
collaborating w i t h them i n the industrialization of Saudi A r a b i a ,
which, as M r . Hanna mentioned, is t h e i r No. 1 interest.
W h i l e we are there, we w i l l take the o p p o r t u n i t y as bond salesmen
also to t a l k to them on the other subject.
M r . F R E N Z E L . I hope you t a l k about prices too, because i t seems to
me there is not a n y t h i n g better than we can do, p a r t i c u l a r l y f o r the
poorest of the poor, than t o t r y t o reduce those prices. W h i l e we have
been criticized a l i t t l e b i t , i t seems to me t h a t when f o o d got short, we
at least t r i e d to increase food supplies i n every way t h a t was available
to us, while the producers of oil took the contrary course o f action.
I do not t h i n k t h a t we are deserving the same criticism t h a t they do,
and I believe i t is i n their interest to see t h a t those prices come down a
l i t t l e bit. They may get bigger piles of money, b u t they are going t o
spend the same way because of the inflation problem. I y i e l d the bal-
ance of m y time.
M r . G O N Z A L E Z . M r . Young.
M r . Y O U N G . Yes. M r . Secretary, before you r u n off, I wonder i f you
m i g h t just say a w o r d about the consequences t o the U n i t e d States of
any of the lesser developed countries actually going bankrupt.

57
M r . B E N N E T T . I have never thought the concept of bankruptcy was
extremely useful i n t a l k i n g about the affairs of a government. Gov-
ernments, of course, can always p r i n t money. They can default on their
international obligations, and as a major creditor, that is a concern to
us. B u t I t h i n k i t would be more appropriate to look at the u n d e r l y i n g
situation.
I f a government loses its ability to insure some degree o f economic
v i a b i l i t y f o r an economy, what w i l l be the political consequences? W i l l
the government be overthrown ? W i l l they take violent courses or t r y to
make alliances t h a t under normal circumstances they would not
contemplate ?
I t h i n k , ultimately, we have to not only look at the humanitarian but
also the political consequences of severe economic situations. M r .
Grant, I am sure, could answer this better than I .
M r . Y O U N G . I was really t h i n k i n g more along the lines ofwell, we
saw Jamaica begin t o raise the price of its bauxite i n an attempt to
remain somewhat stable. T h a t government, f o r instance, where we
have tremendous hotel travel and other kinds o f American invest-
ments; should t h a t government begin to totter, i t would not only have
a political impact, i t would have a direct economic impact back on us.
I was t h i n k i n g more i n those terms, because when we t a l k about the
Congress going along w i t h more, or any k i n d of aid, i n view of our
touchy experience last week w i t h I D A , that is what disturbs me about
your somewhat optimistic approach. I t m i g h t be very good economic-
ally and i n terms of our whole w o r l d picture, but m terms of com-
municating any sense of urgency t o Members of this House of Rep-
resentatives, i t does not quite do justice, I t h i n k , to the condition m
which we f i n d ourselves, a condition which affects us economically and
not f r o m just a humanitarian consideration f o r the rest of the world.
M r . B E N N E T T . W e l l , there is no doubt that government i n extremis
can take violent measures, not only w i t h respect t o foreign investments
there, or exports, but i n other ways. O n the other hand, we have t o tem-
per that w i t h the realization t h a t there has been an unusually large
rash of expropriations and breaches of contract by governments that
were not i n extremis. Y o u cannot say that they only occur i n those
circumstances.
M r . Y O U N G . M y colleague here passed a note t o me saying you can
only legalize the purchase o f gold once.
M r . R E E S . H O W are we going to get the next b i l l t h r o u g h ?
M r . G O N Z A L E Z . W e m i g h t have special d r a w i n g rights, domestic
special d r a w i n g rights.
M r . Y O U N G . T h a n k you very much.
M r . G O N Z A L E Z . M r . Burgener.
M r . B U R G E N E R . I have no questions.
M r . G O N Z A L E Z . M r . Johnson ?
M r . J O H N S O N . I , too, M r . Bennett, want t o congratulate you on your
appointment and hope you have a very lovely swearing i n ceremony
today. I t certainly is a b i g h i g h l i g h t i n your career.
M r . B E N N E T T . I look f o r w a r d t o a calm life.
M r . J O H N S O N . Y O U t h i n k you w i l l survive i t a l l r i g h t ? I am quite
interested i n one statement i n your speech where you said:
Neither do I feel that current developments pose a serious threat of world
depression.

58
Then M r . Gonzalez i n his statement quotes the respected Economist

magazine, saying t h a t :
The world's rich countries are digging the foundations for a major world
depression.
I realize those statements are contrary to each other, and first of a l l ,
w o u l d you comment on your statement t h a t you do not t h i n k i t poses a
threat of depression?
M r . B E N N E T T . W e l l , i t was w i t h statements such as t h a t o f the Econ-
omist i n m i n d that I thought i t was appropriate t o p u t i n such a
phrase. E a r l i e r i n the statement, I had pointed out t h a t the o i l and
other economic developments have led t o a cut i n our standard of l i v -
i n g and have led to a reduction i n our rate of g r o w t h . B u t t o refer t o
t h a t as a recession tends to be misleading.
T h a t is because of a shortage of something real. I t is not the type of
recession we normally t h i n k of, since we a l l studied or grew u p i n the
1930's, i n which there was just p l a i n a lack of money to purchase the
goods and to keep the plants working. T h a t type of recession just does
not seem relevant to t h i n k o f at this time.
Second, I see no evidence t h a t governments at this p o i n t are over-
doing their fight against inflation to the extent t h a t they are unneces-
sarily restraining production, or t h a t one country is overdoing i t and
t h a t w i l l reflect on and h a r m the next country. I n fact, i t is h a r d t o
find a government that has been able t o p u l l itself together t o go f a r
enough i n fighting inflation. T h a t is our problem, not the reverse, not
t h a t governments are overdoing i t and t h a t is h u r t i n g us, or t h a t we
are overdoing i t and that is h u r t i n g other governments.
M r . J O H N S O N . I could ask you more questions, b u t I want t o get y o u
downtown. I want t o get you to the church on time. T h a n k you very
much.
M r . G O N Z A L E Z . T h a n k you, M r . Bennett. W e wish you well.
M r . B E N N E T T . I am sorry I cannot stay here ana argue w i t h M r .
Grant, b u t I appreciate your consideration.
M r . G O N Z A L E Z . I d i d want t o mention t o the subcommittee t h a t we
had the t h i r d witness, V i c t o r K u r t z , here, and we w i l l allow M r .
G r a n t t o finish his summation, because we interrupted h i m . B u t I do
want to point out we have our t h i r d witness, and I would l i k e to see us
remain here
M r . K U R T Z . I am sorry I cannot question M r . Bennett, because I
have accused the administration of terrible, basic errors, w h i c h are
responsible f o r the crisis.
M r . G O N Z A L E Z . W e l l , M r . K u r t z , what I was going to suggest is we
allow M r . G r a n t to finish his summation, and then we w i l l recognize
you f o r the presentation of whatever statement you have, and also have
you introduce yourself to us and give us a l i t t l e background and the
like.
M a y I say by way of explanation t h a t M r . K u r t z has been i n touch
w i t h us f o r more than a year and had wanted t o appear before the
subcommittee a year ago out h a d t o go t o Europe at the time, and he
could not make i t .
So, M r . Grant, we indulge a l i t t l e b i t f u r t h e r on y o u r good kindness
and w i l l come back t o you and leave i t u p to you how you wish t o sum
up. Y o u were i n the process of sunmming up your presentation, and I

59
regret the interruption, but we d i d want to see M r . Bennett leave i n

time f o r his swearing in. So you have the floor.
M r . G R A N T . W e l l , M r . Chairman, I can be very brief, because I was
at the end o f m y statement.
I n essence, i t is that f o r the most severely ~ affected countries, the
F o u r t h W o r l d , they clearly require major emergency assistance, f o r
which the present mechanisms are not adequate. There has been an
appeal by the Secretary General f o r an emergency effort over the next
year, to be supplemented by a longer term arrangement.
I would only say on this t h a t while i t is clear that the o i l countries
need to play a very m a j o r role i n p r o v i d i n g the resource flow ? that so
does the U n i t e d States. This is, i n part, because the financial crises t h a t
the countries of the F o u r t h W o r l d are in, are i n p a r t due to the higher
prices t h a t we ourselves are charging today f o r the goods t h a t we sell.
W e w i l l earn more than $2 b i l l i o n extra f r o m the higher prices f o r
food t h a t we are selling t o the developing countries this year.
I f we would clearly move affirmatively i n p r o v i d i n g additional as-
sistance to these countries to p a r t i a l l y compensate f o r the impact of the
higher prices t h a t we are charging, i t w i l l then become vastly easier
to get the O P E C countries to come t h r o u g h w i t h compensatory financ-
i n g f o r the somewhat larger burden t h a t they are imposing.
F i n a l l y , we do see, looking over the next 4 or 5 years, t h a t the coun-
tries which have a capital surplus are, i n the first instance, the O P E C
countries, b u t i n the second instance, the O P E C countries are going to
invest much of t h a t capital surplus i n countries like Canada and the
U n i t e d States, w h i c h are much better investments t h a n ; let us say,
I t a l y or the U n i t e d K i n g d o m , f o r their money; so t h a t u l t i m a t e l y p a r t
of the recycling problem is not only how to get money f r o m the O P E C
countries directly to the F o u r t h W o r l d and the developing countries,
but also how do we get some of the capital surplus f r o m N o r t h A m e r -
ica and A u s t r a l i a to the countries t h a t are i n short supply.
M r . G O N Z A L E Z . I n other words, would i t be correct and f a i r to say
that what you are t e l l i n g us is that w i t h o u t America not only partici-
p a t i n g but t a k i n g the leadership i n evolving a w o r l d approach, o r a
cooperative venture, i n respect to helping these nations i n distress, that
there is very l i t t l e optimistic outlook f o r a successful venture, either by
the U . N . or by a combination of the other countries ?
A s I gather i t , the thrust of what you are t e l l i n g us is t h a t American
leadership is very essential, necessary, and t h a t w i t h o u t i t , really, i n
effect, we may not solve this problem?
M r . G R A N T . Y o u are absolutely r i g h t , M r . Chairman. T h e events of
the last 2 years have i n many ways returned the U n i t e d States t o the
sort of economic and political preeminence t h a t we had 10 or 12 years
ago. The pattern that we have witnessed i n the late 1960's ana the
early 1970's where the Europeans and the Japanese were t a k i n g an
ever-larger share of the burden, they currently have had their stuffing
knocked out of them much more than we have, and, really, looking
over the next 10. years, we are relativelyas the world's largest raw
material producerwe are i n a relatively much more advantaged
position.
The O P E C countries are raw, nouveaux riches. They do not know
what to do w i t h their money yet. I t w i l l take, I t h i n k , several years to

60
get f u l l y responsible behavior out of them, at best. I f d u r i n g this

period the U n i t e d States does not take a vigorous lead, then the fears
o f a 1930's type situation t o me are very, very real.
M r . G O N Z A L E Z . I was very much interested i n what y o u said on page
2 1 , 1 believe, of your statement, w i t h respect to Canada. T h i s is a very
l i t t l e discussed subject matter, and you, I t h i n k , very wisely pointed
out the fact that Canada has been one of the beneficiaries i n its ex-
portation o f o i l t o the U n i t e d States, and also happens to be one of the
great w o r l d g r a i n dealers.
Could you explain a l i t t l e b i t f u r t h e r your reference to Canada's
increased earnings and what you mean by offsetting t h a t w i t h the o i l
imports f r o m eastern Canada ?
M r . G R A N T . W e l l , M r . Chairman, Canada is both a m a j o r o i l ex-
porter t o us and a major o i l importer i n eastern Canada to meet its
requirements.
M r . G O N Z A L E Z . W e l l , w h y is this not more developed i n our national
consciousness? Seldom do you hear any mention about Canada i n this
role, or what its politics has been, or whether there has been a change
i n its politics w i t h respect to the U n i t e d States i n the recent months
because of our added i m p o r t a t i o n of o i l f r o m Canada.
D o you have any statistics on the increase, or what t h a t trade figure
represents?
M r . G R A N T . I do not have an exact figure. W h a t we do know is t h a t
the substantially increased i m p o r t b i l l she pays f o r o i l she brings i n t o
eastern Canada is offset by the very substantially increased export b i l l
she gets f o r oil. She is then a major net gainer i n terms o f the much
higher prices of grains, timber, ores, t h a t she exports.
I f you look at the five or six countries i n the w o r l d t h a t have really
gained f r o m the recent shifts, t w o or three of the A r a b countries, the
O P E C countries, would be first, and then Canada comes i n there as
the fifth or the s i x t h p r i n c i p a l beneficiary.
M r . G O N Z A L E Z . Pardon me, M r . Grant. W e have a signal t h a t a
quorum call is on. M a y I very respectfully and earnestly solicit m y
colleagues to take this quorum call and, i f possible, r e t u r n so t h a t we
can w i n d this u p by g i v i n g M r . G r a n t an o p p o r t u n i t y t o complete and
also t o hear M r . K u r t z present his testimony.
I am sure i t would not take long, and we could come back and w i n d
i t up. I t h i n k we w i l l have t h a t o p p o r t u n i t y after this first quorum.
I s there any objection to doing that? i f not, we w i l l t e m p o r a r i l y
recess to take this quorum call, and return.
[ A b r i e f recess was taken.]
M r . G O N Z A L E Z . The subcommittee w i l l resume.
I expect to have some additional members of the subcommittee com-
i n g back f r o m the quorum call, and I take this o p p o r t u n i t y t o t h a n k
M r . H a n n a and M r . Y o u n g f o r being here, and M r . Grant, we were
involved on this question of the role of Canada and its impact on the
U n i t e d States and how much potential there is. I n other words, we
like t o t h i n k i n terms o f Europe and distant nations, and we tend t o
overlook our own neighbors. I wanted t o go over some o f the specifics.
M r . G R A N T . W e do tend to underestimateas one who was b o r n a
Canadian, M r . Chairman, I am conscious of the fact t h a t we do tend
to take our neighbor t o the N o r t h f o r granted. I t is not commonly
recognized, f o r example, t h a t we have as much trade w i t h Canada as
w i t h a l l of Europe and Japan p u t together.

61
M r . G O N Z A L E Z . N O ; t h a t is not known at all, I w o u l d say, t o the

average American. I would say that is a fact t h a t is significant because
of how i t has been overlooked. I f i t is a l l r i g h t w i t h you and i f i t is
a l l r i g h t w i t h m y colleagues. I t h i n k we ought t o give M r . K u r t z an
o p p o r t u n i t y to present his statement, and let me advise you
M r . Y O U N G . Excuse me, may I just ask M r . Grant one point?
M r . G O N Z A L E Z . Oh, absolutely, absolutely. Please feel free.
M r . Y O U N G . I n the whole t a l k on agriculture, one t h i n g t h a t we ran
into en route to A f r i c a was the presence of American agribusiness con-
cerns moving into Senegal and Gambia.
D o you have any indication t h a t there is an export of American agri-
business to the F o u r t h W o r l d , and would this i n any way help t o deal
w i t h the problem y o u mentioned about balancing some o f the yields or
u t i l i z i n g some of the more fertile land ?
M r . G R A N T . There clearly has been quite a large degree of activity B Y
American agribusiness i n the developing world. However, most of i t
has been, u n t i l at least very recently, has been directed at producing
products f o r export out into the industrial economy. I t has not tended
to focus on the basic food crops t h a t are so indispensible to these econo-
mies t h a t have been lagging. I t is quite clear t o me that i f we are to
seriously address this question of how the w o r l d gets another 400 m i l -
l i o n tons of increased agricultural food production a year w i t h i n 10
years f r o m now t h a t we need t o harness f a r more effectively than we
have the skills of agribusiness, including their research facilities, t o go
into the developing countries, because as I indicated i n m y testimony,
the low cost potential food producing areas today are the developing
world. W e can increase food here, but w i t h ever r a p i d l y increasing
costs. F o r that, agribusiness corporations are a very i m p o r t a n t means
of technology transfer.
M r . H A N N A . M r . Chairman?
M r . G O N Z A L E Z . M r . Hanna?
M r . H A N N A . I t h i n k t h a t i t ought to be said here that i n considering
this question of the petrodollars t h a t we m i g h t very well make the
point t h a t the energy crisis which has brought the petrodollar t h i n g
into focus is more properly seen i f we realize t h a t the energy crisis is
t w o f o l d : One is the fuel f o r the human body and the other is the fuel
f o r human activities. B u t i t is an energy problem and the crisis i n the
w o r l d , I t h i n k , is t o take the increased volume o f money being pro-
duced b y the increased prices of o i l and seeing that a considerable
portion of i t is directed t o w a r d the other face of the energy crisis,
which is to increase food production, because i t occurs to me t h a t so
long as a l l foods contain a considerable amount of sugar they also can
be turned into fuel t h r o u g h the process of m a k i n g methanol or alcohol
as a substitute f o r o i l and gasoline, and I do not t h i n k t h a t has been
stressed sufficiently to make us see this t h i n g i n its t o t a l i t y .
M r . G R A N T . R i g h t , and M r . Hanna, i t is not generally recognized,
f o r example, how much energy i t takes today to produce food, and i t
used to take 1 calorie of energy to produce a calorie of food i n this
country, 50, 60 years ago. Now i t takes 10 calories of energy, and we
are at a point of r a p i d l y diminishing returns i n this. T h i s is one more
reason w h y , i f we want to get cheap food production over the next 10,
15 years, we have t o put more into the devloping countries which have
not yet reached the point of diminishing returns.
37-211 O - 74 - 5

62
M r . H A N N A . T h a n k you, M r . Chairman.
M r . G O N Z A L E Z . T h a n k you, M r . Hanna.
M r . Burgener, do you have any questions ?
M r . BURGENER. NO.
M r . G O N Z A L E Z . I f there is no objection. I t h i n k i t w o u l d be proper
t o recognize V i c t o r K u r t z , and I am going t o make a request, M r .
K u r t z , t h a t vou give us a b r i e f autobiographical sketch. M y under-
standing is, f r o m correspondence w i t h y o u and the fact t h a t you were
interested i n appearing before our subcommittee f o r more t h a n a year,
t h a t you have intimate associations and dealings w i t h the interna-
t i o n a l financial situation. So we iare interested i n h a v i n g a l i t t l e b i t
of your background and i n hearing f r o m you. I f I may suggest a b r i e f
summary o f your statement, though. I f y o u have a prepared t e x t y o u
can introduce i t f o r the record o f the proceedings o f t h i s subcommit-
tee, and I suggest this only because we cannot foretell when we w i l l
have another vote since the House now is i n session.
STATEMENT OF VICTOR KURTZ, ELVIC IMPORT CORP.,

NEW YORK, N.Y.
M r . K U R T Z . T h a n k y o u very much M r . Chairman. I appreciate very
much the courtesy you gave me f o r i n v i t i n g me t o appear before your
committee.
F o r many years I have been i n contact w i t h the administration,
many Senators and Congressmen, b u t a l l I got were very polite letters
b u t no action.
I was born and brought u p i n Vienna and studied international
economies a t the U n i v e r s i t y or Vienna. I have been interested i n geo-
politics since my, y outh.
I also lived i n Paris f o r many years.
N a t u r a l l y I speak fluently French and German.
I am a businessman and I have been going f o r more t h a n 25 years
at least once a year f o r 4 t o 6 weeksto Western Europe where I have
excellent connections and therefore I am well i n f o r m e d about the eco-
nomical, political situations i n those countries. Furthermore, I get
every week the most i m p o r t a n t French and German weekly maga-
zines24 hours a f t e r they appear i n Europe.
I n J a n u a r y 1968 I had a meeting i n F r a n k f u r t w i t h one o f the
highest officials o f the German Federal Reserve B o a r d (Bundesbank)
about the gold crisis and discussed m y ideas w i t h h i m .
F o l l o w i n g some correspondence, M r . Califano, special assistant to
the President, i n v i t e d me i n February t o Washington, t o a meeting
w i t h t h e i r g o l d expert.
T h e student unrest i n France i n M a y 1968 and the flight of capital
f r o m France solved the crisis f o r us at t h a t time.
I n your statement, M r . Chairman, you speak about "potential f o r
economical and political disaster as o f the 1930's." I t h i n k the danger
is even greater.
Before we discuss the causes o f our difficulties and ways t o solve
them, we have t o ask: W h o is qualified t o speak and make decisions
f o r us?
I don't blame the managers o f A R A M C O E X X O N f o r m e r l y

63
Standard O i l N.J., Standard O i l California, Texaco, M o b i l O i l t o

accept the order of their K i n g not to supply our A r m e d Forces w i t h
o i l anywhere.
B u t the managers o f the domestic companies who own A R A M C O
have no r i g h t t o decide our policy because they have too many con-
t r a r y interests.
T h e same concerns international bankers.
M r . Chairman, you said the o i l producers w i l l have a surplus this
year o f $65 b i l l i o n instead of $7 b i l l i o n last year. I t could even amount
t o $100 b i l l i o n i f I r a n ' s pressure t o raise o i l prices prevails.
T h i s means, by next year the foreign exchange reserves o f the
Western Worldabout $165 b i l l i o n w i l l be gone. T h i s is an intoler-
able situation.
W e are not interested i n recycling o i l money. W e want private
investments, not foreign government investments. O i l money is f o r -
eign government money. T h e o i l price has t o be broken. A possible
new embargo danger cannot be tolerated.
H o w d i d we come t o this situation? A s leading political, m i l i t a r y ,
and economical power, we must have a respected strong money. B u t
somehow M r . M i l t o n F r i e d m a n and M r . Reuss decided t h a t only a
devaluation could help our trade and payment balance.
T h e t r u t h is t h a t our trade balance f o r the first t i m e was negative
because o f the s h i p p i n g strike i n 1971. Because o f the shipping strike
we could not export our grains, soybeans and heavy machinery, while
goods came i n f r o m bonded warehouses and consumer goods b y air.
B u t we had an active trade balance w i t h Europe.
T h e 1971 trade deficit of $2 b i l l i o n was mainly w i t h Canada and
Japan. B u t i n 1972 our trade deficit was 300 percent greater because
our imports cost more and the exports received less. B u t h a l f of our
trade is w i t h countries which d i d not want a cheaper d o l l a r : Canada,
Mexico, Central America, nearly whole of South America, many
countries i n A f r i c a , Israel, Pakistan, I n d i a , Philippines, Yugoslavia,
Greece, T u r k e y stayed w i t h us. B u t because Germany introduced i n
1968 the value added tax, a b i g inflation started there, f o l l o w i n g the
French example.
There are i n France 3 m i l l i o n foreign workers: 1 m i l l i o n Algerians,
500,000 Portuguese, Spaniards, Italians.
There are i n Germany 3 m i l l i o n foreign workers: 1 m i l l i o n Turks,
500,000 Yugoslavians, Italians, and Spaniards.
A l l these foreign workers wanted higher wages and got i t , so
European prices went u p a n d up, while i n spite of the V i e t n a m war,
inflation here was extremely small.
Because of our b i g investments i n Europe, there were many Euro-
dollars there, b u t according t o the U.S. T a r i f f Commission of M a r c h
1973: " U . S . f o r e i g n affiliates own about $190 b i l l i o n o f l i q u i d assets
i n international markets."
I t w o u l d 'have been possible t o use our foreign assets t o support our
money i n an emergencythe same as the B r i t i s h d i d i n W o r l d W a r
W h i l e i n 1971 our trade balance w i t h Europe was %iy 2 b i l l i o n i n

our favor, i n 1972 i t was negative w i t h $140 million. F o r the whole
year 1972, our trade deficit t r i p l e d f r o m $2 b i l l i o n to $6 billion.

64
O u r official position was, we bad not enough devaluated and the

D o w J ones ticker reported the f o l l o w i n g :
O n February 6,1973:
Representative Reuss s a i d : The Monetary crisis i n Western Europe demon-
strates t h a t the d o l l a r i s p a t e n t l y overvalued a g a i n a n d said the U n i t e d States
can't expect the Smithsonian Agreement of December 1971 t o h o l d things to-
gether much longer.
O n February 12,1973:
W e are of t h e v i e w t h a t p a r i t y o f the d o l l a r should be fixed by t h e m a r k e t
r a t h e r t h a n the fiat of central.
A tremendous speculation on the foreign exchange market followed
this news. The deutsch m a r k and Swiss franc went up and Chairman
Stein reported on February 12, 1973 t o the President, we have to
devaluate again.
A g a i n , about 50 percent of our foreign tradespecially our neigh-
bors Canada and Mexicomaintained the same relation w i t h our
money t h a n before.
Today we know the tremendous power of the speculation.
A t a bankers convention i n San Diego, i n A p r i l of this year, the
f o l l o w i n g was reported:
I s the giant w o r l d w i d e m a r k e t f o r exchanging n a t i o n a l currencies being rigged ?
B a n k s are d i s r u p t i n g the foreign exchange m a r k e t t h r o u g h excessive speculation.
I f the German and Swiss banks f o r instance take a position of $500
m i l l i o n , there is no way you can go against it.
F o l l o w i n g the oil embargo, as i t was f o u n d out t h a t we depend on
much less oil imports than Europe, the dollar went up about 30 per-
cent. T h a t was the reason that our trade balance i n the last 3 months
of 1973 was i n our favor because of the higher value of our export
dollar and the lower price f o r our imports. B u t as end of January 1974
a l l restrictions f o r capital outflow was l i f t e d , and the dollar was again
under speculative pressure and went down 20 percent.
The tremendous amount of speculation is proven by a German regu-
l a t i o n t h a t starting June 1, 1974, all foreign exchange transactions i n
" F o r w a r d T r a d i n g " have to be reported t o the authorities.
The deutsche bank, the biggest, reported f o r 1973 foreign exchange
transactions f o r over $300 billion778 b i l l i o n D . M .
T h a t was only one, the biggest bank. There are 350 other b a n k i n g
institutions i n Germany.
T h e foreign exchange t r a d i n g i n New Y o r k was about $5 b i l l i o n per
day.
The tremendous losses m foreign exchange speculation w h i c h one of
the b i g three Swiss banks recently reported, and also the second biggest
bank i n Germany followed now by the bankruptcy of one of the biggest
private banks i n Germany ( H e r s t a t t ) , showed the extent of speculative
t r a d i n g which involved here the F r a n k l i n National B a n k and others
t i l l now unknown.
I don't t h i n k more proof is necessary after the public knows now
about the mystery of f o r w a r d foreign exchange speculation t h a t M r .
M i l t o n F r i e d m a n is dead w r o n g i n saying i n Newsweek of A p r i l 23,
1973:
The p r i v a t e speculation t h a t the governments deplored was socially useful and
h a d desirable effects. The official speculation i n w h i c h the governments engaged
was socially h a r m f u l and had undesirable effects.

65
The B a n k of E n g l a n d does not permit speculation against the pound.

I t is imperative that we immediately stop p e r m i t t i n g to trade against
the dollar.
Since 1971 the German mark went up f r o m 25 cents (U.S.) t o about
40 cents (U.S.).
I n J u l y o f last year, the m a r k was nearly double i n value but at the
same time the German trade balance got better and better. The German
export t o the U n i t e d States rose i n the first 3 months of this year by
18 percentthe imports only 9 percent. The next months were even
better f o r German exports. B u t our export items are also wanted and
w i l l be bought regardless of the value of the dollar. O n l y i f the dollar
is strong, there w i l l be less commodity speculation, less flights f r o m
the dollar, less inflation.
O n l y recently German inflation is smaller than ours.
I n general, Western Europe had overemployment, while we had
underemployment; so the price pressure was greater there.
W e cannot afford a budget deficit because we need international
confidence i n our money.
Because the oil producers received less money f o r the dollar they
received f o r their products, they asked always compensation w i t h
higher prices. The o i l importers d i d not fight i t , because their tax
break got greater w i t h each price raise.
The result, the arrogance of the oil producers showing their strength
leading to an embargo and the attack of the Shah of I r a n to raise oil
prices because he says the o i l companies make exhorbitant profits and
his own imports went up tremendously i n price. I n the meantime, to
stop dollars f r o m leaving our country interest rates going higher and
higher.
The stock market goes down, the b i g board alone shows a reduction
i n value since last year of about $150 b i l l i o n to about $600 billion. T h i s
means that the assets of our b i g public owned corporations can be
picked up extremely cheap f r o m foreign oil governments. This has to
change.
F o l l o w i n g the Herstatt crisis, the German authorities to stop a
market collapse offered money w i t h 9 percent per annum against stocks
( L o m b a r d C r e d i t ) , what we need here. Furthermore, our gold stock
should be a weapon f o r us, not against us. The fact that t r a d i n g is $25
m i l l i o n a day against about $160 b i l l i o n i n official gold reserves at the
market's price is true. T r a d i n g i n the key places i n F r a n k f u r t and
Z u r i c h is even less.
The B r i t i s h Finance Minister, M r . Denis Healey, thinks that addi-
tional demand f r o m American citizens would temper the possible
price-depressing effects of new I M F sales of gold andgold sales f r o m
Central Banksthen the American public would just be p a y i n g a
h i g h price. So Americans would just be the suckers to buy gold at
$150 an ouncemaybe drive the price up to $200 then the speculation
would unload and force the m a r g i n buyers to selland would buy
back at h a l f the price or even lower.
The French weekly magazine " L ' E x p r e s s " writes now i n its J u l y 8
edition:
Gold i n d a n g e r : Gold stock correspond t o 30 years of difference between pro-
duction and consumption. A t least 50 percent of it, is speculation. I f I t a l y starts
to sell i t s gold stock, the m a r k e t could collapse. Our hope is t h a t American
citizens w i l l now be able to buy gold. W h y should the Americans buy gold, i f i t
is no more a secure investment? (ask L ' E x p r e s s ) .

66
So obviously a much higher gold price w o u l d again devaluate the
dollar more tremendously and create a fantastic commodity specula-
tion. The Commodity Exchange Inc., N . Y . , New Y o r k Mercantile
Exchange, Chicago Mercantile Exchange, Chicago B o a r d of Trade
are ready to trade i n gold and are w a i t i n g f o r the suckers.
Now M r . Simon says, his first step is to fight inflation, but we can-
not fight inflation i f we permit Americans to buy g o l d ; 75 countries
do not permit their citizens to buy gold, i n c l u d i n g the U n i t e d K i n g -
dom, Australia, N o r w a y , and Denmark. The citizens of these coun-
tries do not lose their freedom because they don't have the r i g h t to
buy gold.
The French and German have the r i g h t , but we should not permit
i t because the American is the most speculative. I f only a few m i l l i o n
of Americans buy one ounce of gold, the gold price w i l l go up and
then our commodities w i l l go up. Then I r a n w i l l again want to raise
prices f o r their oil because the price they pay f o r soybeans and wheat,
et cetera, w i l l go up.
O n l y M r . Yamani, the oil minister of Saudi A r a b i a , sees the danger
f o r the world's economy w i t h higher oil prices, but a l l the other o i l
producers are more or less greedy. They want to give us a lesson t h a t
we should reduce our standard of l i v i n g . B u t we feel we don't have
to reduce our standard of l i v i n g w e have to break this undeserved
monopoly that ruins the Western W o r l d . W e have now an excellent
foreign policy situation.
W e have a f r i e n d l y relationship w i t h the most i m p o r t a n t o i l pro-
ducer, Saudi Arabia. W e have the detente w i t h Russia and China.
I r a n wanted to raise the price f o r natural gas to Russia. Russia buys
this n a t u r a l gas and sells i t w i t h profit to Europe. A s Russia refused
the higher price, I r a n doubled it. Russia is extremely dissatisfied, l i k e
us, w i t h Iran's price policy.
W e have now i n the key countries i n Europe, a change i n govern-
ment, favorable to us. M r . Schmidt, the German Bundeskanzler w i l l
make a more pro-American policy t h a n his predecessor. M r . Giscard
D ' E s t a i n g , the smartest of the European politicians is not a French
chauvenist. O n the contrary, he smashed the Gaullist P a r t y i n the
shortest time since he came to power and is more pro-American than
he admits to his people.
W e should t e l l our European friends t h a t a break i n the price o f
gold would have a long-range positive influence on their o i l imports,
because the most important t h i n g now is t o break the oil price w h i c h
went up about 400 percent since last year w i t h no end i n sight. Over
700 percent since 1970.
I f we sell f r o m our gold stock$111/0 billionabout $2 b i l l i o n
over $6 b i l l i o n at today's market priceit would s t i l l leave us w i t h a
higher gold stock than France, Switzerland, England, and Japan.
T h i s amount would break the gold price and would have a tremendous
effect on the M i d d l e East countries which hoard gold.
W h i l e France and Germany {nade b i g contracts w i t h I r a n , what
France sold to I r a n w i l l take them 10 years to deliver, but the amount
t h a t France w i l l sell to I r a n i n 10 years corresponds to a 1-year deficit
i n their o i l imports. The new leaders i n Europe realize t h a t only a
common policy w i t h the U n i t e d States can reestablish the situation
and not g i v i n g i n to the oil producers i n every respect.

67
The underdeveloped countries are i n an extremely bad situation

because o f the h i g h o i l price. They w i l l never be able t o pay f o r i t ,
and ask us f o r help. A l l these countries first supported the embargo of
the o i l producers against us, ( but now they realize the damage t o their
economythey are most unhappy.
I t is extremely important to help these countries, but before we can
help them, they can help us w i t h strong moral pressure on the o i l pro-
ducers, t o give up their greediness. I t is not satisfactory that the o i l
producers offer t o loan them a trifle of their income.
We, the U n i t e d States, w i t h our European allies and w i t h the under-
developed countries have to force a showdown w i t h the greediness of
the oil producers.
O n l y recently A l g e r i a said, i f their new price f o r natural gas which
is about three times the previous price, is not accepted, they w i l l start an
embargo again, so France is most uphappy, and American companies
which made contracts w i t h A l g e r i a do not have the slightest idea how
these contracts w i l l be honored.
I r a n wants to be the biggest power i n its area and place very b i g
weapon contracts w i t h us. W e should, i n agreement w i t h our European
allies, suspend all weapon deliveries to I r a n i f I r a n insist on higher oil
prices. I n the meantime, weapon suppliers here should be paid by the
Government, otherwise there w i l l be tremendous pressure not to sus-
pend the deliveries, because of economic difficulties.
I n the last analysis, i f the Shah of I r a n , whom the C I A brought
back f r o m Rome to his throne, continues to be the leader i n asking f o r
always higher oil prices and menacing to reduce production, we w i l l
have to let h i m know that we can always make i n desperation, an
agreement w i t h the Soviet Union. W e have to let h i m know that to
save Western civilization and Western prosperity, i f he should con-
tinue i n his policy t h a t we w i l l have to remember the famous agree-
ment of 1939.
M r . Chairman, you took the leadership w i t h your committee t o look
f o r solution i n our present crisis. I t would be i m p o r t a n t t h a t Congress
does not permit i n the future, hysterical statements which are un-
founded to go over the D o w Jones ticker and start a tremendous
speculation which forces then policy decisions which are against our
national interest.
On February 6,1973 the D o w Jones ticker said:
MonetaryReussthe dollar is patently overvalued again.
O n February 9, M r . Reuss said:
German export lobby likes the legalized dumping inherent in an undervalued
mark. Washington had joined in this reckless process. Overstimulate German
export which then fracture the jobs of American workers.
On February 12,1973 the Dow Jones ticker said:
MonetaryReusswe are of the view that parity of the dollar should be fixed
by the market rather than the flat of central bankers.
Since this time, all officials and private experts agreed that the
February devaluation was unnecessary. There was never a German
export lobby and there were no undervalued mark i n February 1973.
B u t the result was that after our money was devaluated again, the
oil producers started to raise their prices nearly every month to make
up f o r their losses. O n l y the successive price capitulation o f the o i l

68
importers showed the o i l producers their political strength and started

to give them the idea of the o i l embargo. I hope we w i l l not commit
similar errors again.
I hope you w i l l succeed t o b r i n g Congress to its senses and overturn
the g o l d law which only play i n the hands of the o i l producers again 1
because of the new devaluation danger. O n l y w i t h strength can we
break the o i l producers' unity. I n the last analysis, i f absolutely neces-
sary, a cooperation w i t h Russia has to break Iran's o i l blackmail.
[ T h e f o l l o w i n g articles, and letters were submitted by M r . K u r t z
f o r inclusion i n the record:]
[From the New York Times, January 17, 1974]
P B I C I N G I M P A C T CALLED GLOBAL
ENERGY E C O N O M I S T S A Y S R E S U L T M A Y BE DEPRESSION
(By William D. Smith)

Unless t h e s h a r p l y h i g h e r p r i c e s recently imposed by t h e o i l - p r o d u c i n g coun-
t r i e s a r e q u i c k l y cut t o a level t h a t t h e oil-consuming countries can a f f o r d t o pay,
t h e e n d r e s u l t w o u l d be a g l o b a l depression, a c c o r d i n g t o W a l t e r J. L e v y , one of
t h e w o r l d ' s l e a d i n g energy economists.
M r . L e v y , a c o n s u l t a n t t o b o t h governments a n d companies, i s n o t p a r t i c u l a r l y
sanguine a b o u t t h e possibilities o f s o l v i n g t h e problem. " T h e t i m e t o a c t w a s
y e s t e r d a y , " he s a i d i n a n i n t e r v i e w . " T h e seriousness of t h e s i t u a t i o n c a n n o t be
exaggerated."
A p o i n t o f c r i t i c a l importance, he said, i s t h a t a reasonable balance be s t r u c k
between t h e u l t i m a t e p r i c e f o r o i l a n d t h e i m m e d i a t e foreign-exchange cost t h a t
w o u l d have t o be met. H e declined t o specify w h a t he t h o u g h t w o u l d be a f a i r
price. P r o d u c e r n a t i o n s have q u a d r u p l e d prices i n t h e l a s t three m o n t h s .
I f a n u n d e r s t a n d i n g can be w o r k e d o u t j o i n t l y between consumer a n d p r o d u c e r
n a t i o n s i t s h o u l d be possible to a l l e v i a t e m a n y of adverse effects n o w a n t i c i p a t e d ,
M r . L e v y said.
A s a first step, M r . L e v y calls f o r i n t e r n a t i o n a l cooperation a m o n g oil-consum-
i n g n a t i o n s , as he has been since November, 1972, w h e n i n a speech t o t h e A m e r -
i c a n P e t r o l e u m I n s t i t u t e he u r g e d a "concerted e f f o r t by t h e U n i t e d States a n d
W e s t e r n E u r o p e a n governments a n d t h e i r i n d u s t r i e s t o t r y t o p r o t e c t as best
they c a n t h e i r security a n d p r o s p e r i t y w h i c h depends so decisively on energy
a v a i l a b i l i t y on acceptable p o l i t i c a l a n d economic t e r m s . "
On P r e s i d e n t N i x o n ' s i n v i t a t i o n , a conference of oil-consuming n a t i o n s w i l l be
h e l d Feb. 11 i n W a s h i n g t o n . Members of t h e E u r o p e a n Economic C o m m u n i t y
have j o i n t l y accepted t h e i n v i t a t i o n , w h i c h w e n t also t o Canada, J a p a n a n d
Norway.
M r . L e v y asserted:
" T h e h i g h prices t h a t t h e O r g a n i z a t i o n of P e t r o l e u m E x p o r t i n g C o u n t r i e s have
been able t o e x t r a c t f o r t h e i r o i l m a y r e s u l t i n d i s r u p t i v e t r a d e a n d m o n e t a r y
policies i n c l u d i n g c u r r e n c y r e s t r i c t i o n s as w e l l as social a n d p o l i t i c a l upheavals
t h a t w i l l be most h a r m f u l t o b o t h o i l - p r o d u c i n g a n d oil-consuming c o u n t r i e s . "
SPREADING CONSEQUENCES
T h e strongest c a r d consumers have is t o m a k e t h e p r o d u c i n g n a t i o n s a w a r e

t h a t t h e y w i l l suffer t h e same t e r r i b l e consequences as t h e i n d u s t r i a l i z e d n a t i o n s
i f t h e w o r l d economic system crumbles, M r . L e v y said.
Some believe t h a t t h i s is w h y S a u d i A r a b i a ' s O i l M i n i s t e r , Sheik A h m e d Z a k i
a l - Y a m a n i is r e p o r t e d t o have s a i d recently t h a t the p r i c e of o i l is n o w too
h i g h a n d t h a t t h e p r o d u c t i o n cutbacks o f t h e A r a b p r o d u c i n g n a t i o n s h a v e been
too severe.
M r . L e v y asserted t h a t t h e enormous increases i n w o r l d o i l prices since m i d -
October t h r e a t e n t o d i s r u p t t h e economic a n d m o n e t a r y s t r u c t u r e o f a l l o i l - i m -
p o r t i n g countries i n 1974 a n d t h a t because o f t h e w o r l d ' s economic interdepend-
ence, n o n a t i o n w o u l d be able t o escape t h e consequences.

69
COST L I M I T S
T h e economist s a i d t h a t t h e r e w e r e r e a l l i m i t s on t h e a b i l i t y of c o n s u m i n g
countries t o meet added costs o f o i l i m p o r t s o u t of c u r r e n t m o n e t a r y reserves or
increased e x p o r t earnings.
" T h e balance w o u l d h a v e t o be covered by c a p i t a l flow f r o m o i l - p r o d u c i n g
countries r e s u l t i n g i n a b u i l d u p i n financial c l a i m s on t h e o i l - i m p o r t i n g countries,
b u t t h i s w o u l d t a k e place over a r e l a t i v e l y s h o r t p e r i o d of t i m e a n d o n a n un-
precedented scale," he continued. " T h e r e s u l t i n g s t r a i n s on i n t e r n a t i o n a l finan-
c i a l m a r k e t s a n d i n s t i t u t i o n s w o u l d be e x t r e m e l y g r e a t
" W h a t w o u l d r e a l l y be i n v o l v e d w o u l d be a massive t r a n s f e r of w e a l t h f r o m
o i l - i m p o r t i n g t o o i l - e x p o r t i n g countries. T h e o i l - e x p o r t i n g countries w o u l d be-
come owners of a r a p i d l y i n c r e a s i n g share of the economic resources of the rest
of t h e w o r l d based on w h a t is f u n d a m e n t a l l y a monopolist r e n t f o r t h e i r o i l re-
sources a m o u n t i n g t o some 50 t o 60 times the a c t u a l cost of p r o d u c i n g t h e i r oil.
" M o r e o v e r , as revenues f r o m t h e governments of o i l - e x p o r t i n g countries, in-
vestments made w i t h these f u n d s i n o i l - i m p o r t i n g countries w o u l d be pre-
d o m i n a n t l y owned a n d c o n t r o l l e d by f o r e i g n governments. I t is u n l i k e l y t h a t t h i s
state of a f f a i r s could p r o v i d e a stable basis f o r the w o r l d economy or w o u l d prove
acceptable to t h e i n d u s t r i a l i z e d countries."
" R O L L B A C K " NEEDED
M r . L e v y said t h a t i n order to c o n t a i n the serious, i f n o t disastrous, economic

i m p a c t of the o i l cost explosion, i t w o u l d be necessary t o " r o l l b a c k " o i l prices
to a level t h a t could be managed by the v a r i o u s i m p o r t i n g countries w i t h o u t
severe economic dislocations a n d possibly even a w o r l d w i d e depression"indeed
a most d i f f i c u l t u n d e r t a k i n g , " he conceded.
A p r i c e r o l l b a c k should be h a n d l e d on t w o l e v e l s t h r o u g h the establishment of
a c o o r d i n a t i n g policy among the m a j o r o i l - i m p o r t i n g countries a n d t h r o u g h dis-
cussions, r e v i e w a n d negotiations w i t h the i m p o r t a n t p r o d u c i n g nations.
Some idea of the staggering increase i n costs to the c o n s u m i n g nations is given
i n a s t u d y by M r . L e v y ' s c o n s u l t i n g firm. I t presents d a t a on the cost of o i l
imports, exclusive of t r a n s p o r t a t i o n a n d r e l a t e d charges, f o r 1972 a n d shows
t h a t costs i n 1974 f o r i m p o r t s a t t h e 1972 v o l u m e w o u l d be f o u r or more times
higher. T h e figures, i n b i l l i o n s of dollars, f o l l o w :
1972 1974
U n i t e d States 5 21
Western Europe 11 51
Japan 4 16
On the same basis, government revenues of the o i l - p r o d u c i n g n a t i o n s i n the
M i d d l e E a s t w o u l d increase f r o m $9-billion i n 1972 t o about $5.7-billion i n 1974.
I r a n ' s income f r o m o i l w o u l d go f r o m $2.5-billion t o $16-billion a n d Venezuela's
revenues w o u l d c l i m b f r o m under $2-billion to about $10-billion.
T h e increased cost of o i l i m p o r t s w o u l d p l a y havoc w i t h balances of payments
a n d reserves of f o r e i g n exchange. I n the case of the U n i t e d States, t h e i n d i c a t e d
1974 level of o i l i m p o r t s w o u l d be enough t o s w i n g the t r a d e balance f r o m surplus
i n t o a $13-billion deficit, m o r e t h a n the n a t i o n ' s t o t a l gold a n d foreign-exchange
holdings. T h e increased cost f o r J a p a n w o u l d almost equal her gold a n d foreign-
exchange holdings of $13-billion as of October, 1973.
[From the Wall Street Journal, April 11, 1974]

F O R E I G N E X C H A N G E A B U S E S BY S O M E B A N K S ALLEGED A T
CONVENTION, SPURRING DEBATE
( B y Charles N. S t a b l e r )
San Diego, C a l i f . I s t h e g i a n t , w o r l d - w i d e m a r k e t f o r e x c h a n g i n g n a t i o n a l
currencies being rigged?
Some i n t e r n a t i o n a l bankers here f o r t h e a n n u a l convention of t h e B a n k e r s
Association f o r F o r e i g n T r a d e say, t h e a n s w e r is yes. I n a n unusual, l a s t - m i n u t e
press b r i e f i n g c a l l e d by convention officials, several bankers w a r n e d t h a t c e r t a i n
banks are d i s r u p t i n g t h e f o r e i g n exchange m a r k e t t h r o u g h excessive speculation.

70
"The abuses are picking up in speed, size and importance," warned George H .
Chittenden, senior vice president of New York's Morgan Guaranty Trust Co. H e
described some recent market activity, which has caused large and rapid changes
in currency values, as "almost sinister." Mr. Chittenden and other bankers a t the
press conference called for tighter self-policing of the market.
I n private talks during the convention, some other bankers have cited what
they refeT to as "combines" or "syndicates" of banks, mainly West German and
Swiss, which apparently engage i n concerted attacks on the market "It's a kind
of pooling operation, where they suddenly flood the market with orders, driving
up the price of say, the German mark a few pointsand there is no way you can
go against it," complains one U.S. banker.
A G B A I N OF ,$ALT
But some other bankers here take such warnings with a grain of salt. For ex-
ample, Arthur Meehan, an international executive of Boston's New England
Merchants National Bank, discounts talk of market manipulation. H e describes
the wide fluctuation in currency rates as a natural outgrowth of the floating
rate system, in which currencies fluctuate largely, according to market forces.
Mr. Meehan also noted that European bankers traditionally are willing to take
big risks in the foreign exchange market, "American banks are much more con-
servative," he says.
For example, a foreign exchange trader at a major U.S. bank would normally
be restrained from taking a risk in a single currency of more than $20 million
or so. For a German or Swiss bank, exposed positions of up to $500 million
wouldn't be uncommon, bankers here say.
One foreign banker here suggests that even for German banks this kind of risk
taking is currently declining. Diether H . Hoffman, a director of a major Dus-
seldorf bank, says: " I would think i t isn't much of a problem now, because some
sizable losses were taken by some banks late last year."
I n addition, some executives of smaller U.S. banks here say they suspect that
warnings of problems in the foreign exchange market by major banks may just
be calculated to frighten off competitors. " I think the New York banks some-
times aren't above issuing pious warnings about possible dangers in this or that
market just because they want to hang onto a good thing," says one Georgia
banker.
A t the press conference, neither Mr. Chittenden nor other participants sug-
gested that possible abuses of trading were widespread. However, Robert F .
Leclerc, vice president of Continental Bank International, an affiliate of Chicago's
Continental Illinois Corp., said the speculating banks were taking positions large
enough to artificially influence exchange rates. Mr. Leclerc is head of the Forex
Association of North America, a professional association.
Mr. Leclrec blamed the problem on top-level management of some banks rather
than the traders themselves. H e said some banks are putting intense pressure on
their trading departments in a search for "windfall profits."
"When they expect a trader to make millions of dollars i n foreign exchange
dealing, he can't do i t through normal business," he said. "You have got to go
out and gamble."
[From the Journal of Commerce, July 11,19741

CONTROLS P U T O N C U R R E N C Y M A R T T R A D E
(By Jess Lukomski)

FrankfurtThe Bundesbank evidently subscribing to the old tenet that "con-
fidence is good but control is better" has moved to acquire from some 350 West
German banking institutes full data on their foreign exchange transactions in
forward trading.
Compulsory registrations of such deals went into effect on July 1.
This requirement provides the Bundesbank with full insight on the volume of
forward trading in foreign exchanges and permits it to gauge the difference be-
tween delivery and purchase commitments made by the nation's banks.
Moves i n this direction had been anticipated in the banking circles for some'
time and came as no surprise. But a distinct possibility that the Bundesbank
might take in the future even bolder and tougher steps to control foreign ex-
change activities is of considerable concern here.

71
REASONABLE LIMITS
Since the Bundesbank feels r a t h e r strongly t h a t " t h e risks connected w i t h

f o r w a r d t r a d i n g i n f o r e i g n exchanges must be kept w i t h i n reasonable l i m i t s , the
extension of i t s new regulations to foreign subsidiaries of German b a n k i n g
institutes cannot be r u l e d outpoint out foreign exchange m a r k e t sources.
The decision of the F r a n k f u r t monetary managers to supervise more closely
foreign exchange dealings of commercial banks has been triggered by t h e i r
enormously intensified involvements i n this field.
German bankers have grasped early i n the floating game t h e i r d w i n d l i n g
earnings i n the classical lending business suffering under the " b r u t a l l y restric-
t i v e credit policies pursued by t h e Bundesbank" could be compensated by highly
l u c r a t i v e f o r e i g n exchange transactions.
The 1973 business reports of the big German commercial banks show s t r i k i n g l y
the enormous expansion of operations i n foreign exchange and they reveal to
w h a t extent the handsome profits f r o m those dealings have enriched t h e i r overall
earnings.
50 PERCENT G A I N
The Deutsche B a n k transactions i n foreign currencies have reached last year

DM778 billion, a sum w h i c h is equivalent to West German G N P i n 1971. I n the
past t w o years the f o r e i g n exchange business registered a 50 percent gain w h i l e
the number of people employed i n this field was increased by one-fifth.
The Commerzbank w h i c h employs today nearly one-third more foreign ex-
change experts t h a n t w o years ago managed to expand its t u r n o v e r by 27 percent
i n 1972 and another 20 percent i n 1978. A n d the Dresdner Bank's f o r e i g n ex-
change deals rose by 50 percent last year alone w i t h only a slight u p w a r d adjust-
ment i n the number of employes w o r k i n g i n this field.
T h i s development is not unique to the three big German commercial banks, the
Girozentrale or savings banks, and the cooperative banking associations have
plunged i n t o foreign exchange transactions to j o i n i n the biggest game i n the
b a n k i n g business."
W i t h most w o r l d currencies floating more or less cleanly the range f o r
speculative transactions is almost u n l i m i t e d and temptations t o engage i n them
often irresistible.
German bankers insist t h a t "speculation i n foreign exchange t r a d i n g is taboo."
There is no firm evidence suggesting t h a t this claim is exaggerated. Yet the very
r i s k o f miscalculating the development on the foreign exchange m a r k e t is f o r m i d -
able and even decisions based allegedly on nonspeculative consideration can be
extremely costly.
PAINFUL MISTAKE
The Westdeutsche Landesbank Girozentrale made a p a i n f u l mistake last year

by miscalculating the f u t u r e development on the foreign exchange markets a n d
had to pay a DM100 m i l l i o n penalty f o r its misjudgment.
The f a i l u r e of the large p r i v a t e H e r s t a t t bank is another case i n point. I t was
said t o have lost w e l l i n excess of any other bank here or elsewhere as a result of
unauthorized dealings i n foreign exchange.
I t seems t h a t German commercial banks have not overlooked the clear w a r n -
i n g t h a t the chance of m a k i n g a k i l l i n g on foreign exchange dealings is not any
greater t h a n the r i s k of being caught short. I n days of fixed exchange rates w i t h
the central banks pledged to support the parities both the chances of m a k i n g
spectacular gains and risks of absorbing heavy losses were n a r r o w l y "defined"
by the central banks obligation to intervene. Today this obligation applies to a
h a n d f u l o f currencies floating j o i n t l y i n the European "mini-snake," and costly
miscalculations i n t r a d i n g i n a l l other foreign currencies must be seriously
considered.
T h i s does not mean at a l l t h a t German commercial banks are abandoning
foreign exchange dealings, but the developments i n the past several months
suggest t h a t they have become more cautious even though t h e i r less hectic
a c t i v i t y i n t h i s area has been strongly influenced by tapering off Euro-money
m a r k e t business w h i c h i n the past has tended to trigger m u l t i c u r r e n c y trans-
actions.
Some German bankers suggest t h a t the decision of the Bundesbank t o super-
vise more closely banks' f o r w a r d t r a d i n g on the foreign exchange market m i g h t
reinforce f u r t h e r this trend.

72
T H E W H I T E HOUSE,
Washington, February 5,1968.
M B . VICTOB K U R T Z
Elvic Import Corp.,
15 West 88th Street,
New York, N.Y.
D E A R M B . K U B T Z : Many thanks for your follow up note of January 3 0 . 1 think
i t might be helpful if you would be willing to run down sometime and discuss
your views with Ed Fried who is the Senior International Economist on the
White House staff and who stays on top of the gold problem for us on a day-to-
day basis.
M r . Fried will await your call and set up an appointment with you.
Sincerely,
JOSEPH A . CALIFANO, Jr.,
Special Assistant to the President.
CONGBESS OF T H E U N I T E D S T A T E S ,
H O U S E OF R E P B E S E N T A T I V E S ,
Washington, D.C., August 16,1969.
M r . VICTOB K U B T Z ,
Elvic Import Corp.,
New York, N.Y.
D E A B M B . K U B T Z : Thank you very much for your support of my position against
the unnecessary increase in the prime lending rate. I hope you realize how much
the support of the people means on an issue like this.
High interest rates are a destructive force and they can be brought down only
if the people are willing to take the time to make their voices heard against
the special interests. I hope sincerely that you are letting other people know
about your feelings on this very vital issue.
Enclosed is a speech which I recently made on this prime rate increase.
Sincerely,
WBIGHT PATMAN.
U N I T E D STATES SENATE,
Washington, D.C., May 5,1911.
M r . VICTOB K U B T Z ,
Elvic Import Corp.,
15* West 88th Street,
New York, N.Y.
D E A B M B . K U B T Z : I certainly appreciated your recent message and I wanted
to let you know that I value very much the points you made.
I t is vital for me to get the thoughts and opinion of people like yourself. I t
helps me make up my mind on the vital issues which the Senate must decide.
Once again, thanks so much for letting me know what you think and I appre-
ciate your taking the time and effort to write to me as you did.
Best wishes.
Sincerely,
W I L L I A M PBOXMIBE, U . S . S .

73
CONGRESS OF T H E U N I T E D S T A T E S ,
JOINT ECONOMIC COMMITTEE,
Washington, D.C., October 4,1971.
M r . VICTOR K U R T Z ,
Elvic Import Corp.,
New York, N.Y.
D E A R M R . K U R T Z : Thank you for your letter of the 23rd. I appreciate your in-
cluding the detailed recommendations you have prepared on suggested ways for
overcoming the present international monetary crisis. I have passed these recom-
mendations on to the Joint Economic Committee staff for their review and ap-
praisal.
Sincerely,
WILLIAM PROXMIRE,
Chairman.
M r . H A N N A [presiding]. I appreciate y o u r statement I t h i n k we
need t o a d j o u r n n o w , subject t o t h e call o f the C h a i r .
[ W h e r e u p o n , at 1:10 p.m., the subcommittee was adjourned, subject
to the call of the Chair.]

TUESDAY, AUGUST 13, 1974
H O U S E OF R E P R E S E N T A T I V E S ,
OF T H E C O M M I T T E E O N B A N K I N G A N D CURRENCY,
Washington, D.C.
T h e subcommittee met, pursuant t o notice, a t 10:15 a.m., i n r o o m
2128, R a y b u r n House Office B u i l d i n g , H o n . H e n r y B . Gonzalez (chair-
m a n o f the subcommittee), presiding.
Present: Representatives Gonzalez, Reuss, F a u n t r o y , S t a r k , J o h n -
son, Crane, and Burgener.
M r . G O N Z A L E Z . T h e subcommittee w i l l come t o order.
I n order t o conserve t i m e , and I apologize f o r t h e lateness o f the
hour i n g e t t i n g startedfirst, Governor W a l l i c h , m a y I t h a n k y o u
f o r t a k i n g t i m e t o be w i t h us and f o r an obviously v e r y good statement.
I m i g h t p o i n t out t o y o u t h a t at the latest count t h a t I madeand
I could be a l i t t l e b i t m e r r o r on the conservative sidethere were
over 17 committees, subcommittees on C a p i t o l H i l l i n t h e Congress
g o i n g i n t o some general aspects of the m a i n thesis t h a t we outlined
t o y o u i n the letter when we i n v i t e d you.
However, t h i s subcommittee has more of a direct relationship w i t h
the aspects o f t h e problem, the o i l price increase, the concomitant
problems a t t e n d i n g t h a t , because i t has been i n t h i s area o f o u r legis-
l a t i v e l i f e t h a t we have h a d t o deal w i t h such t h i n g s as the devaluation
o f the dollar. W e w i l l have t o continue t o decide how we are g o i n g
t o a r r i v e at a continuation o f our policy w i t h respect t o t h e interna-
t i o n a l financial institutions t h a t we have c o m m i t t e d ourselves t o be-
l o n g i n g t o f o r some time.
Recently, we h a d the I D A b i l l , and we w i l l have t o c o n f r o n t the
question o f t h e A s i a n Development B a n k b i l l , w h i c h t h i s subcommit-
tee approved and f o r w h i c h we obtained a rule last J a n u a r y t h a t is
p e n d i n g before the House. However, i t may be t h a t we have reached
a p o i n t where the Congress has got t o , i n the l i g h t o f developments,
reevaluate a n d reappraise t h i s basic policy i n v o l v e d i n i t s belonging
to these i n t e r n a t i o n a l financial institutions.
Today's hearings are a continuation o f those t h a t we i n i t i a t e d ear-
lier. T o d a y , i n continuance thereof, we are very p r o u d t o have y o u as
an o u t s t a n d i n g witness.
I n J u l y we pointed out t h a t some o f the i n t e r n a t i o n a l monetary
and economic results o f t h i s f o u r f o l d increase i n w o r l d o i l prices, the
accumulation o f massive amounts o f excess capital b y the members o f
the O r g a n i z a t i o n o f Petroleum E x p o r t i n g Countries really poses a
c o n t i n u i n g problem, i f not a threat, t o every one o f us.
(75)

76
I , for one, since long before I thought I would be a chairman of

the subcommittee, have been very much concerned about the fact t h a t
the Congress seems t o have very l i t t l e role except as an after-the-event
agent such as we d i d i n the case o f devaluation. W e were asked t o come
i n and present on two different occasions a par-value modification b i l l .
W e have been asked on diverse occasions to come i n w i t h these bills
on the w o r l d financial international institutions, and each t i m e i t
becomes increasingly difficult f o r us to assure the administration,
which, i n t u r n , tells us t h a t these programs are a must f o r the basic
national policy, to obtain an adequate congressional reception and
approval.
Since our last hearing we have had additional data t h a t has been
presented t o us. W e have had very interesting material presented by
various individuals who appear to be experts i n this area. They are
a l l very disturbing and w i t h o u t any objection, I would like at this
point to introduce into the record excerpts f r o m an article i n the
Washington Post and one by W a l t e r J . Levy i n the J u l y F o r e i g n
A f f a i r s , just very brief excerpts, not over t w o paragraphs.
[ T h e excerpts f r o m the articles t h a t appeared i n the Washington
Post and the J u l y edition of Foreign A f f a i r s , f o l l o w : ]
[Excerpt from an article in the Washington Post]
A n a r t i c l e i n The Washington Post said t h a t a W o r l d B a n k s t u d y estimates
t h a t by 1980 the accumulated reserves of O P E C countries w i l l 'be $653 b i l l i o n
( c o m p a r e d w i t h $20 b i l l i o n i n 1973) a n d w i l l be $1.2 t r i l l i o n by 1985. T h e s t u d y
s a i d t h a t t h e excess reserves of K u w a i t , Q a t a r , S a u d i A r a b i a a n d t h e U n i t e d
A r a b E m i r a t e s w i l l be a b o u t $1 t r i l l i o n by 1985.
[Excerpt from an article in the July edition of Foreign Affairs by Walter J. Levy]
Today, governments are w a t c h i n g an erosion o f the w o r l d ' s o i l supply a n d
financial systems, comparable i n i t s p o t e n t i a l f o r economic a n d p o l i t i c a l disaster
t o the G r e a t Depression of the 1930's, as i f they were h y p n o t i z e d i n t o i n a c t i o n .
T h e t i m e is late, the need f o r a c t i o n o v e r w h e l m i n g .
I n sum, the short-to-medium t e r m i m p l i c a t i o n s of the present s i t u a t i o n are
s i m p l y n o t bearable, either f o r the o i l - i m p o r t i n g countriesespecially t h e n a t i o n s
a l r e a d y needyor f o r the w o r l d economy as a whole. . . . T h e f a c t is t h a t t h e
w o r l d e c o n o m y f o r the sake of everyonecannot s u r v i v e i n a h e a l t h y or r e m o t e l y
h e a l t h y c o n d i t i o n i f c a r t e l p r i c i n g a n d a c t u a l or t h r e a t e n e d supply r e s t r a i n t s o f
o i l continue on the trends m a r k e d out by the new s i t u a t i o n .
M r . 'GONZALEZ. Therefore, perhaps w i t h not a lot of ado and pub-
l i c i t y , but nevertheless, w i t h a background of what I consider to be
considerable importance and interest to those of us that serve on this
level, we welcome our witness, Hon. H e n r y C. W a l l i c h , member of the
B o a r d o f Governors of the Federal Reserve System, this morning.
Once again, thank you f o r t a k i n g the time out.
I am going to suggest t h a t M r . Johnson, who is our m i n o r i t y r a n k i n g
member, make use of the mike i f he wishes, and then I w o u l d say t h a t
you may proceed i n one of t w o ways. I t is up to you. Y o u have an ex-
cellently prepared statement. I f you wish to read i t , t h a t is fine. I f you
wish to summarize i t , well, you use your discretion.
M r . Johnson ?
M r . J O H N S O N . Yes. I , too, want t o welcome you here this morning:,
M r . Wallich.

77
I cannot help b u t compliment the Fed f o r the great cooperation we

have received f r o m you people i n the last month. W e have had, I be-
lieve, practically every president of the Federal Reserve bank i n the
U n i t e d States i n here to testify. O f course, D r . Burns has been here
frequently and comes at the slightest request. W e are very glad t o wel-
come you here this morning. T h a n k you.
M r . G O N Z A L E Z . Does any other member wish to make a prefatory
remark? I f not, M r . W a l l i c h , you have the floor and we welcome you.
STATEMENT OF HON. HENRY C. WALLICH, MEMBER, BOARD OF

GOVERNORS OF THE FEDERAL RESERVE SYSTEM
M r . W A L L I C H . T h a n k you very much, M r . Chairman.

I appreciate your remarks, and I also appreciate your offer t o let me
summarize the statement. I t is perhaps unduly long, and so I would
like to ease the task of going t h r o u g h i t f o r the subcommittee mem-
bers, i f I may, by summarizing.
The text I have submitted is, of course, m y official statement.
M r . G O N Z A L E Z . Fine. F o r the record we w i l l just permit you to sub-
m i t the entire statement, which w i l l appear i n the record as you
prepared it.
I t h i n k I do not need to go into much detail about the nature
of the international balance-of-payments surplus of the oil-export-
i n g "countries. I t is a subject t h a t has been widely discussed. These
countries are likely t o have something like $100 b i l l i o n of reve-
nues f r o m their o i l exports, an increase on the order of $80 billion.
This leads to a surplus i n their transactions on the order of $50 b i l l i o n
to $60 billion, because some of the exporting countries, at any rate,
w i l l ntft be i n a position to increase their imports enough t o absorb
the proceeds of their increased exports. This likewise leads, of course,
to a very great increase i n the b i l l f o r oil of the o i l - i m p o r t i n g coun-
tries. W i t h some exceptions f o r a few countries whose o i l production
and o i l needs are well balanced, this includes a l l countries t h a t are not
net o i l exporters. T h i s situation leads almost necessarily to a deficit on
trade account f o r these countries.
Several types o f responses have been suggested to this unprecedented
situation. One that is very important is our domestic supply response.
W e have entered into Project Independence aimed to reduce, and hope-
f u l l y eliminate, our dependence on imported oil. This effort w i l l help
us. I t w i l l help the rest of the world. A l t h o u g h I regard i t as a major
policy response, I w i l l not focus on i t today because I do not t h i n k it, is
germane to the discussion here.
A second suggested response on the p a r t of the U n i t e d States and
other i m p o r t i n g countries arises f r o m the concept that i n the increased
prices f o r o i l they find themselves confronted w i t h what is very sim-
i l a r to atn excise tax on oil. I f the current rise i n the cost of oil were due
to the action of the government of an i m p o r t i n g country, i t would
have the same effect as an excise tax. B u t i n the present case the pro-
ceeds go abroad.
T h i s quasi-oil tax, first, has the effect of reducing aggregate demand.
I n itself, i n a period of inflation, this effect is by no means a bad thing.
37-211 O - 74 - 6

78
B u t , as t i m e goes on inflationary forces are brought under better con-
t r o l , we w i l l need to watch the deflationary implications o f t h i s I say
i t i n quotation m a r k s " o i l t a x . "
B y reducing demand i n the economy, this quasi-tax w i l l make room
f o r some substitute demand. T h i s could take the f o r m o f more invest-
ment. A d d i t i o n a l investment w i l l be both appropriate and needed, first
t o take u p slack i n demand as w o r l d inflationary forces are brought
under control, and second because i t is needed t o b r i n g about new o i l
production. T h e problems o f g r o w t h also require i t . F i n a l l y , there is the
tact t h a t inflation w i l l be better contained i f we have the larger ca-
pacity t o produce t h a t added investment can provide.
There is, therefore, an o p p o r t u n i t y here as well as great risks. T h a t
o p p o r t u n i t y is more investment and more growth. T h e risks I w i l l deal
w i t h i n greater detail. T h e present situation concerns the O P E C coun-
tries as w e l l as the o i l i m p o r t i n g countries because both are interested
i n w o r l d stability and the soundness o f our financial markets and in-
stitutions. B u t the o i l i m p o r t i n g countries have an unavoidable deficit
i n the short run.
A corollary of this unavoidable deficit is t h a t there is also automatic
financing o f i t . T h i s has been much discussed. I n measure as the ex-
p o r t i n g countries act t o create surpluses, they cannot avoid the neces-
sity of p u t t i n g the proceeds of these surpluses somewhere. Wherever
these proceeds go, they can be borrowed. B u t what is sometimes over-
looked is t h a t they cannot be borrowed b y everybody. I t takes good
credit standing i n order t o have access t o these funds.
There is thus an automatic recycling i n the aggregate, t h a t is, f o r
the o i l - i m p o r t i n g countries as a group. B u t this automatic financing
of deficits is b y no means available t o every country, nor f o r every
i n s t i t u t i o n t h a t wants t o participate i n the market.
T h e unavoidability of a sizable aggregate deficit f o r the oil-
importers has another implication. I f some countries t r y to reduce these
deficits to zero, and do i t very aggressively, they are l i k e l y to reduce
t h e i r own deficit by increasing t h a t of some other countries. T h i s is be-
cause the O P E C countries cannot, i n the short r u n , buy a great deal
more t h a n they were already likely t o do. I f country A cuts down its
deficit, i t probably does so at the expense of country B , b y policies t h a t
c u r t a i l the exports, or drive u p the imports, of country B . So we may
see a game of musical chairs played w i t h the deficit.
T h a t does not mean the i m p o r t i n g countries should not watch t h e i r
balance of payments. I n particular, they should t r y t o eliminate those
payment deficits t h a t result f r o m payments f o r things other t h a n oil.
There have been many balance-of-payment deficits i n recent years,
before the cost of o i l became an unavoidable source of deficits. Some
of these have been large deficits. B u t over and above elimination of
non-oil deficits, the o i l deficits have to be acceptedby someone. There
is a real problem where these deficits are g o i n g t o end up. Moreover,
i t is not clear that this is a situation w h i c h can be smoothly adjusted to
w i t h o u t a decrease i n the price of oil. A decrease w o u l d undoubtedly
greatly ease a l l aspects of the situation.
A m o n g the i m p o r t i n g countries there is a group t h a t is worse h i t
t h a n others. Some of them are developing countries. Others are those
of the i n d u s t r i a l countries t h a t have special difficulties i n dealing w i t h
t h e i r deficits. These are problems t h a t give one pause.

79
The problems of the less developed countries exclude such questions

as the question whether 1 they are going to have enough food. O i l leads
to fertilizer, fertilizer leads to food. I f a country cannot i m p o r t enough
o i l or i f i t cannot i m p o r t enough fertilizer instead of m a k i n g i t at
home f r o m oil, there is a consequence f o r its food supply. T h i s affects
the price of food throughout the world. W e are thus a l l involved i n the
problems of the developing countries.
I n d u s t r i a l countries, i n some cases, face very large deficits because
their a b i l i t y to reduce their use o f o i l is limited. T h i s is the case when
a country does not have a large automobile population, or i t does not
use o i l f o r a number o f uses t h a t are compressible. I n such cases the
problem of the increased cost o f o i l hits their industrial output and
creates problems there.
I w i l l come back t o some of those problems i n a minute. F i r s t , let me
say a couple o f words about the U.S. balance o f payments, as a p a r t o f
this overall picture.
W e have done very well i n the improvement o f our balance o f trade.
A f t e r the successive devaluations t h r o u g h the end o f 1973, we achieved
a surplus at an annual rate of a l i t t l e over $4 billion. B u t that has now
been converted into a deficit on the order of $7 b i l l i o n by the middle
o f the present year. I f we eliminate f r o m this deficit the increased cost
o f oil, and i f we also leave out of account the special advantages we
have had f r o m h i g h prices on our agricultural exports, we see t h a t
there has been a real underlying structural improvement i n our trade
situation on the order o f $11 b i l l i o n per annum.
I do not say this as an excuse f o r the deficit. T h e deficit is there.
B u t i f we want to see the underlying structure o f our foreign trade,
then we have to make this calculation, and i t does show a substantial
u n d e r l y i n g improvement.
A t the same time, we have seen significant fluctuations i n the rate of
the dollar. T o some extent these fluctuations reflect trade and payment
developments. T h e most h e l p f u l view is not the dollar's relationship to
this or t h a t currency, but is, rather the so-called effective rate. This is
the weighted average of our dollar exchange rate w i t h respect to many
other currencies.
T h a t is, I find the f a m i l i a r representation o f the exchange market
the dollar is down, the dollar is up, i t is d o w n again w i t h respect to
one or only a few currencieslargely misleading. I f we look at the
average, at the effective rate, we see t h a t the dollar's exchange value
is d o w n about 17 percent compared to the period before the revision
o f the whole exchange rate structure.
T h a t 17 percent refers to the industrial countries. W h e n we look
at the w o r l d as a wholeincluding both industrial and developing
countriesthe exchange rate o f the dollar is down only 12 percent. The
reason, i n particular, is t h a t developing countries have acted to keep
their currencies closer to the dollar. I t is m a i n l y the industrial coun-
tries t h a t have appreciated, especially Europe and Japan, t h a t have let
their currencies appreciate w i t h respect to the dollar. T h e dollar was
down severely f o r p a r t o f last year, then up quite sharply early this
year; down a l i t t l e again, and has now been quite stable f o r some time.
W e have been helped i n l i v i n g w i t h these fluctuations b y the system
o f floating rates. I n fact, i t is h a r d to see how, w i t h o u t floating rates,

80
we would have handled the situation. O n the other hand, floating rates
generate problems o f t h e i r own, and we cannot ignore them. T h e y are
problems special to this new financial regime.
Before floating exchange rates became general, one concern was t h a t
i n a regime o f floating rate countries would t r y to gain export advan-
tages by a l l o w i n g their currencies t o depreciate. B u t , i t is interesting
t o observe t h a t this has not happened. O n the contrary, i f I read the
record correctly, countries have been eager to see their exchange rates
remain high.
I believe t h a t the motivation is a conviction t h a t keeping the ex-
change rate h i g h is a means of helping to h o l d down inflation. T h e
higher the exchange rate, the less is the cost o f imports, and the less
imports affect the price level.
T h i s has removed some of the concern about floating rates. O f course,
we cannot be sure that the situation is going t o stay as i t is. I f w o r l d
conditions change, i f demand i n w o r l d markets diminishes, countries
m i g h t begin to adopt different policies.
I t is fortunate, therefore, t h a t i n t h i s picture of floating rates the
Committee of T w e n t y of the I M F has proposed a set of guidelines f o r
floating. T h e aim is to help i n l i m i t i n g extreme fluctuations, and i n
avoiding inappropriate intervention, or intervention at cross pur-
poses. L e t me t u r n now t o the financial consequences of the o i l deficit
and the capital flows associated w i t h i t .
F o r e i g n direct investment i n the U n i t e d States has been high. P o r t
f o l i o investment has been relatively quiescent. B a n k investment
both bank lending abroad and the i m p o r t of funds t h r o u g h our banks
have expanded. T h e t w o amounts come f a i r l y close t o offsetting each
other.
These developments reflect both the removal early this year of
restrictions on international capital movements and effects of the
o i l financing needs of other countries. I t is perhaps of some interest t o
p o i n t out t h a t these international capital movements i n t o and out o f
the U n i t e d States do not change the volume of dollars i n this country.
N o d o l l a r creation occurs due to such capital movements. W h a t hap-
pens is t h a t the foreigner, w i s h i n g to b r i n g capital t o the U n i t e d
States, buys dollars f r o m an American who wants t o own foreign
currency. I f there are no ready sellers of dollars on the American side,
the effect o f the foreigner t r y i n g to buy dollars is to raise the ex-
change rate, t h a t is, to raise the price of dollars w i t h respect t o other
currencies. B u t the number of dollars, w i t h some exceptions, is always
the same.
A n o t h e r easily demonstrated feature of the capital movements we
are observing arises f r o m the fact t h a t capital is very mobile. Except
i n those countries where there are restrictions on capital flows, we have
an international capital market t h a t is only s l i g h t l y compartmental-
ized. T h a t reduces the importance of any particular dollar amount
or amount of any u n i t of currency t h a t lodges i n any particular p a r t
o f this market.
I f money flows into, say, the U.S. compartment of the international
capital market, i t w i l l have the effect of displacing capital t h a t is
already there, or of discouraging other capital f r o m coming in. Thus,
capital tends to be rather evenly distributed over the whole range of
the market.

81
However, capital w o u l d not go where i t feels exposed t o excessive
risks. T h a t is, lack o f compartmentation of the international capital
market does not mean t h a t capital w i l l go everywhere.
T h a t leads me t o say something about the O P E C countries as capital
exporters. These countries are quite different f r o m t r a d i t i o n a l capital
exporting countries i n the degree of their financial experience, i n the
degree t o w h i c h they are likely to accumulate reserves, and i n the
reserves of wealthoil reservesthey now have. A l l this makes, of
course, f o r policies potentially different on their p a r t f r o m those we
know.
W h a t we have observed so f a r is t h a t they have employed very
cautious investment methods. They choose h i g h l i q u i d i t y , and very low
risk assets. Also, they have acted responsibly as investors. T h a t leads
one to ask how things are going t o develop i f O P E C money piles UP
f u r t h e r and f u r t h e r i n the same markets and i n the same financial
instruments.
I t is h e l p f u l , I t h i n k , to compare magnitudes. W e are t a l k i n g about
an O P E C flow of perhaps $50 to $60 b i l l i o n a year. Some of this w i l l
not go into the international capital markets but into bilateral and
other aid to the less developed countries, or into other nonmarket
channels. The amount t h a t is l e f t w i l l go into markets which annually
raise something on the order of $400 to $600 billion. T h a t is the mag-
nitude of the credit raised by the nonfinancial sectors of national
capital markets.
I n the U n i t e d States the amount o f credit raised b y nonfinancial
borrowers is some $200 billion. So the $50 b i l l i o n or thereabouts is
considerably smaller than the annual flow into these markets. This
leads us to hope t h a t the petrodollar funds w i l l be manageable. A
similar impression arises when you look at the E u r o d o l l a r market,
which was expanded by some $50 b i l l i o n i n 1973.
W h a t we have, therefore, is not an overall problem, so much as
problems relating to the effects o f petrodollar flows upon particular
markets, institutions, and countries. B u t these problems are serious
i n some cases, very serious.
One aspect of the problem t h a t arises i n particular markets is t h a t
interest rates w i l l change. I f an investor wants to invest i n only
the highest grade assets he w i l l drive down interest rates on those
assets. One t h i n g is clearas I said before, an inflow of capital does
not change the money supply, except i n special circumstances. So this
does not affect the Federal Reserve's ability t o maintain its overall
monetary policy.
I f the flow of funds into a particular market is larger t h a n the
increased payments resulting' f r o m o i l there w i l l be an impact on the
exchange rate. I t w i l l raise the value of the local currency unless that
country decides to recycle t h r o u g h its market. Most of the so-called
recycling we have seen has taken place t h r o u g h the E u r o d o l l a r
market, but of course recycling could take place t h r o u g h national
money markets, including the U.S. money markets. T h e effect, how-
ever, of such recycling is that i t leaves the recycler i n the position of
intermediary. H e has borrowed and he has lent. H i s f u t u r e is therefore
tied u p w i t h the future o f his creditor and his debtor.
There are advantages to that situation. B u t there could be disad-
vantages to countries t h a t get less capital than their o i l b i l l amounts

82
to. These countries have a variety of adjustment possibilities. T h e y

can borrow f r o m surplus countries provided their credit standing is
good enough. T h e y could borrow f r o m the O P E C countries or inter-
national institutions i f they are of a m i n d to lend. I w o u l d t h i n k t h a t
i n p a r t i c u l a r l y difficult situations the O P E C countries, inasmuch as
they are the cause of the situation, would feel a responsibility t o help.
I n addition t o borrowing, there is a possibility of balance-of-pay-
ment adjustments. These could r u n the gamut f r o m moderate measures
to very drastic measures, and possibly we w o u l d ultimately be forced
to accept the idea t h a t there is no measure t h a t w i l l produce any
tolerable situation.
F o r any one financial i n s t i t u t i o n problems arise when depositors
insist upon very h i g h l i q u i d i t y . W h e n funds are p u t i n t o an insti-
t u t i o n m a i n l y on an overnight basis, this poses f a m i l i a r problems i n
m a k i n g use of the funds. However, such institutions do have means o f
defending themselves. T h e y can cut down the interest rate t h a t they
pay and thereby make short-term deposits less attractive. T h e y can
adapt the nature of the investments they make w i t h such money t o its
characteristics. They can ultimately stop accepting such funds. H o w -
ever, t h a t means leaving p a r t of the problem t o the rest o f the market
or t o official institutions.
I n this respect, i t should be noted that private markets may not be
able to handle the whole problem. T h e monetary authorities have an
obligation t o see to i t t h a t markets function. They have to safeguard
the l i q u i d i t y of markets even though they do not necessarily b a i l out
every i n d i v i d u a l institution t h a t may have trouble. Thus, i n t h a t area
where the l i q u i d i t y of markets is tending to disappear, or where
markets begin to malfunction, there is a place at which p r i v a t e markets
may not be able t o handle this problem, and i t w o u l d have t o be l e f t
to some k i n d of official action.
L e t me conclude, M r . Chairman, by getting back t o the domestic
area. A l l of these problems would be greatly eased, of course, b y a
reduction i n the price of oil. I t is certain t h a t they w o u l d be eased b y
successful action against domestic inflationary forces, t h a t is, those
not arising f r o m the increased cost of oil. T h a t is a key problem every-
where. F i n a l l y the petrodollar problems w i l l be eased b y whatever we
can do t o step up the rate of investment i n the means of substituting
f o r oil, and i n the economy generally.
T h a n k you very much.
[ M r . WaUich's prepared statement f o l l o w s : ]

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Prepared
Statement by
Henry C. W a l l i c h
Member, Board of Governors of the F e d e r a l Reserve System
b e f o r e the
Subcommittee on I n t e r n a t i o n a l Finance
of the
U . S . House of Representatives
August 13, 1974

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Mr. Chairman and Members of the Subcommittee:
I welcome the opportunity to discuss with you some of the
problems created by the enormous increase i n the price of o i l i n the
past y e a r . As a r e s u l t of t h a t increase, oil-consuming nations w i l l
be paying out over $100 b i l l i o n a year to the o i l - e x p o r t i n g (OPEC)
countries a t current prices and volumes, an increase of some $80
b i l l i o n i n the revenues of these countries i n one y e a r . Even a f t e r
allowing for a steep r i s e i n t h e i r expenditures for imported goods
and services, the OPEC countries w i l l be l e f t with a surplus of
funds a v a i l a b l e for investment of some $60 b i l l i o n . This surplus
w i l l almost c e r t a i n l y diminish as time goes by, e i t h e r because the
price of o i l i s reduced to l e v e l s more compatible w i t h a s t a b l e world
economy, or because the OPEC countries w i l l use a greater share of
t h e i r increases to buy c a p i t a l and consumer goods and services from
other countries, and to provide assistance to countries most severely
a f f e c t e d by r i s i n g costs of o i l . Nevertheless, without t r y i n g to
project i n t o the more d i s t a n t f u t u r e , we must address our a t t e n t i o n
to the l i k e l i h o o d t h a t the OPEC countries w i l l have huge surpluses
for some time to come.
I n analyzing the consequences of t h i s enormous new flow of
funds i n the world i t i s h e l p f u l to look f i r s t a t the r e a l impact on
income and investment i n the consuming countries and then to consider
the f i n a n c i a l problems r e l a t e d to managing t h i s flow of funds. These

85
two aspects of the o i l s i t u a t i o n are i n t e r r e l a t e d , of course, and
i f the f i n a n c i a l mechanism does not prove equal to the demands t h a t
w i l l be placed upon i t the consequences w i l l enormously aggravate
the already severe problems of the r e a l sector.
E f f e c t s on Economic A c t i v i t y
The f i r s t immediate and obvious e f f e c t of higher prices paid
for OPEC o i l i s t h a t funds are pulled out of the income stream i n the
consuming countries, and, since as a group the OPEC countries cannot
for some time spend more than a f r a c t i o n of these funds on current
output, there i s a r e l a t i v e reduction i n consumer demand. You w i l l
r e c a l l t h a t l a s t October we also confronted a reduction i n supply,
when we were faced w i t h a cut i n o i l imports, which would also have
reduced production c a p a b i l i t i e s . This s i t u a t i o n set i n motion an e f f o r t
a t planning i n i n d i v i d u a l countries, and m u l t i l a t e r a l l y through the
follow-up on the energy conference held i n Washington i n February
to share research programs, to reduce dependence on imported petroleum
and to share o i l i n the event of f u r t h e r embargoes. I n the U . S . ,
P r o j e c t Independence got underway. I would regard i t as a serious
mistake i f we should allow the more relaxed supply s i t u a t i o n to cause
us to slow down these e f f o r t s . For the United States i n p a r t i c u l a r ,
the most e f f e c t i v e way to deal with the energy problem
i s to mount a strong n a t i o n a l program for holding down energy use and
moving as quickly as possible to develop substitutes for imported o i l .

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Not only w i l l t h i s give us some leverage i n dealing w i t h the present
p r i c e and supply problems i t w i l l move us i n the r i g h t direction
f o r the long-run b e n e f i t of the country.
I n some ways the e f f e c t of the jump i n payments for oil
can be likened to an excise tax c u t t i n g down consumption of oil
i t s e l f as the price r i s e s , and c u t t i n g consumption of other goods to
the extent more i s spent for o i l d i r e c t l y and i n d i r e c t l y . But
there are important d i f f e r e n c e s : the q u a s i - t a x i s levied by f o r e i g n
governments rather than by a domestic government, and the use of the
funds i s not under our c o n t r o l , although, as I s h a l l point out later,
we can nevertheless guide the s h i f t s i n demand and output t h a t
w i l l r e s u l t from the q u a s i - t a x . As I s h a l l point out,
the d e s i r a b l e s h i f t of production i s i n the d i r e c t i o n of more i n v e s t -
ment.
I t i s important to note t h a t while these payments to OPEC
countries tend to dampen consumption demand i n the oil-consuming
c o u n t r i e s , and may cause severe s e c t o r a l d i s l o c a t i o n s i n some
c o u n t r i e s , they do not i n themselves reduce our o v e r - a l l productive
capabilities. R e c a l l t h a t when the o i l price change was occurring
the United States and other i n d u s t r i a l countries were approaching
together the crest of a remarkable boom i n world demand accompanied
as you know by an explosion of world prices as our economies were
being driven a t near to f u l l p r a c t i c a b l e c a p a c i t y . By the f a l l of 1973

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nearly a l l governments were t r y i n g to put a l i d on t h i s boiling
over of demand, a n d w e r e a d o p t i n g more r e s t r i c t i v e fiscal and
monetary policies. In that context, t h e r e was n o r e a s o n t o be
concerned about the demand-depressing e f f e c t s of higher oil pay-
ments, so t h a t any advocacy of expansionary policies to compensate
for t h e m was c l e a r l y misplaced. Now, a s we a n d o t h e r countries are
e x p e r i e n c i n g an abatement of t h e boom, we m u s t be i n c r e a s i n g l y aware
of the fact the rise in oil prices has c o n s e q u e n c e s that depress
activity, as w e l l as t h o s e o b s e r v e d initially t h a t were inflationary.
One r e s u l t of the c o n t r a c t i o n the oil situation has caused
i n aggregate consumer demands, and i n investment demands o f some
sectors depending on p e t r o l e u m , is that there is some additional
room f o r investment elsewhere to take place. This substitution
does n o t a u t o m a t i c a l l y take place - - we n e e d t o t a k e w h a t e v e r steps
we c a n t o shift more of our economic a c t i v i t y from consumption into
investment. Such a s h i f t will redress the imbalance between demand
and p o t e n t i a l supply that underlies the problem of inflation. Stepping
up i n v e s t m e n t s in the energy sector is especially important. The
financial requirements of such v e n t u r e s are huge a n d we s h o u l d give
thought to the problems of financing these investments, w h i c h we h a v e
t h e economic capacity to make.
I w o u l d now l i k e to turn from questions of reordering our
domestic priorities t o t h e more g e n e r a l problems of a l l oil-importing
countries, and s h a l l focus first upon t h o s e countries that are hardest

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h i t , many of them less developed, but some also among the industrial
countries. I f the less developed countries t h a t are severely
a f f e c t e d cannot a f f o r d to buy the o i l they need, or the food and
fertilizer they need, t h e i r present already low standards of living
w i l l f a l l f u r t h e r , and t h e i r hopes of making some gains by i n d u s t r i a l i z i n g
w i l l i n many cases have to be shelved. Unless adequate ways to help
these countries are found, an important part of the r e a l cost of
a d j u s t i n g standards of l i v i n g to pay for o i l w i l l f a l l on those countries
l e a s t able to bear such a burden. Food prices are now r i s i n g
g e n e r a l l y , and the added problems of paying for f u e l and f e r t i l i z e r
may w e l l reach the point of depriving some countries of t h e i r minimal
subsistence needs, posing very harsh a l t e r n a t i v e s . I t can cogently
be argued t h a t the a d d i t i o n a l problems of these developing countries
should be the r e s p o n s i b i l i t y of the o i l - e x p o r t i n g c o u n t r i e s .
We can see how the burden of high o i l prices w i l l impact
i f we look a t the way i n which the balances of payments of d i f f e r e n t
groups of countries are l i k e l y to be a f f e c t e d unless these prices
come down. The OPEC countries w i l l have a huge surplus i n t h e i r
current account - - an export surplus - - amounting to perhaps $60
b i l l i o n or more per year a t current p r i c e s . They w i l l dispose of
t h i s surplus i n various ways; some w i l l go i n t o b i l a t e r a l a i d programs,
or i n t o the i n t e r n a t i o n a l i n s t i t u t i o n s , and t h i s can help take some of
the s t r a i n o f f the poorer countries; but the bulk of the funds w i l l be

89
placed i n the c a p i t a l markets of the w e a l t h i e r industrial countries.
The i n d u s t r i a l countries, as a g r o u p , will have a l a r g e current
account deficit with t h e OPEC c o u n t r i e s . In the aggregate, however,
this w i l l be a u t o m a t i c a l l y financed -- if my p r e s u m p t i o n about
capital investment plans of t h e OPEC c o u n t r i e s is correct -- by a
capital inflow f r o m OPEC c o u n t r i e s . This is a n o t h e r way o f saying
that these w e a l t h i e r countries as a g r o u p w i l l n o t have to, and will
indeed not be a b l e , to pay f o r their full oil imports by exporting
goods and s e r v i c e s , until s u c h t i m e as t h e OPEC c o u n t r i e s can absorb
imports equal to their exports; and i n d e e d they w i l l not be a b l e to
repay their debts, a g a i n as a g r o u p , until t h e OPEC c o u n t r i e s begin
to run trade d e f i c i t s , perhaps a f t e r the exhaustion of their oil or
its replacement by a l t e r n a t i v e energy sources that the high oil price
is likely to encourage. This is not to say t h e r e w i l l not be problems
of adaptation in the industrial countries of the sort I mentioned a
moment a g o . It d o e s mean t h a t , provided the oil deficits c a n be
financed, real incomes need n o t be much d i f f e r e n t from what they
w o u l d have been w i t h o u t the r i s e in oil prices. But t h a t is not
true for those industrial as w e l l as d e v e l o p i n g countries that will
not, through the workings of the market, or through public policy
measures, be a b l e to attract an i n f l o w of capital that w i l l take care
of their new i m p o r t requirements. These c o u n t r i e s can i n some cases
r u n down e x i s t i n g reserves. After that, they would face drastic

90
adjustments unless they receive support. Taking these three groups
of countries as aggregates, we f i n d one group, the OPEC c o u n t r i e s ,
very much b e t t e r o f f both i n terms of current incomes and i n terms
of t h e i r claims on future world production; we f i n d a second group,
the w e a l t h i e r countries w i t h a t t r a c t i v e c a p i t a l markets, or good
capacity to borrow, t h a t are very uncomfortable perhaps about a
r i s i n g debt to OPEC countries, but would be able to cope w i t h the
r e l a t i v e l y small loss of r e a l incomes t h a t might occur; and we f i n d
another group of countries some counted as LDC's and some counted
i n the ranks of i n d u s t r i a l countries - - who w i l l face serious
difficulties. Their d i f f i c u l t i e s may i n t u r n react adversely upon
the countries o r i g i n a l l y i n a more favorable p o s i t i o n .
I remarked j u s t now t h a t some of the w e a l t h i e r countries
may be increasingly uncomfortable about a r i s i n g debt to OPEC c o u n t r i e s .
I n f a c t , some countries d i s l i k e the idea so strongly t h a t they may
resolve to avoid i t by bringing t h e i r current account i n t o balance
t h a t i s , they may t r y r e a l l y to pay f o r o i l byêither increasing
exports or decreasing other imports w e l l below the l e v e l s t h a t would
otherwise be observed. This sounds very virtuous we a l l f e e l t h a t
going i n t o debt should be l i m i t e d and should be for some productive
purpose. But the r e s t of the world happens to be i n a unique s i t u a t i o n
v i s - a - v i s the OPEC countries u n t i l those countries as a group buy
more than they s e l l , they can only p i l e up f i n a n c i a l surpluses

91
abroad. Thus, if each consuming c o u n t r y acting i n what appeared
t o be a r a t i o n a l fashion tried to avoid going into debt there
c o u l d o n l y be a g r e a t e r d e b t a c c u m u l a t i o n by o t h e r consuming
countries. In real terms, the countries avoiding d e b t w o u l d be
paying for their oil currently, while other countries would find
that their trade balance being d r i v e n into deficit more t h a n would
otherwise be t h e case and t h a t their d e b t was i n c r e a s i n g . In effect,
some c o u n t r i e s w o u l d be u n l o a d i n g t h e i r deficits upon t h e rest. They
might do t h i s either by u s i n g d i r e c t controls to a f f e c t their trade
balance, or m a n i p u l a t i n g their exchange rate to depreciate it, or
taking some e x t r a m e a s u r e o f restraint t o h o l d down d o m e s t i c demand.
The h o l d i n g down o f demand may i n many c a s e s be e n t i r e l y desirable
i n order to curb inflation or e l i m i n a t e any payments d e f i c i t arising
independent of the o i l situation. Such d e f i c i t s exist now, and the
countries experiencing them s h o u l d indeed e l i m i n a t e them. But
if many c o u n t r i e s try to eliminate those d e f i c i t s resulting from the
rise i n the price of oil, we w o u l d , I believe, be i n serious danger
not only of a major setback i n w o r l d economic a c t i v i t y but also of
a breakdown i n the r u l e s for fair t r a d e among n a t i o n s that could take
us b a c k t o the practices of the 1930's.
We have not come near to such a state of turmoil i n the
world trading system. I believe we can avoid i t . But i t i s d i f f i c u l t
to predict the decisions of nations when they f i n d themselves confronted

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w i t h major d i f f i c u l t i e s . Some countries may w e l l consider the problems
confronting them insolvable a t the present price of o i l . I n the absence
of a s u b s t a n t i a l reduction i n t h a t price unforeseeable conditions could
develop t h a t could make the s i t u a t i o n d i f f i c u l t i f not impossible to
manage.
I would l i k e to t u r n now to the U.S. balance of payments,
and to the e f f e c t s of the o i l c r i s i s on our i n t e r n a t i o n a l position.
Our trade balance has already f e l t the weight of the sharply higher
cost of imported f u e l i n the second quarter of t h i s year we were
paying $28 b i l l i o n a t an annual r a t e for f u e l imports - - about $20
b i l l i o n more a t an annual r a t e than we were paying a year ago. This
i s almost e n t i r e l y a price e f f e c t - - i n volume terms imports of f u e l s
were nearly unchanged. Mainly because of r i s i n g f u e l imports, our
trade balance for a l l goods has worsened sharply from a surplus a t
an annual r a t e of $4.2 b i l l i o n (balance-of-payments basis) i n the
fourth quarter of l a s t year when we reached the high point of
recovery from the deep d e f i c i t i n 1972 to a d e f i c i t a t an annual
r a t e of nearly $7 b i l l i o n i n the second quarter of t h i s y e a r . How-
ever, our underlying trade balance, that i s , abstracting from the
a r b i t r a r y increase i n o i l prices and also leaving out the extraordinary
jump i n a g r i c u l t u r a l exports, has shown considerable strength, moving
s t e a d i l y from a d e f i c i t a t an annual r a t e of about $12 b i l l i o n i n the
f i r s t quarter of l a s t year to a d e f i c i t of only about $1 b i l l i o n i n

93
the second quarter of t h i s year. I n volume terms we have done even
b e t t e r , w i t h export volumes r i s i n g and import volumes no higher than
they were e a r l y i n 1972.
So f a r as our merchandise trade i s concerned, we seem to
have made the kinds of gains i n competitive p o s i t i o n t h a t could be
expected from the depreciation of the d o l l a r since 1970, and t h i s ,
together w i t h the extraordinary r i s e i n the value of a g r i c u l t u r a l
exports, has helped to o f f s e t the huge jump i n o i l imports. However,
l i k e other countries we must be concerned w i t h achieving an o v e r - a l l
balance i n our accounts, including c a p i t a l movements, that w i l l under-
pin a stable d o l l a r i n exchange markets. The part of t h a t under-
pinning t h a t must come from an appropriate net inflow of c a p i t a l
from abroad could be s i g n i f i c a n t l y less than the e x t r a $20 b i l l i o n
i n payments due to the higher .price of o i l , i f i t turns out that
there are s u f f i c i e n t improvements i n the rest of our accounts.
There have been considerable gyrations i n the exchange value
of the d o l l a r since the second devaluation i n February l a s t year. But
since about mid-May the d o l l a r has held f a i r l y stable against a
weighted average of the currencies of the countries that are our
major competitors i n world markets. As i t stands now, the d o l l a r
has depreciated about 17 per cent against those currencies since May
1970, and has moved up s l i g h t l y i n recent months. On a broader measure,
taking i n t o account the movement of the d o l l a r against a weighted
i7_9ii r

94
average of nearly a l l f o r e i g n currencies, the devaluation of the
d o l l a r has been appreciably less amounting to perhaps 12 per cent
since 1970. The smaller d e p r e c i a t i o n measures the d o l l a r ' s so-called
" e f f e c t i v e r a t e , " against the world as a whole. The reason for the
d i f f e r e n c e between the two measures i s t h a t while the currencies of
most of the major i n d u s t r i a l countries have appreciated quite sharply,
against the d o l l a r , those of numerous other countries, including most
of the developing world, have tended to stay w i t h or near the d o l l a r .
I t i s the average r a t e r e l a t i o n s h i p t h a t comes closer to representing
the longer run e f f e c t s on our balance of payments, r a t h e r than changes
from time to time against p a r t i c u l a r f o r e i g n currencies.
Recent r e l a t i v e s t a b i l i t y of the d o l l a r has of course been
gratifying. I t has m a t e r i a l i z e d w i t h i n an environment of f l o a t i n g
exchange r a t e s , i n which very wide swings had occurred during the
12 months following the breakdown of the f i x e d r a t e s system i n
February-March 1973. Rate f l e x i b i l i t y has proved i t s usefulness in
times of severe disturbance. I t has given r i s e , on the other hand,
to new concerns. Among these has been the fear t h a t flexibility
might be abused to engage i n competitive d e p r e c i a t i o n as a means
of s t i m u l a t i n g exports. So f a r nothing of the kind, and indeed
perhaps the very opposite, has happened. Faced w i t h strong demand
for exports, and w i t h domestic i n f l a t i o n , most countries have had a
motive to keep the value of t h e i r currencies high. That holds down
the price of imports and helps r e s t r a i n domestic i n f l a t i o n . Downward

95
f l u c t u a t i o n s of the d o l l a r , such as occurred i n the middle of 1973 and
i n the e a r l y months of t h i s year, must i n the l i g h t of t h i s nexus be
regarded as harmful to our e f f o r t s to curb i n f l a t i o n i n the U.S.
Of course one cannot a n t i c i p a t e t h a t n a t i o n a l preferences as
regards exchange r a t e s w i l l always be the same and w i l l always
favor a high r a t h e r than a low value for the l o c a l currency. If
demand i n i n t e r n a t i o n a l trade should slacken, or i f some countries
should begin to make strong e f f o r t s to eliminate t h e i r o i l deficits,
n a t i o n a l preferences and the trend of f o r e i g n exchange rates may
change.
I t i s of considerable i n t e r e s t , t h e r e f o r e , t h a t as part
of the e f f o r t to reform the i n t e r n a t i o n a l monetary system, certain
guidelines for f l o a t i n g rates have been proposed. The reform
e f f o r t has met w i t h only l i m i t e d success, which was to be expected
once skyrocketing o i l prices and u n i v e r s a l i n f l a t i o n engulfed the
world. No long-run reform has been agreed upon, although valuable
preparatory work has been done. But among the immediate steps that
were agreed upon by the Committee of Twenty of the I n t e r n a t i o n a l
Monetary Fund, the proposal e s t a b l i s h i n g guidelines for floating
provides some hope t h a t extreme and inappropriate r a t e fluctuations
can be contained.
The recent s t a b i l i t y of the d o l l a r i n the exchange market,
w i t h i n a context of f l o a t i n g r a t e s , indicates that the net movement
of c a p i t a l to the United States has increased s u f f i c i e n t l y to j u s t

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about o f f s e t the d e t e r i o r a t i o n i n our balance on goods and s e r v i c e s .
U n f o r t u n a t e l y , we do not yet have a c t u a l data i n d e t a i l to support
t h i s i n f e r e n c e , but c e r t a i n patterns were showing up e a r l i e r . In
the f i r s t q u a r t e r , U.S. d i r e c t investors' net outflows were q u i t e
low, while there was a very large i n f l o w of c a p i t a l from f o r e i g n
business concerns acquiring businesses i n the United S t a t e s . This
p a t t e r n of d i r e c t investment may w e l l be continuing. Portfolio
investments i n v o l v i n g i n t e r n a t i o n a l dealings i n s e c u r i t i e s seem to
have dropped o f f sharply t h i s y e a r , w i t h Americans buying only a
small volume of f o r e i g n s e c u r i t i e s even though the I n t e r e s t
E q u a l i z a t i o n Tax on such purchases has been dropped, w h i l e foreign
purchases of U.S. corporate stocks an important type of i n f l o w i n
the past few years has also paused. Moreover, new issues of bonds
i n the i n t e r n a t i o n a l markets outside the United States have been less
t h i s year than i n any recent year.
By c o n t r a s t , there has been an e x t r a o r d i n a r y surge so f a r
t h i s year i n i n t e r n a t i o n a l c a p i t a l flows through banks i n both d i r e c -
tions we see i t i n our own data and also i n terms of new loans
arranged i n the Eurodollar market. U.S. banks, including the U.S.
agencies and branches of f o r e i g n banks, increased t h e i r foreign
assets by about $9 b i l l i o n i n the f i r s t f i v e months of t h i s y e a r ,
spread over many countries but e s p e c i a l l y d i r e c t e d toward Japan.
A simultaneous massive r i s e i n l i a b i l i t i e s reduced the net outflow

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which measures the net impact on our i n t e r n a t i o n a l balance and
on our domestic c r e d i t markets - - to only about $ 1 - 1 / 2 b i l l i o n .
I would associate part of the increased international
a c t i v i t y of U.S. banks w i t h the removal or reduction of b a r r i e r s
to such transactions t h a t occurred both here and abroad e a r l y i n
the year. At times, d i f f e r e n c e s i n r e l a t i v e i n t e r e s t rates have
also been important, with U.S. rates moving up r e l a t i v e to foreign
rates a f t e r the e a r l y part of the year. But I believe much of the
heightened a c t i v i t y was a r e s u l t of the new o i l s i t u a t i o n , which
generated a demand for loans by some countries to help meet the
higher costs, and a t the same time resulted i n an added supply of
l i q u i d loanable funds i n i n t e r n a t i o n a l markets as OPEC countries
placed t h e i r revenues w i t h the Eurobanks.
I n examining these manifold flows of c a p i t a l , i t must of
course be borne i n mind t h a t an inflow or outflow of funds does not
o r d i n a r i l y influence the amount of bank reserves i n the U.S. banking
system or the American money supply. Foreign c a p i t a l does not bring any
new d o l l a r s from abroad. Every d o l l a r of foreign c a p i t a l "flowing" to
the U.S. was i n f a c t i n the U.S. before. I t simply s h i f t e d ownership.
This s h i f t could have taken the form of an American s e l l i n g d o l l a r s
to the f o r e i g n e r , i n which case the inflow was matched by an outflow
as the American acquired whatever f o r e i g n currency or assets the
buyer paid him w i t h . Or i t could have represented a s h i f t among

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f o r e i g n holders, for instance i f the foreigner acquired d o l l a r s
from a f o r e i g n c e n t r a l bank which had held them previously as p a r t
of i t s reserves. What changes as a r e s u l t of changes i n c a p i t a l
flows, under our present regime of f l e x i b l e exchange r a t e s , i s the
exchange r a t e , as a r i s e i n the demand for d o l l a r s , i n the case of
c a p i t a l inflows, or i n the supply i n case of outflows, s h i f t s the
balance of the market i n favor or against the d o l l a r . Only i n s p e c i a l
cases i s a d i f f e r e n t i n t e r p r e t a t i o n a p p r o p r i a t e .
One f u r t h e r conclusion t h a t I would draw from the v a r i e t y
of o f f s e t t i n g c a p i t a l flows t h a t have occurred i s that under today's
conditions, c a p i t a l i s h i g h l y mobile. The w o r l d ' s n a t i o n a l
money and c r e d i t markets are more open to s h i f t s among countries
sometimes v i a the Eunro-markets, than they have been since before the
1930's. Hence the system of n a t i o n a l and i n t e r n a t i o n a l c a p i t a l markets
c o n s t i t u t e s i n e f f e c t something l i k e a large and only moderately
compartmentalized pool, r a t h e r than many separate w a t e r t i g h t compart-
ments. As a r e s u l t , any move of c a p i t a l i n one d i r e c t i o n i s q u i t e
l i k e l y to be o f f s e t by movements i n the opposite d i r e c t i o n . A large
outflow from the United States tends to d r i v e down i n t e r e s t r a t e s
abroad, which makes American c a p i t a l markets r e l a t i v e l y more a t t r a c t i v e
and causes other funds to come to the U . S . , and i n v e r s e l y . To pour
c a p i t a l , whether owned by OPEC countries or others, i n t o any one p a r t
of t h i s market does not mean t h a t the net supply i n that market i s

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increased by the f u l l amount. C a p i t a l already present there tends
to be pushed elsewhere, thus tending to even up the supply elsewhere.
Of course, these equalizing movements w i l l take place only i f
conditions are otherwise p r o p i t i o u s . When there are heavy r i s k s
of a c r e d i t , exchange, or p o l i t i c a l s o r t , the movements w i l l not
occur, or w i l l occur only i n response to severe declines of exchange
rates or increases i n i n t e r e s t r a t e s , or both. The evidence t h a t
i n today's markets c a p i t a l i s highly mobile should be kept i n mind
i n examining the possible e f f e c t s of placement of OPEC money i n any
one p a r t i c u l a r market.
This leads me to some comments on the more s p e c i f i c aspects
of the flows of funds derived from OPEC revenues, and t h e i r impact on
f i n a n c i a l i n s t i t u t i o n s and structures. I believe i t i s worth emphasizing
that there w i l l be great d i s p a r i t i e s among the OPEC countries i n t h e i r
a b i l i t y to u t i l i z e t h i s new wealth to improve t h e i r own countries, and
i n t h e i r plans for investment of t h i s huge cash flow i n f o r e i g n
c a p i t a l markets. We see already t h a t I r a n has made plans for
i n d u s t r i a l i z a t i o n and i s developing t i e s w i t h countries t h a t can be
h e l p f u l i n t h a t process. We know that Kuwait, for instance, has been
thinking through the requirements of an acceptable investment p o r t -
f o l i o for some time, and i s probably f a i r l y w e l l d i v e r s i f i e d . In
the case of Saudi Arabia, the i n i t i a l r e a c t i o n , which was simply to
l e t funds accumulate i n l i q u i d forms i n the Eurodollar market, seems

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to be moving already i n the d i r e c t i o n of f i n d i n g more permanent
lodging i n such investments, perhaps, as special issues of U.S.
Treasury o b l i g a t i o n s . According to IMF data, the reported increase
i n monetary reserves of the OPEC countries i n the f i r s t h a l f of 1974
was about $15 b i l l i o n , but the gains were a c c e l e r a t i n g , and were
$3-4 b i l l i o n per month i n May and June, w i t h larger increases still
to come.
These funds should not be regarded as a monolithic mass
of maneuver, poised to s h i f t t h i s way or t h a t for speculative or
p o l i t i c a l reasons. There are many i n d i v i d u a l OPEC governments
involved and there is no evidence t h a t they are taking any unnecessary
r i s k s w i t h t h e i r funds. Working with t h e i r f i n a n c i a l advisers, these
countries are l i k e l y to d i s t r i b u t e t h e i r funds over a wide range of
investments, always mindful of the need for security and s t a b i l i t y .
I n r e t u r n f o r continued r i s i n g l e v e l s of o i l output i n OPEC
c o u n t r i e s , those countries understandably wish to be provided w i t h
s u i t a b l e ways of holding t h e i r accumulating assets. I doubt t h a t
there w i l l be attempts to a t t a i n dominance over p a r t i c u l a r large
companies or economic sectors i n the i n d u s t r i a l c o u n t r i e s , since
t h i s would expose them to considerable economic and p o l i t i c a l risks.
At the same time, the amounts involved are formidable by any normal
standards of i n t e r n a t i o n a l c a p i t a l flows. Questions n a t u r a l l y a r i s e
about the a b i l i t y of c a p i t a l markets to absorb such flows without

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suffering severe dislocations. I believe some o f these concerns
are justified, but that others are exaggerated.
T h e r e a r e a number o f ways i n w h i c h a n a n n u a l flow of
funds of, say, $50 b i l l i o n c a n be c o m p a r e d w i t h over-all flows
of funds in f i n a n c i a l markets. I n the United States alone the
total of funds r a i s e d by n o n f i n a n c i a l sectors i n U.S. credit
m a r k e t s a r e now c l o s e to $200 b i l l i o n a year; for all industrial
countries together the t o t a l is two t o three times that amount.
By f a r the greater part of these flows of funds is between domestic
sectors of t h e economy, though a t times the flow of funds vis-a-vis
other countries can have a s i g n i f i c a n t effect on c a p i t a l m a r k e t s in
individual countries. Also, i n recent years the Euro-currency markets
have grown i n i m p o r t a n c e a s a m e c h a n i s m t h r o u g h w h i c h f u n d s move to
a n d f r o m n a t i o n a l money a n d c r e d i t markets. The E u r o - m a r k e t s have
now t a k e n on i n c r e a s e d importance, since a large part of the receipts
of t h e OPEC c o u n t r i e s is being deposited in their accounts in these
banks, and i n t u r n w i l l be l o a n e d by t h i s g r o u p o f banks to borrowers
i n national markets. The r e c o r d shows t h a t the Euro-currency market
has been c a p a b l e of very rapid growth i n the past. For instance, the
net size of the Euro-currency market (that is, after eliminating
claims of one b a n k o n a n o t h e r within the eight countries usually
c o n s i d e r e d as forming "the market") g r e w b y $25 b i l l i o n in 1972 a n d

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b y $50 b i l l i o n in 1973. There i s an e s t i m a t e that a further net growth
of $30 b i l l i o n has o c c u r r e d this year to mid-May, bringing the net size
of the market to about $185 billion.
It seems t o me t h a t if we h a v e p r o b l e m s in handling the
flows of funds associated w i t h higher payments for oil, it will not
be s o much b e c a u s e o f the sheer size of t h e amounts i n v o l v e d , but
because of several kinds of potential dislocations.
In the first place, the normal stream of investment into
financial assets in a given country w i l l reflect the existing asset
preferences of investors and i n s t i t u t i o n s i n those countries -- a
mixture of corporate debt and e q u i t y , financing of government at
various levels, mortgages, and d e p o s i t s in financial institutions.
On t h e other hand, the investment preferences o f OPEC g o v e r n m e n t s
may b e q u i t e different; I would expect t h e m t o be m o r e interested
i n assets that are r e l a t i v e l y liquid, widely traded both nationally
ana i n t e r n a t i o n a l l y , and backed by t h e strongest guarantees. That
would imply some s h i f t s i n the yields on d i f f e r e n t kinds of financial
assets i n national markets, reducing yields on more l i q u i d assets
relative to yields on, say, mortgages. I n the case o f the United
States, if there s h o u l d be a l a r g e inflow t o major U.S. banks and
to Treasury obligations, a s seems p o s s i b l e , some d o w n w a r d pressure
may r e s u l t on y i e l d s i n those sectors. T h a t d o e s n o t mean necessarily
that the rate of growth of the monetary aggregates w i l l be significantly

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affected, but it d o e s mean t h a t yield relationships c o u l d be c h a n g e d for
some t i m e t o come. The F e d e r a l R e s e r v e c o u l d e s t a b l i s h a n d m a i n t a i n any
d e s i r e d degree of over-all restraint or ease i n m o n e t a r y policy.
Another kind of irregularity in flows that could be trouble-
some i s t h a t OPEC c o u n t r i e s are likely to prefer assets based directly
or indirectly on t h e c o u n t r i e s w i t h the strongest economies and the
broadest markets. So may t h e b a n k s t h a t receive OPEC d e p o s i t s in
the Eurodollar m a r k e t and l e n d them out t o governments and private
borrowers a l l over the world. The p r o b l e m o f the weaker countries
is obvious they w i l l sooner or later find it difficult to attract
funds f r o m t h e m a r k e t as t h e i r debt burdens reach the limits which
the market s h o u l d and p r o b a b l y w i l l place on t h e i r borrowing capacity.
However, if t h e y do n o t succeed i n a t t r a c t i n g funds to
cover their deficits, it m u s t be t h a t some o f the stronger countries
a r e a t t r a c t i n g more t h a n enough f u n d s t o cover their own deficits
with t h e OPEC c o u n t r i e s . If a few c o u n t r i e s w i t h strong economies
and b r o a d c a p i t a l markets a t t r a c t a disproportionate s h a r e o f OPEC
investments and the U n i t e d S t a t e s could well be one o f them
a number of adjustments are possible. First, other countries needing
to borrow to cover their deficits w o u l d be a b l e to take advantage of
the a d d i t i o n a l liquidity available i n these surplus countries that
is, c a p i t a l markets i n these c o u n t r i e s c o u l d do a c o n s i d e r a b l e part
of the recycling job. Also, countries receiving inadequate financing
could allow their currencies to depreciate, so t h a t part of the

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adjustment could come t h r o u g h c h a n g e s in the trade balance. After
a point, however, these accommodations through the market mechanism
would not take care of the problems of countries whose d e b t capacity
was r u n n i n g o u t o r who c o u l d n o t adjust their trade balance beyond
some p o i n t of necessity.
To d e a l w i t h such s i t u a t i o n s the most logical solution
would c l e a r l y be f o r the responsible parties -- t h e OPEC c o u n t r i e s --
to relieve the burden. The t o t a l amount o f aid required would not
be l a r g e relative to t h e m o u n t i n g OPEC r e s e r v e s , and i t might be
a more f r u i t f u l investment i n terms of the stability of the world
economy t h a n a c o n t i n u i n g a c c u m u l a t i o n o f financial assets in the
stronger countries. If t h e OPEC c o u n t r i e s do n o t m e e t t h i s challenge,
s h o u l d we e x p e c t those countries that r e c e i v e OPEC f u n d s i n excess of
their needs t o a c t as financial intermediaries, b o r r o w i n g f r o m OPEC
countries a t market rates and w i t h a s s u r a n c e that these assets of
t h e OPEC c o u n t r i e s a r e sound, w h i l e extending aid to cover the cost
of oil to c o u n t r i e s who c a n n o t borrow a t market terms? I raise this
question not because I believe the industrial countries should cease
to contribute to t h e economic progress of poorer countries -- quite
the contrary -- but rather t o emphasize that there i s now a new
b u r d e n on t h e s e c o u n t r i e s that should c a l l f o r t h a new s e t of aid
donors.

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T h e r e has a l r e a d y been a c o n s i d e r a b l e amount o f activity
by t h e OPEC c o u n t r i e s t h a t may u l t i m a t e l y relieve the burden for
some o f the LDC's, but though the list of proposals for new funds
or institutions is quite long, it is not clear how w e l l the actual
disbursement of funds w i l l meet t h e needs o f particular countries.
Nevertheless, if t h e OPEC c o u n t r i e s are w i l l i n g t o do t h e i r share
and t h e industrial countries are not left w i t h an untenable inter-
mediary position, we s h o u l d be a b l e to p r o v i d e mechanisms for aiding
c o u n t r i e s when m a r k e t sources are not available.
Finally, another aspect of the flow of petrodollars causing
concern is the impact of these flows on t h e institutions in world
f i n a n c i a l markets. In particular, will untenable strains develop
from a flood o f OPEC f u n d s coming i n as v e r y s h o r t - t e r m liabilities
f o r w h i c h banks must q u i c k l y find outlets that a r e u s u a l l y much less
liquid? It w o u l d be u n w i s e t o be c o m p l a c e n t a b o u t this question
b a d j u d g m e n t s may be made a n d t h i n g s c a n go w r o n g f o r individual banks.
We m u s t be p r e p a r e d t o meet these risks, by o b t a i n i n g and providing
up-to-date information, by c a r e f u l r e g u l a t i o n and s u p e r v i s i o n , and
in the last resort by a c t i o n that would safeguard the liquidity of
m a r k e t s and t h e integrity of t h e payments mechanism by k e e p i n g possible
problems o f a n y one i n s t i t u t i o n from c r e a t i n g problems for the entire
system. But g i v e n p r o p e r caution on a l l sides, I believe that fears
sometimes expressed of financial difficulties are greatly exaggerated.

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Banks and t h e i r OPEC c u s t o m e r s have a l r e a d y begun to
rationalize the flow of funds: there are reports that on t h e deposit
side the m a t u r i t i e s are stretching out, or y i e l d s are dropping enough
to c a u s e OPEC g o v e r n m e n t s to seek out other assets; banks a r e assisting
these countries to f i n d more s u i t a b l e outlets for their funds; on the
asset side, some o f the problem of liquidity is alleviated by the
practice o f m a k i n g t e r m l o a n s whose i n t e r e s t rate c a n be a d j u s t e d at
intervals to reflect changing conditions in the market. So f a r , it
appears that the l e a d i n g banks have d e a l t with these flows efficiently
and r e l a t i v e l y smoothly. Countries i n need o f f u n d s have been able
to raise very large sums i n the Eurodollar markets anticipating
their requirements for some t i m e a h e a d . For instance, i n the first
half of this year, publicly announced medium- and l o n g - t e r m Euro-
currency bank c r e d i t s t o t a l e d about $20 b i l l i o n -- almost a s much
as i n a l l of 1973 and f a r more t h a n i n a n y e a r l i e r year.
Nevertheless, to express faith i n our financial institutions
does n o t mean t o say t h a t t h e y c a n m e e t a n y and a l l demands on t h e m .
On t h e c o n t r a r y , if they are to act prudently, they w i l l have t o keep
t h e s c a l e and k i n d o f their operations w i t h i n the limits of acceptable
risks. Given present oil prices, t h i s may l e a v e substantial investment
needs of the o i l e x p o r t e r s and b o r r o w i n g n e e d s o f the importers to be
met t h r o u g h o t h e r c h a n n e l s . T h e r e can be no a s s u r a n c e , at this time,
t h a t the problems, p a r t i c u l a r l y of the borrowing countries c a n be m e t
without a substantial cut i n the p r i c e of oil.

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W h e t h e r the p r o b l e m s I have d i s c u s s e d r e l a t i n g to petro-
dollars become a c u t e or n o t depends i n good p a r t also
on our a b i l i t y to get control of i n f l a t i o n and g e n e r a t e more
investment in the areas of greatest capacity shortages. If we c a n
make p r o g r e s s on t h o s e fronts, we c a n be m o r e h o p e f u l that special
problems of adjustment to high o i l prices, or t o other unexpected
strains, will not degenerate into serious impasses.

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M r . G O N Z A L E Z . T h a n k you very much. I n your statement, on page 1 7 ,

you first discussed the question o f the investment flow of this money,
excess money i f we want to call i t that, and t h a t perhaps some k i n d of
special issues of U . S . Treasury obligationsyou point out t h a t the
I M F data shows a reported increase i n monetary reserves of the O P E C
countries i n the first h a l f of 1974 of about $15 billion. Secretary Simon
had t o l d us on the eve o f his departure to the M i d d l e East t h a t this was
one o f the things t h a t probably would be discussed and t h a t is the
attraction of some o f this money i n t o the U n i t e d States and t o official
paper t h r o u g h some type of a special security. B u t then I t h i n k you
reflect the fact t h a t since then an A r a b finance minister has stated t h a t
one reason they have been slow i n doing t h a t is t h a t they want t o make
sure t h a t i f they do i t w i l l be on some k i n d of paper t h a t is inflation
proof. I t h i n k you reflect t h a t on page 19 by saying t h a t you w o u l d
expect and I quote " t h e m t o be more interested i n assets t h a t are rela-
t i v e l y liquid, widely traded both nationally and internationally and
backed b y the strongest guarantees." W h a t k i n d of securities w o u l d
t h a t be, M r . W a l l i c h ? W h a t would be an example ?
M r . W A L L I C H . A S you know, M r . Chairman, the interest rate t o some
extent inflation proofs a security. T h i s is p a r t i c u l a r l y so i n the case of
a short t e r m security because i t has to be issued repeatedly. A t each re-
issue, the interest rate can be p u t at the level t h a t current market con-
ditions require. T o the extent, then, t h a t interest rates move w i t h infla-
t i o n there is considerable protection i n the short-term instruments.
M r . G O N Z A L E Z . S O an interest yield h i g h enough to make i t interest-
i n g would be one of the things?
M r . WALLICH. Yes.
M r . G O N Z A L E Z . O n page 2 0 you say the Federal Reserve could estab-
lish and m a i n t a i n any desired degree of overall restraint or ease i n
monetary policy i n case the impact was such t h a t i t would have or tend
to have an impact t h a t w o u l d have t o result i n some k i n d of a policy
and you seem to be very confident about the a b i l i t y of the Federal
Reserve t o develop t h a t strong policy i n the l i g h t of what D r . B u r n s
said just last week, w h i c h was to a layman l i k e myself i t was u t t e r l y
astonishing. I n case, he said, the current policies were to result i n a
6 percent unemployment, then as a must the Government w o u l d have
to go into the public works arena but now this is what he and others
have been saying has been the cause of the bad inflationary tendencies
to begin w i t h so i t seems t o me rather tragic to say we are g o i n g to
admit t o a policy t h a t is going to b r i n g about unemployment so i n case
i t gets t o a p o l i t i c a l l y unbearable degree, well we w i l l get to the o l d
nostrum and have public works. I s not t h a t a self-confession of contra-
d i c t o r y policies and results ? W o u l d not the same t h i n g happen here ?
M r . W A L L I C H . Before t r y i n g to respond t o your question let me ex-
p l a i n w h a t I meant to say i n t h a t p a r t o f m y prepared text to w h i c h
you refer. I have heard i t said t h a t inflows of o i l money w o u l d affect
the U.S. money supply and therefore monetary policy. I merely meant
to explain t h a t technically t h a t is not so. T h e money supply does not
changeit just changes hands. T h e Federal Reserve's a b i l i t y to control
i t is not altered, broadly speaking. A s f a r as particular specific mone-
t a r y policy such as Chairman B u r n s was t a l k i n g about, I t h i n k t h a t
monetary policy has one p r i n c i p a l objective now, and t h a t is t o b r i n g

109
inflation under control. I t can do this job more effectively i f some of the
undesirable byproducts of anti-inflation policy can be prevented. One
such action would be to supply public service jobs so that the unemploy-
ment rate is kept down.
M r . G O N Z A L E Z . O n page 22 i n mentioning one other aspect of this
flow and some consequences i n case you have, as you very w e l l point out,
O P E C funds coming i n as very short-term liabilities w h i c h would o f
course create a problem f o r the institutions, the bank institutions. Y o u
say i n t h a t case, we must be prepared f o r this risk by obtaining and
p r o v i d i n g up-to-date information, by careful regulation and super-
vision and i n the last resort by action t h a t w o u l d safeguard the
l i q u i d i t y markets and the i n t e g r i t y of the payments.
M y question is, should we not now be anticipating t h a t as a very,
very real possibility we could have this influx of short-term liabili-
ties or capital and what is i t that we could be doing i n the meanwhile
i n anticipation? W o u l d i t require legislation or is this something that
would be an administrative policy now w i t h i n the confines of the
regulatory agencies, or would they have to have some legislation f r o m
us.
M r . W A L L I C H . Insofar as I can foresee the problem, I belive that i t
can be handled under existing powers. The problems raised by petro-
dollar flows relate not only to i n f o r m a t i o n about our domestic banking
system, and the situation of our financial markets. I t relates to banking
and t o financial markets worldwide, because the operations of banks
and financial markets are worldwide. W e are i n the process of strength-
ening our i n f o r m a t i o n domestically and internationally, p a r t i c u l a r l y
w i t h respect to the foreign exchange positions of banks. Thus, I t h i n k
the w o r k that you suggest, M r . Chairman, is going f o r w a r d .
M r . G O N Z A L E Z . O u r final question. I s there any possibility t h a t our
country could develop any k i n d of muscle, any k i n d of pressure i f you
want to use t h a t w o r d on the oil-producing nations to b r i n g about some
reason ? There is no question they have been gouging us unmercifully.
Y o u know, an increase of 400 percent is just not w i t h i n the realm of
reasonable or justifiable, i n the normal sense t h a t we use that word.
D o we have t o ? I s the country powerless ? I s the political situation such
that our country does not exert pressures t h a t i t m i g h t otherwise be
able to i n this area of o i l p r i c i n g ?
M r . W A L L I C H . I w o u l d say our best bet is to go f o r w a r d i n developing
our own sources of supplydeveloping an increased capability and
thereby reducing our dependence on foreign sources. T h i s w i l l have
t w o effects. One w i l l be the reduction o f demand f o r o i l i n w o r l d mar-
kets. T h a t w i l l tend, according to the laws of economics, t o b r i n g the
prices down. The other effect, by m a k i n g us more independent i n our
policies w i l l be to give us more leeway f o r action.
M r . G O N Z A L E Z . I t seems though t h a t Project Independence i n the
effort to make ourselves sort of fortress America is t h a t respect is not
one of easy realization, or at least not i n the very near foreseeable fu-
ture. A l l the experts seem to indicate t h a t there is this reliance on this
M i d d l e East oil. W h a t I do not understand is f o r example, the reports
that some of the countries i n the A r a b i a n producing w o r l d such as the
Saudis w o u l d be amenable t o a reduction i n price but are kept so by
such obdurate attitudes as those reflected by the Iranians, and there
37-211 O - 74 - 8

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I am asking a question and perhaps i t is one t h a t really we should ad-

dress to other officials and that is, is i t politics that is keeping us f r o m
t a l k i n g t u r k e y to the Iranians ?
M r . W A L L I C H . L e t me begin w i t h the first p a r t of your question. A s
I have said, I t h i n k a reduction i n the price of o i l is necessary i n order
to be sure the petrodollar problems are manageable. W i t h respect t o
Project Independence, i t must be realized that, to a potential investor
i n a substitute energy source, these plans may i m p l y t h a t possibly the
price o f energy sources w i l l go down. I n t h a t case, his incentive t o make
the investment w i l l be less. There are t w o sides t o the subject of the
potential decline of o i l prices. I t may help on the O P E C side, but i t
does not help on the side of domestic investment.
A s f a r as the O P E C countries are concerned, I am not a specialist
i n this area. M y impression is t h a t different countries are quite d i f -
ferently situated w i t h respect to the price of oil. Countries t h a t have
reserves of only l i m i t e d size are more interested i n obtaining a h i g h
price f o r their l i m i t e d supplies. F o r them, the flexbility lies i n de-
cisions as t o whether the o i l should be brought above ground now or
later. B u t , countries t h a t have v i r t u a l l y u n l i m i t e d reserves can be less
concerned about price because i t applies to an unending flow. So there
are v a r y i n g conditions here and i t is difficult to judge how an approach
could be made and its effect.
M r . G O N Z A L E Z . T h a n k you very much. M r . Johnson ?
M r . J O H N S O N . T h a n k you, M r . W a l l i c h . I wish I had had time t o
really read your statement. I t certainly is a very scholarly statement
and has an a w f u l lot of meat i n i t as they say.
I am t h i n k i n g of one o f the statements you have made t h a t this year
our purchases of o i l abroad w i l l j u m p f r o m about $5 b i l l i o n to about
$25 billion. T h a t is a $20 b i l l i o n increase i n cost and no doubt a great
strain on our b a n k i n g system. These firms i n the U n i t e d States t h a t
are b u y i n g this oil, how are they financing t h i s $20 b i l l i o n extra cost
t h a t they are going t o be faced w i t h ?
M r . W A L L I C H . U l t i m a t e l y , o f course, i t comes f r o m the consumer;
we are a l l p a y i n g f o r i t . The o i l companies presently have t o carry
higher inventories. A s they are very strong companies, I do not doubt
t h a t they have good credit facilities. I am concerned about the fact
t h a t when the o i l price goes up, i f they are on a first-in, first-out ac-
counting basis, this gives them a very large visible profit which is not
a real p r o f i t ; i t is just a capital gain on which they pay tax. A c t u a l l y ,
their l i q u i d i t y is reduced as a result o f h a v i n g had this r u n u p i n the
price o f their inventory. B u t I have never heard t h a t the o i l companies
have had any difficulty i n financing these inventories.
M r . JOHNSON. I read over the weekend t h a t there is a greater demand
f o r bank loans today than at any t i m e i n history. I s this huge demand
f o r bank credit the result of a demand f o r o i l loans? A l l o f a sudden
we need $20 b i l l i o n extra to buy o i l f r o m the Mideast?
M r . W A L L I C H . I cannot say specifically w i t h respect t o the o i l in-
ventories. W i t h respect to a l l inventories I t h i n k there is a very good
case to be made t h a t w i t h the rise i n the price o f inventories, and the
taxes levied on them, the l i q u i d i t y of corporations has been reduced.
T h i s w o u l d force them i n t o the banks.
M r . J O H N S O N . I was t r y i n g to t h i n k , as you have been delivering
your statement, how the Federal Reserve banks can enter into this

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picture and be h e l p f u l as f a r as financing the purchases o f the oil. Y o u

can rediscount the notes f r o m a bank t h a t loans money to a b i g o i l
company to buy oil, can you not ?
M r . W A L L I C H . T h a t is r i g h t . There has been a very significant ex-
pansion o f credit, particularly commercial and industrial loans. There
has also been a significant expansion o f the money supply, although
currently at a lower rate. Consequently, I do not t h i n k there has been
any lack of financing f o r the o i l companies.
M r . J O H N S O N . N O W also, these O P E C countries are of course being
the recipients o f large inflows of cash. Where w o u l d they deposit t h a t
money? A r e they p a r t i a l to American banks over there like Chase
Manhattan, and F i r s t National C i t y Bank, and Continental, and some
of the b i g banks, or do they deposit i n their own local banks?
M r . W A L L I C H . I t has been tending t o go into the E u r o d o l l a r market
and to a lesser extent into banks i n the U n i t e d States. American banks
have branches i n the Eurodollar market, which is m a i n l y but not
exclusively situated i n London. They have a very i m p o r t a n t share of
t h a t market. So i n those t w o senses money is going i n t o American
banks f r o m O P E C countries.
M r . J O H N S O N . The reason I asked t h a t is i t seems t o me that I read
where Chase Manhattan B a n k was anticipating deposits maybe to the
extent of $25 billion. O f course they would have t o i n some way handle,
and as you mentioned i n your statement, provide l i q u i d i t y f o r i t be-
cause they are i n the nature o f very, very short-term deposits.
M r . W A L L I C H . Yes, t h a t is a problem f o r banks. So f a r , they have
been getting predominantly short-term deposits. T h a t puts a constraint
on them regarding the m a t u r i t y of the use t h a t they can make o f these
funds.
M r . J O H N S O N . T h i s month Saudi A r a b i a very wisely agreed w i t h M r .
Simon to hold an o i l auction and they have set the target date. They
w i l l ask f o r bids f o r the sale of i y 2 m i l l i o n barrels of o i l a day f o r 16
months, and I t h i n k M r . Simon and everybody is hoping t h a t b y
reason of the 2 b i l l i o n barrel a day g l u t r i g h t now i n o i l markets t h a t
those bids m i g h t be as low as a reduction of $2 a barrel. D o you have
any i n p u t on that? D o you t h i n k t h a t is possible under the present
situation wherever there is a tremendous overproduction o f o i l i n the
world?
M r . W A L L I C H . There is certainly room f o r a decline i n the price of oil.
Whether this particular mechanism is likely t o produce i t , I have no
means of judging. I am no expert on this subject. One has t o bear i n
m i n d of course t h a t an increased supply f r o m any one country could
be offset by reduction i n the supply f r o m others. T h i s w o u l d be the
case unless the country t h a t is expanding its production has such great
productive capacity that its expansion would result i n an increase i n
aggregate output even though others were c u t t i n g back. These are
complexities t h a t we cannot see t h r o u g h very effectively at t h i s time.
B u t actions designed to b r i n g down the price of o i l w i l l certainly bear
exploring.
M r . J O H N S O N . W e l l , is i t not true as M r . Gonzalez mentioned t h a t we
have not used any political pressure as is nonexistent? A b o u t the only
t h i n g t h a t is going to b r i n g down the price of o i l is the l a w of supply
and demand and the i n a b i l i t y of the Arabians t o sell the oil. I under-
stand the storage facilities are just jammed f u l l all over the w o r l d and

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we may see a surprising drop i n the price of oil. I k n o w someone said

they can c u r t a i l their production. I come f r o m the Pennsylvania oil-
fields and i f you curtail production of a prolific lease by reason o f pro-
r a t i o n o r something, when you w a n t t o restore production back again,
w h y paraffin has set i n t o the o i l sands and you don't get the production
back. T h a t could well happen t o these people over there although I do
not know the character of their o i l sands, whether a precipitous cur-
tailment of production would cause the sands to fill up w i t h paraffin
and asphalt.
M r . W A L L I C H . I lack expertise here also. I always thought o f the
m a i n pressure on the price of o i l as coming f r o m the development o f
substitute sources of energy, not only of o i l b u t o f other sources. B u t
conceivably, such a t h i n g as storage limitations may have a much
greater impact.
M r . J O H N S O N . T h a n k you. I believe m y t i m e has expired.
M r . G O N Z A L E Z . M r . Reuss?
M r . R E U S S . T h a n k you, M r . C h a i r m a n ; and M r . W a l l i c h , t h a n k you
f o r a masterful paper. I have several hours of questions b u t I w i l l
compress them i n t o 5 minutes.
O n page 2, you say, t o w a r d the bottom o f the page, " f o r the U n i t e d
States i n particular, the most effective way t o deal w i t h the energy
problem is t o mount a strong national p r o g r a m f o r h o l d i n g down
energy use, and m o v i n g as quickly as possible t o develop substitutes
f o r imported o i l . " I certainly agree, and I want t o p u t t o y o u w h a t , t o
me, is the most worrisome t h i n g about the o i l supply price i m p o r t
situation; and let us see what your reaction is.
I am not p r i m a r i l y worriedand I know you are not, eitherabout
M i d d l e Easterners acquiring investment interest i n the U n i t e d States.
I t h i n k we can protect our interests there, a l l r i g h t . N o r am I p r i -
m a r i l y worried about M i d d l e Easterners who now hold enormous
reserves, and w i l l h o l d even greater reserves, b r i n g i n g the temple down
by destructive dumpings o f dollars or some other currency; because
f o r one t h i n g , they would h u r t themselves about as much as they w o u l d
h u r t t h e i r intended victim. W h a t I am concerned aboutand I won-
dered whether you share m y concernis simply this r here we are, i n
the U n i t e d Stateswe w i l l just t a l k about our country t h o u g h the
same situation prevails i n most of the other industrial countrieshere
we are, on an essentially business-as-usual, o i l consumption-as-usual
basis. W e are t r y i n g some conservation, but not much, as anybody who
is d r i v i n g down the highway can p l a i n l y see; and meanwhile, the
O P E C countries are accumulating horrendous reserves. Y o u gave us
the arithmetic on that, and because they are not going t o spend them
a l l currently, they are going to invest them. Those reserves are going
t o grow. They are keeping t h e i r poker chips on the table, i n short, and
t h e i r p i l e is g r o w i n g higher and higher.
I f , i n 5 or 10 or 15 years, about the time we hope, i f we are l u c k y , i n
reaching something like Operation Independence of our o w n i f about
t h a t time the A r a b countries decide t o spend f o r imports i n t o t h e i r
country these fantastic accumulations; and p a r t i c u l a r l y i f t h a t t i m e
coincides, as w e l l i t m i g h t , w i t h an increased scarcity o f materials
worldwide, are we not l i k e l y t o have i n this country, w i t h really no
option about i t , a serious d i m i n u t i o n i n our real income, because o f the

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necessity to p a r t w i t h these resources which we ship overseas; a n d / o r

a b o i l i n g inflation as domestic demand and foreign demand coincide?
I n short, i t seems to me t h a t we are not i n the lucky situation we
were i n i n the 1960's, when by and large we let the Germans and the
Japanese m a i n t a i n an overvalued dollar exchange rate, and then sup-
p l y us w i t h enormous quantities of Volkswagens and M i n o l t a cameras
at cheap prices; and they d i d not know, u n t i l i t was a l l over, how they
would be frustrated by devaluations of the dollar, much depre-
ciation of the d o l l a r plus much inflation. I do not t h i n k the Arabs are
going t o be t h a t shortsighted. W e are floating, so we cannot devalue.
A n d i f we continue t o inflate, our creditors w i l l start b u y i n g while the
b u y i n g is good.
D o you share m y concern t h a t this is the real t h i n g we ought t o be
concerned about, and t h a t unless we want t o impose o n the American
people a no-choice alternative i n , say, 10 years, o f h a y i n g t o undergo a
considerable d i m i n u t i o n i n national income and the i n d i v i d u a l stand-
a r d of income, we should take more seriously the need t o conserve
imported o i l now ?
M r . W A L L I C H . Congressman Reuss, I have been very conscious of this
problem, but w i t h a s l i g h t l y different emphasis. I have looked at i t i n
the f o l l o w i n g terms. W e are i n c u r r i n g a great debt, which w i l l require
service. Someday i t w i l l have to be repaid, presumably when the O P E C
countries can accept trade deficits instead o f h a v i n g surpluses. T h e
way t o p u t us i n position to service this debt, and ultimately repay i t ,
would be t o accumulate more capital i n the real sense. T h a t is, use the
leeway created i n the economy now by this o i l " t a x , " the d r a i n i t creates
on consumer demand, i n order to step up the rate o f capital formation.
Then we w i l l have a bigger capital stock. The return on t h a t stock w i l l
help t o pay interest on the debt that is outstanding. U l t i m a t e l y i t could
serve, alsoalthough I doubt t h a t would happento repay the debt.
So, by d o i n g this, I t h i n k we would i n the main meet the problem that
you are concerned about.
However, since such a process never works completely smoothly, I
t h i n k i t is certainly true t h a t whatever we can do to reduce the oil
deficit i n the first place w i l l be a l l to the good.
M r . R E U S S . O n t w o of the factors which are likely to keep things
f r o m going as smoothly as you and I would like, the first one is that the
O P E C countries are not l i k e l y to supply as much of the funds which
they have skimmed off f r o m us i n higher prices back here i n the f o r m
of investment and equipment as may be needed; and second, both the
capital goods, the tools and equipment that you mean when you say
capital investment, a n d the things they make, w i l l have an increasing
proportion o f high-cost imported componentscopper, bauxite; you
know the whole list. W e l l , would you agree t h a t those are possible
variables w h i c h may t h r o w off your nope a 1bit?
M r . W A L L I C H . T h e y are definitely variables, and they present diffi-
culties. I w o u l d add just one thing. Suppose the O P E C money should
not come to the U n i t e d Statesalthough i n fact there is no particular
reason t o t h i n k t h a t we w i l l not get some reasonable share of i t , having
good capital markets. B u t even i f t h a t should happen, so long as de-
mand is reduced by the payment of h i g h prices f o r o i l and by the flow
of money abroad, there is o f course a gap i n the economy, i n real terms.

114
T h i s can be filled b y some other f o r m o f demand. A n increase i n invest-

ment is just as good, or even a better way o f filling t h a t gap t h a n
raising consumption spending. T h e market w i l l tend t o b r i n g i t about,
although one cannot be sure t h a t i t w i l l b r i n g i t about completely.
T h i s w i l l happen due to a f a l l i n interest rates and by other circum-
stancessuch as the limitations placed upon industrial capacity. These
factors w i l l encourage investment and b r i n g about the needed increase
i n capital formation.
M r . R E U S S . T h a n k you.
O n another subject, you speak approvinglyand I surely j o i n you
i n what the Committee o f T w e n t y has done i n its recommendations
w i t h respect to rules o f the road and guidelines on flexible exchange
rates; so f a r , so good.
I am concerned, however, about another recommendation of the
Committee of T w e n t y ; namely, that despite a l l that we have learned,
we should now, i n effect, p l a n a return to the stable b u t adjustable rates
of B r e t t o n Woods days, and thus apparently deprive the U n i t e d States
o f the o p p o r t u n i t y to float, as i t is now floating, when i n its sovereign
judgment we determine t h a t i t is the t h i n g to do. Instead, i t w o u l d be
up to the I M F to decide this question.
I f I read the C - 2 0 r i g h t a n d I t h i n k I do, because I have read i t
again and againshouldn't the Congress now serve notice t h a t i t
simply w i l l not r a t i f y any amendment t o the I M F articles t h a t w o u l d
envisage such an improvident impairment of our r i g h t t o make our
currency flexible ?
M r . W A L L I C H . T h e output of the Committee of T w e n t y is not a final
agreed-upon report. I t is simply a report t h a t states the positions w h i c h
the group had arrived at when i t dissolved.
M r . R E U S S . A n d w i l l recommend t o the Governors?
M r . W A L L I C H . Yes; b u t what i t recommends t o I M F ' s board is
essentially a series o f short-run i n t e r i m steps. Those short-run objec-
tives do not include a r e t u r n to stable b u t adjustable rates. T h a t is
p a r t of the longrun perspective. I would be concerned about something
t h a t compelled the U n i t e d States t o give u p a floating posture so l o n g
as the U n i t e d States thought t h a t there was an advantage i n main-
t a i n i n g i t . O n the other hand. I see considerable advantages, over the
l o n g run, i n stability o f exchange rates. I believe everybody does, and
i f we can create conditions i n which stable rates are possible, then I
w o u l d see a r e t u r n t o them as quite feasible. T h a t is, I can envision
circumstances i n w h i c h stable rates w o u l d be i n our interests. B u t this
is a conjectural matter. One cannot foresee how conditions w i l l de-
velop, and t h a t is one reason the C-20 never settled this p o i n t i n
reaching i n t e r i m agreement.
M r . R E U S S . Then i t is your view, as you read the C-20 recommenda-
tions of June of t h i s year, t h a t they do not recommend a r e t u r n to
stable but adjustable rates; t h a t they are simply t a l k i n g about the
sweet by-and-by, and something that should be talked about, and t h a t
Congress w i l l not be confronted w i t h new articles of the I M F f o r
ratification w h i c h adhere to stable b u t adjustable rates?
M r . W A L L I C H . N o t as a result of this negotiation. I t h i n k i t is f a i r
to say t h a t there was a s p i r i t i n the committee approving the general
idea of stable but adjustable rates, b u t t h a t the circumstances at the

115
time were so uncertain that no proposals of that k i n d are going t o be
made to legislatures.
M r . R E U S S . T h a n k you. I have not been told, but I suspect m y time
is up.
M r . G O N Z A L E Z . Yes; well, the Chair is being liberal w i t h the mem-
bers.
M r . Crane?
M r . C R A N E . Yes; thank you, M r . Chairman. I w o u l d l i k e t o welcome
M r . W a l l i c h before the subcommittee, too.
M r . W a l l i c h , i n your testimony on page 2, you made reference t o a
relative reduction m consumer demand, and t h a t this relative reduc-
t i o n i n consumer demand could help to alleviate some o f our problems.
B u t I am wondering about a reduction, say, i n demand f o r food, where
we are faced w i t h the prospect of heightened demand worldwide
because of shortages and increased food needs. T h i s summer, unfor-
tunately, we are faced w i t h the prospect of a major drought.
The last figures I saw contended t h a t we are going to be about 30
m i l l i o n tons of g r a i n short of our anticipated yield this year. W e also
have other significant problems i n housing and, w i t h a g r o w i n g num-
ber of the young people who were a product of the post-World W a r I I
baby boom i n the process of f a m i l y formation, i t seems to me that
there are additional and inevitable strains there.
There is the f u r t h e r problem of job creation to avoid rather sig-
nificant unemployment ratesand I am t h i n k i n g again of that post-
W o r l d W a r I I baby boom population, and the need by industry to
absorb almost twice as many people into the w o r k force today as they
have been doing f o r the past 7 years. A s I understand i t , that is to
continue f o r about another 7 years before we get back to normal job
creation i n a h i g h l y industrialized society, where i t costs about $25,000
to create a job.
The question I am wondering about is, how you achieve reduction i n
consumer demand when you are stuck w i t h those givens.
M r . W A L L I C H . L e t me say something about how I visualize the im-
pact on demand. I t h i n k that i t would be very widely spread. People
are very l i k e l y to cut back a l i t t l e here, a l i t t l e there. T h e y are going
to cut back on what they spend on gasoline; perhaps not i n dollar
terms, but i n terms of the amount of gasoline, and i n the other forms
of o i l which they use. A reduction i n demand f o r food is not involved,
I believe. Food is mainly a supply problem at this time.
H o w does that fit into an overall aggregate demand policy ? I quite
agree w i t h you, we need a proper balance. W e have h a d substantial
excess demand, and t h a t has contributed to inflation. I t needs to be
cured. O n the other hand, we have to be careful not t o develop an
overall demand weakness which would make i t difficult to absorb
g r o w t h i n the labor force. T h a t is a problem of the medium term, I
w o u l d say. The demand trend has to be sufficiently u p w a r d t o absorb
new entrants to the labor force.
M r . C R A N E . Another question t h a t came to m y m i n d t h a t Congress-
man Reuss touched upon, concerns this necessity f o r developing sub-
stitutes f o r imported o i l ; and one of the concerns t h a t I haveand i n
fact a number of m y colleagues dois over the impact o f some of the
environmental legislation that we have passed i n significantly in-

116
creasing demand f o r this product. Then, such delays as construction

of the Alaskan pipeline, and so f o r t h I am wondering i f , i n your
judgment, there should be a continued effort at relaxing and extend-
i n g the timetable f o r implementation of some of our efforts at con-
t r o l l i n g p o l l u t i o n of the environment.
M r . W A L L I C H . A S an economist, I like to see balanced adjustments.
W e have had the misfortune at a time when we took what seemed to
be desirable environmental action, we experienced an unforeseeable
rise i n the cost of these policies. I t seems appropriate t h a t on the one
hand we pay a l i t t l e more, and on the other, demand a l i t t l e less. T h a t
way we w i l l bridge the gap.
M r . C R A N E . W e l l , i t is the p a y i n g a l i t t l e more t h a t I t h i n k is a p a r t
of the problem, too, at a time when there are such demands f o r money
i n so many other sectors, whether i t is developing additional f u e l re-
sources, or whether i t is job creation i n industry, and so f o r t h .
L e t me t u r n t o another point. O n page 4 o f your testimony, where
you made reference t o control o f b o i l i n g over of demand i n the f a l l of
1973, and you added t h a t nearly a l l governments were adopting more
restrictive fiscal and monetary policies, f r o m late f a l l of 1973 t h r o u g h
1974 d o w n t o the present time, what has been the rate of expansion m
the money supply ?
M r . W A L L I C H . The rate o f expansion i n the n a r r o w l y defined money
supply i n the U n i t e d States was of the order of 7.6 [6.8] 1 percent f o r the
6 months preceding, February t h r o u g h J u l y of this year. L e t us take
the last 9 months, November 1973 t h r o u g l i J u l y 1974. O f those, the
average of the last 3 months was 4.4[4.8] 1 percent, and the average of
the 6 months preceding t h a t was about 6.8 [7.5] 1 percent. So, this aver-
ages 7.1 [6.6] 1 percent f o r the 9 months.
M r . C R A N E . JBut most recently, i t has been i n the 8-percent range i n
the preceding 6 months.
M r . W A L L I C H . T h e last 3 months, i t has been at 4 . 4 [ 4 . 3 ] 1 percent rate,
and before t h a t i n other words, the aggregate o f 9 monthsapproxi-
mately 7.1 [6.6] 1 percent.
M r . C R A N E . I see.
W i t h respect to fiscal policy, there have been some proposals t h a t I
t h i n k are i n line w i t h other recommendations t h a t you nave made, t h a t
we m i g h t relaxor, i n fact, reducesome of the taxes on capital in-
vestments, capital gains; even some relaxation or reduction o f corpo-
r a t i o n taxes as a means of t r y i n g to stimulate increased investment,
because of the expectation of a higher r e t u r n on investment; and i t
w o u l d seem t o me that t h a t coincides w i t h some of the other recom-
mendations i n your statement. W o u l d you recommend any specific
changes i n our tax laws here, t o encourage more investment ?
M r . W A L L I C H . I have a h a r d t i m e being very specific about these
suggestions. I am aware o f the objective ana I am also aware t h a t they
are t a x devices t h a t could be useful. I n t h a t respect, may I d r a w y o u r
attention t o an aspect of the corporate-profits picture. Due t o the fact
t h a t price rises have inflated inventory profits, the true profits o f
business are currently very substantially overstatedin the economic
sense, at least. I f you take into account the fact t h a t corporations must
1
Figures I n brackets indicate revisions made August 21, based on new data.

117
pay t a x on these inflated inventory valuations, the rate o f taxation

on corporate income is really much higher than i t appears t o be. B u t
that is an economic, not a legal, calculation.
M r . C R A N E . F i n a l l y , you make reference also i n your statement t o
the need t o take whatever steps we can t o s h i f t more o f our economic
activity f r o m consumption into investment and I assume particularly
you are concerned about return on investment and energy related
fields, whether i t is o i l or what have you. D o you know what the
r e t u r n on investment at the present time is f o r the m a j o r o i l com-
panies i n this country ?
M r . W A L L I C H . N O . I don't. I would have to look at the figures. I
would guess t h a t because o f the profits on inventory d u r i n g the period
when the price of o i l rose, i t would be necessary t o take a longer
period i n order to get a meaningful figure. I t would be very h a r d t o
p u t i t , say, i n terms of 1973 or i n terms of 1974 only.
M r . C R A N E . T h e reason I raise t h a t point is because unfortunately
i t seems t o me t h a t the o i l companies have come under undue criticism.
There have been very dramatic headlines advertising the percentage
of profit increase over say last year or the preceding 6-month period,
when, i n fact, the r e t u r n on investment of the m a j o r o i l companies
i n this country d u r i n g the preceding 5 years t o the time o f the o i l
embargo was, relatively speaking, lower t h a n the r e t u r n on investment
i n other forms o f industry i n this country. I t just seems t o me t h a t
the o i l companies have taken something of an u n f a i r and unwarranted
criticism i n this regard and that i f we are going t o stimulate t h a t
investment then i t is necessary to develop a degree o f self-sufficiency,
t h a t instead o f t a l k i n g about nationalization of American o i l com-
panies we ought instead t o be applauding a return on investment t h a t
finallv has exceeded a return t h r o u g h the p r i m e rate, and i t was below
that t o r several years.
M r . W A L L I C H . I would never accept a percentage w i t h o u t stating
the base and w i t h o u t relating i t t o longer r u n data.
M r . C R A N E . T h a n k you, M r . W a l l i c h . M y time has expired.
M r . G O N Z A L E Z . T h a n k you. M r . Burgener.
M r . B U R G E N E R . T h a n k you very much, M r . Chairman.
Governor W a l l i c h , i t is a privilege t o have you here. I would l i k e to
ask a few monetary policy questions and w o r k m y way t h r o u g h o i l
and end u p i n Eurodollars maybe. Chairman B u r n s suggests t h a t
monetary policy alone can certainly not solve inflation, although i t is
an i m p o r t a n t part. H e says that fiscal restraint on the p a r t o f Govern-
ment, on the p a r t of individuals, labor, management, and everybody is
essential. H i g h e r p r o d u c t i v i t y , a l l of this combined w i t h monetary
policy can tend to attack the problem. I s t h a t generally how you see
his views?
Governor W A L L I C H . Yes; t h a t is the way I see i t . Monetary policy
should not be made t o carry the f u l l burden.
M r . B U R G E N E R . A l l r i g h t . Now am I correct i n m y assumption t h a t
i f the Federal Reserve dramatically reversed its field and eased money
and made i t easy and i t is t i g h t at the moment, t h a t t w o things would
happen. I recognize t h a t this is oversimplified. A m I correct i n assipi-
ing, (a) t h a t interest rates would come d o w n ; and (b) t h a t prices
would go up?

118
M r . W A L U C H . I f i n d i t difficult to generalize about monetary policy.
B u t let me p u t i t this w a y : Over a period of time inflation and the
movement o f prices reflect developments i n the money supply. I am
not speaking t o the precise situation now, because there are always
particular aspects that have t o be taken i n t o account. B u t speaking m
general, i f at any one t i m e the central bank suddenly steps u p the rate
of g r o w t h of the money supply and the money supply eases i n the
sense y o u said, Congressman Burgener, the immediate effect w o u l d be
a decline i n interest rates. Subsequently, however, prices w o u l d go up.
R i s i n g prices tend t o p u l l up interest rates i n the long run. I do not
know exactly what the t i m i n g w o u l d be. B u t the final result w o u l d
be higher interest rates.
M r . B U R G E N E R . The Federal Reserve most recently has a slower
money supply g r o w t h rate o f about 4 percent as opposed t o last year's
8. W h a t do we know i n general terms about the g r o w t h o f money
supply i n foreign countries, p a r t i c u l a r l y our t r a d i n g partnersJapan,
Europe, the A r a b countries, and so on? H o w is t h e i r own currency
g r o w i n g or is it?
M r . W A L L I C H . Some of those countries have i n the past had very
much higher rates of money growth. Some o f them, however, have
been quite successful i n l o w e r i n g the rate of g r o w t h o f money. Japan,
f o r instance, had a severe rate of increase i n the money supply i n
1972-73. T h e U n i t e d K i n g d o m d i d also. They have managed t o cope
w i t h t h a t t o some extent. B r o a d l y speaking, one can trace these effects
of monetary policy and price behavior. The countries I mentioned
need to balance their payments. The rate of exchange o f t h e i r currency
also has great significance w i t h respect to prices. I n addition interest
rates have an international relationship. Thus, p a r t i c u l a r l y i n smaller
countries, rates tend t o be influenced by rates abroad. A l l this makes
i t harder t o follow the mechanisms, i f I understand you correctly, t h a t
you are t r y i n g t o examine. B u t , broadly speaking, I t h i n k i t is vali-
dated.
M r . B U R G E N E R . I s i t true, t h a t w i t h o u t passing judgment on whether
i t is a good or bad idea, t h a t Japan moves very quickly i n terms o f
allocating credit w i t h i n the nation t h a t we do not?
M r . W A L L I C H . I n Japan they have had a system i n w h i c h the Govern-
ment has had a great deal of control over the allocation o f credit. M y
own impression is t h a t they feel the t i m e has come t o reduce t h a t de-
gree of control. They have t r i e d to make their markets more responsive
t o what we w o u l d call market forces.
M r . B U R G E N E R . O n the O P E C countries, i f t h i s large reservoir is
seeking h i g h l y l i q u i d or low-risk investments I assume t h a t h i g h r i s k
brings h i g h returns and low risk generally low returns. Y o u state
i n your testimony that that would have a tendency to force the rate
of r e t u r n down. I s that what you are saying? I f they are seeking low
risk w i l l not t h a t b r i n g their interest rates down ?
M r . W A L L I C H . T h a t is correct. I meant t o say t h a t i f more money
flows i n t o low-risk areas, such as short-term Government securities,
the supply o f funds there w i l l be increased and t h a t w i l l necessarily
tend to drive down rates.
M r . B U R G E N E R . O f course, I guess currently our Government securi-
ties are quite h i g h r e t u r n or is t h a t just the short-term ones?

119
M r . W A L L I C H . I am a f r a i d that i n considering interest rate levels

one always has to consider the rate of inflation, Congressman Burgener.
M r . B U R G E N E R . I S 8 and 9 percent low return ?
M r . W A L L I C H . T h e nominal rate, o f interest consists, economists
would say, of the real rate, plus an inflation premium. I do not know
what rate of inflation investors expect. B u t you could visualize an
8-percent interest rate that would contain a very sizable inflation
premium.
M r . B U R G E N E R . W e are p a y i n g about $20 b i l l i o n more f o r o i l and
we are not getting more o i l and I take i t we are not getting less oil.
The point is are we conserving energy or are we just t a l k i n g about i t ,
i n your opinion ?
M r . W A L L I C H . I am not an energy expert, but m y overall impression
is this. There is some conservation at the consumer level. Consumer
conservation of energy was better d u r i n g the period of the boycott
than i t is now. There is a significant effort at the business level, where
conservation practices are based on precise calculations. There is a
longrun effect but no one knows just what t h a t includes. There are
structural factors such as a change i n the size of the average car, the
insulation of the average house, and the way the factories are b u i l t ,
which w i l l take a long time t o become effective. B u t effort i n this area is
proceeding. I t h i n k i t is probably the main part of this conservation
effort.
M r . B U R G E N E R . W o u l d i t be safe t o assume t h a t as of r i g h t now i t
is more of an intention than a f a i t accompli ?
M r . W A L L I C H . I would say i t is certainly not a f a i t accompli. I
would add t h a t I t h i n k everybody has the best intentions. B u t , unless
these intentions are backed by economic reality I do not t h i n k they
are going to get us t o the desired result. I do see the reality of higher
prices w o r k i n g on people, so that regardless o f intentions they are
likely to be pushed i n the direction of conservation.
M r . B U R G E N E R . A l l r i g h t . F i n a l l y then, I take i t a E u r o d o l l a r is
an American dollar i n a European bank regardless of how i t got there
or what the source. Y o u mentioned i n your testimony t h a t Eurodollars
increased some 50 b i l l i o n last year. I s that roughly correct?
M r . WALLICH. Yes, sir.
M r . B U R G E N E R . Can you break down the source of t h a t increase
i n any way?
M r . W A L L I C H . I t certainly was not i n any major p a r t the U . S . balance
of payments, although that is one possible area f r o m w h i c h the Euro-
dollar market can be fed. I believe there is some internal generation
i n the creation of funds i n the Eurodollar market, proceeding i n the
same way as i n any banking system. T o look at the detail, I w o u l d
have to go back t o m y sources, and I am sorry to say t h a t m y informa-
t i o n about t h a t market is not as precise as I w o u l d wish i t to be, be-
cause i t is an international market where many monetary systems, of
many countries, come together. Y o u can perceive events over a given
interval. B u t i t is quite difficult to go beyond t h a t and trace the funda-
mental causes of the events.
M r . B U R G E N E R . A m I correct i n m y assumption that the immense
b u i l d u p of Eurodollars tends to make all dollars worldwide less valu-
able, less desirable, devalued so to speak ?

120
M r . W A L L I C H . T h a t is an interesting hypothesis. I could not char-

acterize i t as more t h a n that. G i v i n g you a very broad opinion, i n
one sense the E u r o d o l l a r market increases the international availa-
b i l i t y of dollars, but demand tends at the same time to press against
i t . The U.S. dollar is being used a l l over the w o r l d f o r trade, f o r
reservesprivately, and by official holders. The fact t h a t the dollar
plays t h a t great a role is of course an i m p o r t a n t element i n the demand
f o r dollars. T h e upshot is contradictory forces: possibly increased
supply o f dollars, but also an institutional underpinning o f the dollar
due to demand f o r i t . I do not know i n w h i c h way the net effect takes
place.
M r . B U R G E N E R . T h a n k you very much, M r . Chairman. M y t i m e has
expired.
M r . G O N Z A L E Z . T h a n k you. M r . Fauntroy?
M r . F A U N T R O Y . T h a n k you M r . Chairman. M r . W a l l i c h I j u s t have
one line o f questions and i t has t o do w i t h the possible use o f t a x re-
f o r m and its effect upon the whole o i l industry and upon prices. T o
what extent w i l l a decrease i n the o i l depletion allowance affect the
o i l investment picture ?
M r . W A L L I C H . M r . Congressman, realizing t h a t I am not a t a x m a n
p r i m a r i l y , m y reaction has been, w i t h respect to depletion, t h a t i t is
a device t h a t encourages both the discovery and the production o f oil.
W h e n the price of o i l became h i g h and i t suddenly became very i m -
p o r t a n t t o find more o i l I t h i n k a legitimate question was raised
whether we should not g h i f t t o taxes t h a t would emphasize f i n d i n g
and conservation, rather t h a n the l i f t i n g o f o i l above ground. T h a t ,
i t seems t o me, would be responsive to the economic needs.
T h e second question is, what rate o f r e t u r n do the o i l companies
need i n order to take on the admittedly h i g h risks of exploration and
additional production ? Problems enter here such as: H o w assured are
the markets? W h a t are the chances t h a t , after they have b u i l t re-
fineries or d r i l l e d a well, o i l w i l l suddenly go down to a lower price
and the investment w i l l lose its value ? A l l these things, I t h i n k , have
to be considered j o i n t l y when you t a l k about o i l taxation.
M r . F A U N T R O Y . T h a n k you, M r . Chairman.
M r . G O N Z A L E Z . T h a n k you. One t h i n g has been pointed out. I t h i n k
i t is well f o r the record t o c l a r i f y , M r . Burgener i n his colloquy w i t h
you defined the Eurodollar, as an American dollar i n a European
bank. More technically and correctly speaking, is t h a t not really a
claim on a European bank denominated i n American dollars ?
M r . W A L L I C H . Yes, I t h i n k one could call i t both. I f the d o l l a r is i n
a European bank, then i t is a claim on a European bank. W h e n we say
i t is a dollar, i t is a claim denominated i n dollars. There is not neces-
sarily a dollar i n the U n i t e d States behind this Eurodollar. I t is nec-
essary to make t h a t point, w h i c h I regard as a distinction.
M r . B U R G E N E R . I f the chairman w o u l d y i e l d I t h i n k this is i m p o r -
t a n t and I certainly do not pretend to understand i t yet. I t h i n k i t was
M r . W r i g h t the other day who set the example o f going i n t o a L o n d o n
bank and opening an account and asking f o r the account t o be i n U.S.
dollars f o r $100,000 and you give the banker a check on a New Y o r k
bank f o r $100,000, we a l l understand t h a t transaction.

121
A different k i n d of a transaction would be to say I want t o open

an account f o r 100,000 American dollars. I do not have the money,
but I have collateral, so you loan me the $100,000 and w i l l open m y
account and I t h i n k i t was M r . W r i g h t who said they opened your
account w i t h nothing, w i t h no American dollars and w i t h no relation-
ship t o any Federal Reserve requirements i n our country at all.
H e alleged they just created out of t h i n air $100,000. N o w d i d they,
or d i d they not? D o they have reserve requirements? T h a t is w h a t we
are getting at.
M r . W A L L I C H . E v e n the experts argue about this process, because i t
is curiously h a r d to p i n down. M y own view is t h a t the market can
create dollars, but that b y no means a l l of the dollars t h a t are i n i t
have been so created. T h e y could have come out o f the U n i t e d States.
Essentially i t is easiest t o t h i n k about the E u r o d o l l a r market as i f
the whole market were a single bank. Just as a bank can make a loan
to you i f you supply collateral and the 'bank w i l l w r i t e up its l i a b i l i t y
the Eurodollar market can do likewise. There are no reserve require-
ments against deposits such as U.S. banks maintain. However, the
" E u r o d o l l a r b a n k " t a k i n g the whole E u r o d o l l a r market, f o r purposes
of discussion, as a single bankmaintains, o f course, some l i q u i d i t y
i n the U n i t e d States. I t does so because i t is called upon f r o m time
to time to make a dollar payment, and then i t must be able to provide
dollars i n the U n i t e d States. T o do that, i t must either have those
dollars or must have short-term l i q u i d assets w h i c h can be sold to
obtain dollars.
M r . B U R G E N E R . I guess what we are finally, M r . Chairman, getting
to is that while you, the Federal Reserve, makes a real effort t o re-
strain inflation by monetary policy, 4 percent, 8 percent, 6, and
wherever you go, can you really come to grips w i t h i t w i t h no con-
t r o l really over the Eurodollar ? I do not know.
M r . W A L L I C H . T h e E u r o d o l l a r market is somebody's money supply
but no country's money supplythe Eurodollar does not enter into
any country's statistics as money. The data appear to me t o indicate
that this market has been g r o w i n g faster than money supplies around
the w o r l d . T o the extent t h a t i t has the effect of stimulating demand,
this may have contributed to generating excess demand i n the w o r l d .
I do not t h i n k i t p a r t i c u l a r l y affects the U n i t e d States, because the
impact o f the people who spend out o f Eurodollar l i q u i d i t y is world-
wide. Thus, the impact on the U n i t e d States o f E u r o d o l l a r spending
would at most be a small fraction of the total. B u t I t h i n k t h a t on a
worldwide scale i t probably has been o f some effect i n increasing
demand.
M r . B U R G E N E R . T h a n k you.
M r . G O N Z A L E Z . There is one final question, M r . W a l l i c h . I t looks as
i f our U.S. commercial banks are going to have t o recycle some of these
petrodollars and loan them i n t u r n to countries t h a t are, or possibly
can be, very bad credit risks. I s that not a dangerous situation ? Isn't
there a n y t h i n g t h a t we should t h i n k i n anticipatory action ?
M r . W A L L I C H . I t h i n k the banks are conscious of these risks. A well-
r u n bank w i l l have an idea of how much exposure i t can afford i n any
particular country. Even so, accidents can happen, of course. The

122
obverse of this is t h a t countries t h a t are not strong credit risks may not
be able t o get the money they need. Then a problem arises f o r other
countries, s h o u l d they help this country? Should the international
institutions enter the scene? Should the country make a desperate
effort to adjust its balance of payments by some f o r m o f restriction
or depreciation ? A l l these variables enter i n t o the matter. I f the banks
act prudently they w i l l protect themselves, but they w i l l not protect
each and every country t h a t is i n need of financing, and a problem is
therefore l e f t to be dealt w i t h .
M r . G O N Z A L E Z . W e l l , we h a d one gentleman witness who mentioned,
and o f course I am just repeating, I am not an expert on this, t h a t we
had the experience of the F r a n k l i n National B a n k , and his remarks
were to the effect t h a t i n some countries, and I t h i n k he mentioned
E n g l a n d and Germany, the governments had a flat prohibition, pro-
h i b i t i n g the banks f r o m speculating against their own currency, and
t h a t the U n i t e d States does not have this control. I s t h a t an accurate
report? I s t h a t true? I s there such a t h i n g as that?
M r . W A L L I C H . I t contains an element of t r u t h . Some countries con-
t r o l the degree t o w h i c h a bank may speculate and i n this group each
country does t h i s to a different degree. Some countries p e r m i t no specu-
l a t i o n against the home currency. Others impose no constraints at all.
I note t h a t f o r the most p a r t restraints where they exist refer t o specu-
l a t i o n only against the home currency. T h i s means the central bank is
t r y i n g to protect the currency f o r which i t is responsible. Such re-
straints do not, by any meanseven when they are extensiveprotect
banks because i t is s t i l l possible f o r a bank t o speculate i n currency B
against currency C, leaving the home country out of i t . Risk arising
f r o m t h a t k i n d o f speculation remains, and i t is i n f o r m a t i o n on t h a t
problem t h a t we are now t r y i n g to get.
M r . G O N Z A L E Z . I see. W e l l , thank you very much, M r . W a l l i c h . W e
are deeply g r a t e f u l t o you.
[Whereupon, at 11:55 a.m., the subcommittee recessed, subject t o the
call of the chair.]
[ T h e background material on the " I n t e r n a t i o n a l Petrodollar
Crisis" prepared by the staff o f the subcommittee and referred t o b y
Chairman Gonzalez on page 3, f o l l o w s : ]

123
HENRY B. GONZALEZ, TEX., CHAIRMAN ALBERT W. JOHNSON. PA.

J. WILLIAM STANTON, OHIO
HENRY S. REUSS. WIS. PHIUP M. CRANE. ILL.
WILLIAM S. MOORHEAO, PA. B|i_|_
FRENZEL, MINN.
THOMAS M. REES. CALIF.
waTYPAS^RO^C. U.S. H O U S E O F REPRESENTATIVES

FORT^Y^ÊT^tark. JR.. CAUF. SUBCOMMITTEE ON INTERNATIONAL FINANCE
>. STEPHENS, JR.. GA. Q p j H

W A S H I N G T O N , D.C. 20515
Background Information
for
Hearings
on
International Petrodollar Crisis
Prepared by Subcommittee St-
July 1974

124
Hobart Rowen
T H E WASHINGTON POST June 20, 1974
The Deepening Monetary Crisis

A little more than a month ago in
Basel, Switzerland, the rich nations' "For the first time, international financial
central bankers had one of their regu-
lar and secret sessions on the status
of the world economy. men speak of a world-wide recession "
This time, the subject was the deep-
ening financial crisis occasioned by
the high price of oil set by the pro-
ducers' cartel, which is causing hor- For the first time, some prominent
rendous balance of payments prob- bankers and international financial
lems for Italy, France and G r e a t men speak of a worldwide recession,
Britain as well as financial chaos
for the hardpressed developing coun- with the remaining strong nations
tries. the United States and Germanybe-
But the most important financial ing forced to bail out other countries.
men were far from the quaint little Writing in the July issue of Foreign
Swiss city. They were in Vienna, pre- Affairs, oil consultant Walter J. Levy proposed it to.a surprised group of
paring for a meeting of the Organiza- warns that we are witnessing "an his colleagues at that meeting a month
tion of Petroleum Exporting Coun- erosion of the world's oil 6upply and ago (in Basel.
tries in Quito, Ecuador, where sub- financial systems, comparable in its The Europeans for long have been
sequently they would decide that the urging that they be allowed to settle
oil-consuming world would get no potential for economic and political
disaster to the Great Depression of their debts with each other by the
price relief. exchange of gold at real market
the 1930s."
Last week, the IMF's Committee of prices. This would enable them, they
Twenty met in Washington for a ses- Italy has already been driven to the held, to "unfreeze" that portion of
sion which once had been targeted as edge of bankruptcy by a deficit in her their reserves consisting of goldbut
the final "wrap-up" conference for balance of payments running at an which they obviously wouldn't' part
international monetary reform. But annual rate of $13 billion in the first with at $42.22 an ounce.
as financial jitters spread, the best four months of 1974. It is true that The wily Burns reasoned that some-
that the IMF could come up with was Italy has had other problems besides thing had to be done for Italy in a
adoption of a few tentative steps at- oila raging inflation, excessive im- hurry, but that an across-the-board
tempting to ease the burdens placed ports of consumer goods, and a weak inflation of total world gold reserves
on developing and developed countries government. But it is oil that has would not only be unnecessary, but
alike by the high price of oil. pushed Italy to the brink, and reduced dangerous.
, The plain fact is that there can be her credit-worthiness to almost zero. The gold "collateral" compromise,
only postponementnot settlement France and Great Britain could be a concession by the United States,
of the threatening international mone- close on Italy's heels. The British may buy time for Italy and other coun-
tary crisis so long as the consuming balance of payments deficit just for oil tries fortunate enough to own a gold
nations must meet oppressive bills on this year is likely to be $7 billion, or stockpile.
a continuing basis. as much as the estimated 1980 value But how about the poor countries?
The Trilateral Commission, a private
of highly-trumpeted North Sea oil pro- group of American, Japanese and Eu-
duction. , ropean citizens, speaks eloquently of
The tremors are being felt, as well, i the "economic disaster" that could
in the huge, $150 billion Euro-dollar befall the 30 poorest nations if the
market, where major companies as developed world and the suddenly
well as nations have been borrowing wealthy OPEC nations fail to agree on
money. This source could dry up quick- a crash rescue program.
ly, because it has been fed by Arab Everything done so far in the wake
"petro-dollars," placed on deposit for of the oil crisisfor the industrial or
very short periods of time. LDC countriesincluding the steps
Recently, Chase Manhattan Bank taken at the C-20 session, is inadequate
head David Rockefeller expressed pub- or spineless. Untold hazards lie ahead
lic concern about the Euro - dollar unless there is some alteration in the
market. The best way for banks to vast shift of funds demanded by the
get in trouble, he pointed out, is by OPEC nations. That requires lower oil
borrowing for short periods of time prices.
(from the Arabs) and lending for peri-
ods up to 7 years (to European coun-
tries in deficit).
It is for this reasonin desperation
the major governments quietly got
together in Washington, and over din-
ner at the Watergate Hotel agreed that
Italy and others in the same boat
should be allowed to pledge their gold
reserves as loan collateral, not at the
official $42.22 an ounce price, but at
something "related" to the open mar-
ket price of more than $150 an ounce.
This clever, stop-gap device was the
brainchild of Federal Reserve Board
Chairman Arthur F. Burns, who first

125
Perils of Oil Complacency

has already visited some of the auto companies with
By THOMAS E. MULLANEY a view toward exploring ways for developing cars tljat
OME constructive developments In the international use less gasolaie.
The New As any one who has motored along some of the major
oil and energy situation during the three months
Y o r k Times since the end of the Arab embargoespecially in highways in recent weeks has noted, the public is out
S I recent dayshave encouraged some economic an- on the roads again in much greater volume and driving
alysts and seemingly eased the overwhelming pressures at faster speeds than they were when the gasoline
J u n e 2 3 , 1 9 7 4 that last fall's oil offensive suddenly created throughout shortage was so severe last winter.
the world. Traffic has not yet returned to pie-embargo levels in
most states, but there are signs that there will be mora
The real improvement, however, has been relatively summer driving than was expected a few months ago.
minor and promises to be no more than a short-term .Highway traffic in Michigan, for instance, came within
palliative both for the United States and all the other 2 per cent of last year's volume over the Manorial Day
nations that are so heavily dependent on the Middle weekend after being down 10 per cent in the early part
East's, great resource now and for some time ahead. of this year. And parkways in New Jersey and Ntrw,
The real danger is that the recent abatement of the York, which showed'declines of 17 per oent or more as
Oil-supply crisis will mask for a while the potentially recently as February, have seen the drop narrow to 3 or
catastrophic financial consequences that lie ahead as a 4 per cent in recent weeks.
result of the sudden and explosive rise in the cost of The prospective increases in highway traffic and other
petroleum during the finarquarter of 1973. uses of energy may soon turn demand for petroleum
Equally worrisome is the possibility that the oil- products shaiply upward again after significant declines
consuming nations will become too complacent and fail in the early months of 1974. Total demand was down
to eMbrace a program of austerity and cooperation to about 7 per cent in January from * year before, off 12
mitigate the awesome economic and political problems per cent in February and 6 per cent in March md do#n
that the recent startling changes in oil tupply-and-price less than 2 per cent ki April, when the country's con-v
conditions have created for every nationeven-the most sumption of all petroleum products ran about 16 million
advantaged and affluent in energy and other resources. barrels a day.
Perhaps the best recent newsthough a email7 com- For the four weeks ended June 7, total demand wail
fortwas the fact that the oil-producing nations, at their still around that level, but in that last week, the figure,
meeting last weekend in Quito, Ecuador, did not push jumped to 16.7 million barrets a day, up about 10 per
through another increase in prices and Confined them- oent in that period from the previous one and about 3
selves instead to raising royalty payments from the oil per cent above the same week of 1973.
companies by 2 per cent, which hopefully, will not be The greater availability of gasoline and other petro-
passed along to consumers. After a bruising intramural leum products, combfhed with the disappearance of the
battle, Saudi Arabia successfully beat back the strong irritation of waiting in lines to get to gasoline pumps,
efforts of her producer colleagues to raise posted prices may weaken the earlier public support for programs to
of oil at this time. bolster the nation's independence of foreign sources of
What is needed now is an actual reduction in world energy. There may be a greater tendency to defer the
oil prioes. That may come later on. It depends, prob- hard choices that must be made if the nation is to com-
ably, upon either the continued aggressive goodwill'of mit financial resources to the necessary research and
the Saudis or the ability of the United States to get Iran, development of alternative sources of supply.
the most militant of the oil producers, to accept the fact And it is clear that the United States and the rest
that the high level of oil prices is disastrous for all. of the world do have some hard choices to make. It is
Since mid-March, when the Persian Gulf states lifted unrealistic to believe that, this country can become com-
their politically motivated embargo Against certain pletely independent of foreign energy by 1980, but it
nations, it is true that there has been some improvement could sharply reduce that dependence if it pushes for-
in the over-ail oil picture and other problems related ward with a number of proposed high-coat programs. .
to it, but the specter of new and even darker troubles Hie job ahead for all nations in the energy area was
remains ominous. cogently outlined by a respected international oil econo-
* The supply situation is better because of increased mist, Walter J. Levy, in the July issue of Foreign Affairs.
production and reduced consumption. And the cost of After setting down the grim prospects for every one of
the liquid gold, which snot from 90 cents a barrel in the present realities in international oil supply trends
1970 to $3 last October and then to $7 at the end of and prices, he stressed the importance of extreme auster-
1973, has since stabilized at that high and unbearable ity in consumption.
level. : He suggests reducing the growth of consumption to
Moreover, much thought and some effort have been a 3.3 per cent annual rate from the 5.6 per cent level
devoted to various ways to reduce dependence on Middle that prevailed duping the 1968-72 period and a "wide-
East oil as well as viable solutions for recycling the ranging coordinated program among all importing coun-
vast new monetary wealth that has been flowing into tries" to achieve. "sOme downward adjustment of foreign
the producing nations. crude oil prices to all consumers."
In addition, some steps have been taken to ease the In a concise sum-up of his perceptive analysis, Mr.
financial burden of nations most affected by the dis- Levy commented:
ruptive influences created by the huge increases in their "Four elements are essential to move to a reasonable
food costs, though these have been mostly pledges that adjustment: far-reaching cooperation among the oil-
till have to be redeemedthings such as promises not importing nations; an understanding by the importing
to engage in trade policies that would further aggravate nations of the interests and aspirations of the producing
payments positions, improvements in trade preference countries; a clear-cut (and painful) program of energy
systems for the poorer nations and some additional austerity by the oil-importing countries, and a recogni-
monetary aid for the developing world. But not nearly tion by the producing, countries that even in an austerity
enough has been done so far. situation any attempt to hold prices high must result in
There is evidence, at the same time, that there has worldwide dangers to which they could not be immune.
not been sufficient effort so far m many nations to "Only with far-reaching consumer cooperation can it
reduce consumption of this vital resource and to push be expected that the producing countries will come to
the creation of additional sources of energy. this necessary conclusion. At the same time, cooperation
While American industry, for instance, did achieve without austerity will not do the job; Both are needed,
considerable conservation of energy in the period of and a large new dose of political will, not yet in sight,
greatest stringency and high prices test winter, there will be required to achieve them."
is a conviction among many analysts, both in Govern- In this whole* effort the United States will obviously
ment and elsewhere, that greater opportunities in that have to play a pivotal role of leadership. The world can-
area are still available. not afford to bear the tragic consequences that it surely
To that end, the United States Federal Energy Office faces if some dramatic steps are not taken to counter-
is planning discussions with several of the nation's larg- act actions by ttye Arab and other oil-producing states
est energy consumers to seek ways to cut their con- that have increased their cost of such a vital resource
sumption. Walter Sawhill, the new director of that office, to the staggering total of $100-billion this year.

126
THE NEW YORK TIMES Bus i n e s s / F i n a n e e
J u n e 17, 197^
R I S I N G O I L PRICES CREATING DISMAY
E c o n o m i e s o f B i g Consumer
N a t i o n s A r e C o n f r o n t e d . by-
Huge Payments D e f i c i t s
REMEDIAL PLANS HAZY
E x p e r t s F e a r a W o r l d Slump
May Come B e f o r e A c t i o n
I s T a k e n on P r o b l e m s
By C l y d e H . Farnsworth
PARIS, J u n e 15 I t ' s h a p p e n i n g f a s t e r e v e n t h a n t h e
experts thought. The m a j o r o i l c o n s u m i n g n a t i o n s F r a n c e ,
B r i t a i n a n d I t a l y a r e p i l i n g up h u g e d e f i c i t s i n e x t e r n a l
a c c o u n t s , a n d t h e c o n c e r n i s m o u n t i n g a b o u t how t h e s e d e f i c i t s
w i l l be f i n a n c e d .
A b a n k e r i n F r a n k f u r t , West Germany, c o m m e n t s : "The m o n e t a r y
w o r l d h a s c h a n g e d r a d i c a l l y a n d f o r g o o d as a r e s u l t o f t h e e x -
plosion in o i l prices." A b a n k e r f r o m New Y o r k s p e a k s o f h i g h e r
o i l p r i c e s as t h e " f i n a n c i a l monkey w r e n c h " i n t h e w o r l d e c o n o m y .
L o o m i n g i n t h e c a l c u l a t i o n s o f many f i n a n c i a l men o n b o t h s i d e s
o f t h e A t l a n t i c i s t h e s p e c t e r o f a n o t h e r w o r l d economic s l u m p .
A l t h o u g h t h e f i r s t s i g n s h a v e a p p e a r e d o f more c o o p e r a t i v e p o l i -
c i e s b y t h e m a i n o i l i m p o r t i n g n a t i o n s , many e x p e r t s a r e s t i l l
w o r r i e d t h a t nations w i l l act too l a t e t o stop the d r a i n of
w e a l t h and j o b s r e p r e s e n t e d by h i g h e r o i l payments.
Discouraging Trends
The s e c r e t a r i a t o f t h e O r g a n i z a t i o n f o r E c o n o m i c C o o p e r a t i o n
and Development i n P a r i s , t h e N a t i o n a l I n s t i t u t e i n London, t h e
F i r s t N a t i o n a l C i t y Bank i n New Y o r k , t h e D r e s d n e r Bank i n F r a n k -
f u r t , G e r a l d A . P o l l a c k , s e n i o r economic a d v i s e r t o t h e Exxon
C o r p o r a t i o n , a n d W a l t e r L e v y , a p e t r o l e u m c o n s u l t a n t who h a s t h e
e a r o f S e c r e t a r y o f S t a t e K i s s i n g e r a r e among t h o s e who a r e m o s t
d i s c o u r a g e d by t h e l a t e s t t r e n d s .
The o i l money i s a c c u m u l a t e d b y a h a n d f u l o f p r o d u c e r g o v e r n m e n t s .
I t does n o t d i s a p p e a r f r o m t h e s y s t e m . Some o f t h e f u n d s go i n t o
good and s e r v i c e s f r o m t h e i n d u s t r i a l c o u n t r i e s . Some a r e i n v e s t e d
i n t h e money m a r k e t s o f t h e W e s t .
A c c e l e r a t i n g r a t e s o f i n f l a t i o n h a v e meant t h a t much o f t h e
money i s k e p t o n s h o r t t e r m d e p o s i t . So s h o r t t e r m i n f a c t t h a t
a b a n k e r f r o m London snapped, s e v e n days n o t h i n g , we w i s h we
c o u l d h o l d t h e money f o r more t h a n 2 b h o u r s . "

127
THE NEW YORK TIMES June 17, 197^
The q u e s t i o n i s w h e t h e r t h e s e s a v i n g s o f t h e o i l p r o d u c e r s
c a n be t r a n s f e r r e d i n t o t h e c a p i t s l t h a t c r e a t e s j o b s . And
as M r . P o l l a c k o f E x x o n o b s e r v e s , " u n l e s s g o v e r n m e n t s a d o p t
suitable r e f l a t i o n a r y p o l i t i c s , c a p i t a l formation could actually
fall."
B u t w h a t i s h a p p e n i n g now i s j u s t t h e r e v e r s e . The g o v e r n -
ments w i t h t h e b i g g e s t d e f i c i t s a r e d e f l a t i n g i n e f f o r t s t o
improve t h e i r f o r e i g n t r a d e . The c r i t i c a l d a n g e r , as t h e
O . E . C . D . s e c r e t a r i a t p o i n t s o u t , i s on c o m p e t i t i v e d e f l a t i o n
as c o u n t r i e s f i g h t f o r s m a l l e r a n d s m a l l e r e x p o r t m a r k e t s .
H i g h i n t e r e s t r a t e s h a v e a l r e a d y s l o w e d c o n s u m p t i o n i n many
c o u n t r i e s , i n c l u d i n g t h e two b i g g e s t markets f o r t h e w o r l d ' s
e x p o r t s , t h e U n i t e d S t a t e s a n d West Germany.
I t a l y ' s G o v e r n m e n t f e l l l a s t Monday when t h e t r a d e u n i o n s a n d
s o c i a l i s t s r e f u s e d t o a c c e p t a s t r i n g e n t f i s c a l package on t o p
o f t h e s e v e r e c r e d i t squeeze imposed by t h e bank o f I t a l y . They
f e a r e d a sharp r i s e i n unemployment i n t h e f a l l .
Y e t , I t a l y ' s desperate f i n a n c i a l p o s i t i o n s c a u s e d by h i g h e r
o i l p r i c e s s u p e r i m p o s e d o n a n i n f l a t i o n w e a k e n e d economymade
some s o r t o f s t r i n g e n c y a c o n d i t i o n f o r t h e i n t e r n a t i o n a l l o a n s
i t has t o have t o pay i t s b i l l s .
" T h e I t a l i a n s i t u a t i o n i s b a d , b u t i t i s l e s s w o r s e now b e -
c a u s e o f t h e g o l d a g r e e m e n t , " a b a n k e r i n Z u r i c h commented l a s t
week. He was r e f e r r i n g t o t h e a c c o r d i n W a s h i n g t o n t h a t p e r m i t s
c e n t r a l b a n k s t o p l e d g e g o l d a t m a r k e t r e l a t e d p r i c e s as c o l -
l a t e r a l for loans.
$12-Billion in Gold
The 2 , 5 0 0 t o n s o f g o l d i n t h e v a u l t s o f t h e Bank o f I t a l y a r e
w o r t h some $ 1 2 - b i l l i o n , when v a l u e d a t n e a r t h e p r i c e f o r g o l d
i n t h e f r e e m a r k e t , as o p p o s e d t o t h e $ 3 . 5 - b i H i o n when v a l u e d a t
the o f f i c i a l price of gold.
This gives I t a l y a l i t t l e time A " b r e a t h o f a i r " as t h e
Common M a r k e t ' s e n e r g y c h i e f H e n r i S i m o n e t p u t s i t . But i n t h e
f i r s t f o u r m o n t h s o f t h i s y e a r t h e I t a l i a n t r a d e d e f i c i t was r u n -
n i n g a t an a n n u a l r a t e o f $ 1 3 - b i l l i o n . So t h a t g o l d c o u l d go
pretty fast.
N o t o n l y o i l , b u t f o o d i m p o r t s h a v e s w o l l e n t h e b i l l s . Many
e x p e r t s o n t h e I t a l i a n economy s a y t h e c o u n t r y s h o u l d be p r o d u c i n g
more o f i t s own f o o d . B u t t h i s i n t u r n w o u l d t a k e away m a r k e t s
f r o m some o f t h e p r i n c i p a l s u p p l i e r s s u c h as F r a n c e , Y u g o s l a v i a
and. t h e U n i t e d S t a t e s .
Petroleum c o n s u l t a n t W a l t e r Levy observed t h a t a t t h e p r e s e n t
p r i c e s f o r o i l , I t a l y s i m p l y cannot pay i t s b i l l s and w i l l have
t o be b a i l e d o u t e v e n t u a l l y b y W a s h i n g t o n .
M r . L e v y r e a s o n s t h a t much o f t h e o i l p r o d u c e r s ' f u n d s w i l l
f l o w i n t o t h e U n i t e d S t a t e s , a n d t h a t i n t h e l o n g r u n i t w i l l be

128
THE NEW YORK TIMES June 1 7 , 197^
t h e U n i t e d . S t a t e s t h a t w i l l have t o r e c y c l e money t o t h e
debtors, accepting the debtors' ever d e p r e c i a t i n g promissory
notes.
S o , i n t h e end., t h i s p r o c e s s w i l l mean a l o s s o f r e a l r e s o u r c e s
f o r t h e United. S t a t e s . W i l l the American people accept t h i s ,
M r . L e v y a s k e d l a s t week i n a n i n t e r v i e w . He s a i d h e d o u b t s i t ,
e s p e c i a l l y i f i t w o u l d lead, t o more u n e m p l o y m e n t i n t h e U n i t e d .
States.
Y e t , t h e a l t e r n a t i v e c o u l d be I t a l i a n b a n k r u p t c y a n d c r a s h i n g
f i n a n c i a l m a r k e t s , s i n c e i f I t a l y cannot pay i t s b i l l s t h e banks
t h a t h a v e a l r e a d y l e n t i t m o n e y i t has b o r r o w e d i n t e r n a t i o n a l l y
some 1 0 - b i l l i o n o v e r t h e l a s t t w o y e a r s w i l l be i n deep t r o u b l e .
West Germany i s t h e b i g s u r p l u s c o u n t r y i n E u r o p e a n d w i l l
p r o b a b l y be t h e f i r s t t o b e c a l l e d , o n t o h e l p p a y I t a l y ' s b i l l s .
A l t h o u g h , t h e German a c c o u n t s l o o k g o o d o n p a p e r , t h a t c o u n t r y ,
t o o , f a c e s enormous i n c r e a s e s i n i t s e n e r g y c o s t s . And i f
markets a r e s h r i n k i n g f o r i t s e x p o r t s , i t can a l s o r u n i n t o
trouble.
Recard. T r a d e Deficits
L a s t week, b o t h France and B r i t a i n reported, r e c o r d t r a d e d e f i c i t s ,

s i g n s t h a t I t a l y may be j u s t t h e f i r s t o f many d o m i n o e s .
The F r e n c h d e f i c i t a t 6 0 0 - m i l l i o n i n Maywas e v e n h i g h e r t h a n
t h a t f o r e s h a d o w e d , b y F i n a n c e M i n i s t e r J e a n - P i e r r e Fourcad.e when h e
announced a s e r i e s o f a n t i - i n f l a t i o n measures on Wednesday.
The F r e n c h a c t i o n i s aimed, a t c u t t i n g t w o - t h i r d s f r o m t h e
17 p e r c e n t i n f l a t i o n r a t e a n d g e t t i n g t h e i n t e r n a t i o n a l a c c o u n t s
b a c k i n t o e q u i l i b r i u m w i t h i n 18 m o n t h s . The F r e n c h a r e c h i e f l y
c o u n t i n g o n West G e r m a r y b u y i n g o f a l o t more F r e n c h - m a d e c a r s ,
machine t o o l s , f a r m p r o d u c t s and p e r f u m e s . B u t t h a t means some
German r e f l a t i o n , w h i c h has y e t t o be s e e n .

129
T H E WASHINGTON POST June 30, 1974
Joseph R. Slevin
m
Threat of Worldwide Recession Grows
THfi THREAT of a world- Chairman Arthur Burns production, however, is nessmen are showing signs
wide recession is causing and his West German op- changing little, with small of pulling in their horns,
mounting concern among posite number, Bundesbank increases or small declines too.
gnomic forecasters. President Karl Klasen, being typical. French President Valery
It's only a cloud on the three weeks ago joined at Germany is the envy of Giscard d'Estaing has an-
hwrizontoutit looms larger the International Monetary most other countries for it nounced new austerity
than it did a month or two Conference in flatly declar- has the lowest inflation rate measures to curt) inflation-
ago. ing there will be no world and best international pay- ary spending and the Bank
A sampling of government recession. ments performance but Ger- of France recently boosted
and private forecasters dis- man industrial production is its discount rate to a record
closes that few are willing WHILE THE central only 1 per cent above a year 13 per cent.
to predict that a worldwide bankers clearly were anxi- ago and is lower than it was Germany is holding to its
slump actually will occur. ous to bolster public confi- during the winter. tight money policy as are
Many are quick to warn, dence and undoubtedly the British and the inflation-
would take the same upper The huge U.S. economy is
however, that it is a very struggling to grow again af- ridden Japanese.,
real possibility that must be approach today, the econo- Italy has resolved its cabi-
mics of the' major countries ter having slumped sharply
reckoned with. but the consensus judgment net crisis with an agreement
The experts see two main have a weaker look than to carry out firm fiscal anti-
they did. is that it will post only tiny
weaknesses in the interna- gains at most during the inflation measures to bol-
tional economic scene. "Check them out," a top rest of this year and that ster the Bank of Italy's re-
One is the serious, impact federal forecaster urges. it could sink into a deepen- strictive credit program.
that the steeip Arab oil "There isnt one important ing recession if that is the All the major Free World
prices may have, on the ca- country that's expanding way the world is going. governments are consciously
pacity of oil consumers to rapidly, not one." seeking sluggish economies
buy other goods. The government expert TIGHT MONEY is caus- to break their inflation spi-
Jr..The second is the restric- stresses that most countries ing even greater housing rals. It would not take much
tive effect of the increas- seem to be chalking up im- weakness than seemed to push them over the line
ingly rigorous anti-inflation pressive gains because their likely when Burns issued his and into the worldwide re-
programs that industrial na- nominal output volume is "no recession" forecast. Con- cession that Burns and Kla-
tions are pursuing. being swollen by inflation- sumers are behaving like re- sen said won't happen.
Federal Reserve Board ary price increases. Real luctant spenders and busi-

130
T H E UNDER SECRETARY OF T H E TREASURY

WASHINGTON. D.C. 20220
JUN 6 1974
Dear Mr. Chairman:

You wrote to Paul Volcker on May 30, following your
meeting with Congressmen Reuss and Johnson, about three
areas i n which you desired follow-up information i n
connection with reconsideration of IDA replenishment
legislation.
The f i r s t area concerned the Administration's
p o s i t i o n on l e g a l i z a t i o n of p r i v a t e gold ownership, w i t h
p a r t i c u l a r reference to the Dominick Amendment. I have
attached, as Appendix I , a memorandum s e t t i n g f o r t h our
views on t h i s t o p i c .
I have also attached, ag Appendix I I , a memorandum
on another area you mentioned, i . e . , the status of
negotiations concerning the valuation of SDR's, and the
r e l a t i o n of the "basket" approach to U.S. maintenance of
value obligations i n the i n t e r n a t i o n a l f i n a n c i a l i n s t i t u -
tions .
F i n a l l y , you asked what steps the OPEC countries are
taking other than the purchase of World Bank bonds
to help a l l e v i a t e the problems of IDA c l i e n t countries.
I would l i k e to point out by way of introduction that the
sharp increase i n revenues of the o i l producers occurred
only w i t h i n the l a s t eight months, a r e l a t i v e l y b r i e f
time for the o i l producing countries to r e a l i z e the
extent of t h e i r new wealth and then to begin to accept
the i n t e r n a t i o n a l r e s p o n s i b i l i t i e s that go with i t .
Viewing the matter i n perspective, I believe the o i l
producers have made a good s t a r t - - perhaps b e t t e r than
we might have expected l a s t January - - but they must be
encouraged to do more, p a r t i c u l a r l y , as you point out,
i n the area of t r u l y concessional financing.
Some concrete actions which we are aware have been

taken by the OPEC countries are as follows:

131
- 2 -
Six OPEC countries have pledged over $3 b i l l i o n

to a special f a c i l i t y i n the IMF to provide
supplementary financing for o i l importing
countries. Four more OPEC countries are con-
sidering contributions. I t is contemplated that
t h i s f a c i l i t y would be somewhat below market
r a t e s , but not i n the concessional area, ana
would help both developing countries and
developed countries with balance of payments
problems a r i s i n g from increased o i l costs.
Kuwait i s expanding i t s Economic Development

Fund from approximately $600 m i l l i o n to over
$3 b i l l i o n . Assistance from the Fund w i l l no
longer be confined to Arab nations, and the new
funds are to be l e n t on a concessional basis.
Expansion of operations from current levels may
be r e l a t i v e l y slow because of the Fund's
shortage of q u a l i f i e d technical personnel, but
the World Bank has o f f e r e d technical assistance
to overcome t h i s s t a f f i n g problem.
I r a n i s extending over $1 b i l l i o n i n b i l a t e r a l
project assistance on favorable terms to Middle
East and South Asian countries in addition to
providing special price and financing arrangements
f o r c e r t a i n of i t s o i l exports. Saudi Arabia
and I r a q are extending s i m i l a r project and/or
o i l financing f a c i l i t i e s i n the region.
Venezuela is a c t i v e l y negotiating the establish-

ment of a $500 m i l l i o n t r u s t fund with the I n t e r -
American Bank for concessional lending. Venezuela
i s also making a further $30 m i l l i o n a v a i l a b l e
to the Caribbean Development Bank.
Negotiations were completed i n May on a charter
for a 24-member Islamic Development Bank, with an
i n i t i a l c a p i t a l i n excess of $1 b i l l i o n . Formal
approval is expected i n July, with an operational
target of end-1974.
On the basis of .less d e f i n i t e information, Middle
East OPEC countries appear to be considering
special funds for A f r i c a t o t a l l i n g perhaps

132
- 2 -
$500 m i l l i o n , including a $200 m i l l i o n fund,

which would i n i t i a l l y help w i t h financing o i l
imports and then be recycled into longer term
projects.
While we do not have complete and d e t a i l e d informa-
t i o n on a l l the f i n a n c i a l i n i t i a t i v e s , I think the preceding
l i s t amply indicates that o i l producers are channelling a
portion of t h e i r resources to the poorer countries, that
a t least a p a r t of these resources i s being made a v a i l a b l e
on the favorable terms that the s i t u a t i o n requires, and
that we can a n t i c i p a t e s t i l l more constructive steps i n
the f u t u r e .
Mr. Volcker w i l l return to Washington by next Monday.
I know he i s looking forward to accompanying Secretary
Simon for his testimony before your Subcommittee i n
support of IDA next Tuesday, and he hopes Committee
approval and Floor action can then follow i n short order.
The Honorable
Henry B. Gonzalez
Chairman, Subcommittee on
I n t e r n a t i o n a l Finance
House of Representatives
Washington, D.C. 20515
Enclosures

^(or-V: 4/1 r / ? ^ -
MdEMY FUND; Monetary Accord Reached

guidelines tor manaiinP Anv arm= n d m e n t. that are
fl ii ^ hii V r -ite h | igreed ip r\ uld ha e t f
William F Simon haifed the re- he | r Ih M i l 1 rx-s would submitted to Congress -<ind
sults a-; i-omprehensr.-e and nhli h h lid t Kde of other natior1 a 1 legislatures. 1 he
WorM Financial Harmony] r HI till H aid ih n < i ! 11 h i ,hm' f 11 f mi ndiner t ill b- le.ai d
and Aid for Poor PUtlens j n ^ mi r h d J m[ li ned in Should1 or shouM no r n i r nid lull i f de p 1 in, nt
the 1 riai, - , 1 r' eri ridm uti directors ol tne
Set in Interim Agreement nfl.-enee hangc roe. I.M I- betwf *en now and Fenr.o
nierna'i IM ft if Th | in nd
111 a, r ME,it HE aid r , ^ the i n M' J - Permanent Reform Sought 1
B* L. DAUE Jr. I >1 I r-1 ti teps t r tional crm.l'i. I'dav s meeting was the last
l**l wn mv Tort Tt*W greater stability/ in mone'ai . id I us ting urplu ps hn d d f 1 the 1 mmitt e >f \ hi h
WASHINGTON, June IS I relatJ n among the nations in the balance 01 payments i ahl hed in Septenih r
I lie.se r i h i n t the t r mn luri^f r to irv to negotiate perma-
The 20 nations negotiating that rial inns hold.
world monetary reform a j m e d
the p,u" k. 1 > e nent reform of the monetary
' [fr it t i pn- nl ti <1 ^ n nl r l 1 n t 1 1 svstem following the collapse
! today on an eight-potrvt pack- he, ' in the Interna- - impo of'the old svstem when the
lage of "interrm'' arrangements ^no'n l \ n i r Find t-irtii^ U n I e - the e1 ised t
c
to promote financiai harmony imnM HIte|' I--- mike loan to pit itl in r h 1 liar nt Id in! e
in the world and help the less
1
v. hose balance of pav- hanee rales heân to tloat.
developed c o u n t r y pending an m-nt-. i m hall mt The eommittee. though tail-
eventual return to more stable H1 f huher il IL t r I h IGR t-ment n M m
currency-exchange rates.
orr es In h l| s uld h 1 n) runt 1 u had nnd^
a 1 HI 1 r r tn in lu mi 1 onsiderahle prepress h>\ last
! In a major gesture that OIJ iltriec id r a n a hi red memner- the monetar.' fund, September But then the huge
eased the way to the unani- 1 i el (nM u h h ill m t r guhrl =1
mous a^reecwTit, the United air ii me rl- f m netai
y ,
j S t a t e i a^red to "reconsider" i h ^ in'o dr-arra'. The committee
jits lonj-standiftf oppewition to 11 t r p Ml T ra ink, F i,hts df. 'ded m pome last Jar>uarv
based on 1 f l kw t ll- 1 ad enal crrmmittee
I a "link" between ft+d for the
nk, irr TM |P'S and bearing, for 1 the World Ban
1 poorer countries and future is- the transfer
the tune hem? an interest rate
suance of the new international t p< r 11 Th 4 1 ni d t I I pi
reserve money C-allod Special hange ill mal-e r> F v 11 h speo I atten- The outiine of what has been
D r a w i n g Rights. The less-devel- 1 nl- r,e h |e t n t rt-ns m'r s ârde t ^ H,,-i , L igr d t r th
oped countries had made this 1 a lal" [ 1 Id 1 ah' t b\ the e.\pl,,siuii of oil, t,<i shape ol the permanent svstem
an absolute precondition f o r a -.ettlements among na- "1 ^ till r pri e ,n mfl 1 r u N l t "vm rr<
general agreement. t7 n n M Amendment of Agreement 1 n .,n o.nn th* h^w .a
negotiations, though no
Most of the elements in the q.-xerr. u 'nt ? fnn'ipl hut [>t 11 the ;elf.
package had been previously I 1 ' I '.e| n 1 r nl 1 tahl h ed 1 im 1 hr
disclosed in general outline, but -rill are I her new monetarv irti I f
today's c o m m u n i q u e p r o v i d e d i ind len 1 ti , 1 tin r^^^f" ^ deadline ot
is in thi
additional details.
Secretary of the Treasury
ni d n
1
T 1-
I the 1 h fei
floating Guidelines
IMF e
market pn- t

134
The Wall Street Journal June; 1 1 , 1974
9
World s '74 Oil Costs Seem'Manageable'
Bank for International Settlements Says
By RlCHAKD F. JANSSEN deposits on which the banks have based me-
itaff Reporter of TH* WALL STMKT JOURNALdium and long-term loans of Eurodollars,
BASELThe world's oil-related financial which are dollars held outside the U.S.
problems appear likely to be "manageable" Arabs Move. Funds
this year, but just barely so, the Bank for In response to tlifct concern, private
International Settlements indicated in its bankers here said, Arab countries are start-
annual report. . ing to move money into the biggest and pre-
Although highly hedged, the finding is sumably safest banks from those with de-
apt to be received in financial centers as re-posits of under $1 billion. And to mlmlmlze
assuring. As the central bank for European the danger of overdependence on volatile
central banks, the BIS has a reputation for deposits, they say, some large U.S. and for-
silent shrewdness most of the time but for eign banks are starting to insist that Arab
often-pesadmistic candor vin its annual re- countries commit their deposits for terms
ports. longer than the one-month maturities the
Despite an estimated 160 billion of extra Arabs prefer.
oiMmport costs this year, the evidence so Even before much Arab oil money be-
far suggests "that the payments problems came available, "the London-centered Euro-
in 1974 should generally be manageable, dollar market continued growing" vigor-
though individual Countries are likely to en- ously, the BIS said. Net loans outstanding of
counter serious, difficulties," the BIS dollars and other currencies deposited out-
summed up. side their home countries rose to (170 billion
The world might be much less able to at the end of March from $1^5 billion at the
cope with the huge outflow of money to a end of 1973 and from $105 billion a year be-
few oil producer nations if an overall deep fore, the bank said in its yearly analysis of
slump were developing, the bank observed. the Eurodollar market.
But the early 1974 worry of a "significant In an "I-told-you-so" tone, the BIS said
recession" in Industrial nations has faded onthe floating of currencies since March 1973
"more Tecent indications that the setback has on balance "complicated the problem of
won't be prolonged," it said. attaining and maintaining monetary stabil-
ity." The breakdown of fixed exchange
Although there aren't any indications of rates has spared countries such as West
a general rebound in economic output, over- Germany from the need "to expand domes-
all activity in the quarter ending June 30 tic money supply by purchasing foreign ex-
doesn't seem "much changed" from the change at rates declared in advance to the
first quarter, Rene Larre, the BIS general market," it conceded, thus ending one
manager, said in a signed conclusion. And source of inflation.
while inflation rates are generally the fast-
est since the end of World War n, "the ex- But "far from providing a policy-making
treme pessimism of some observers doesn't nirvana," floating rates haven't freed other
seem Justified," Mr. Larre said. countries from tough decisions on support-
ing their. currencies or lessening steep de-
clines that worsen their inflation by making,
Most countries are seeking to keep over- imports more costly. Currency market par-
! all demand from "heating up again," and ticipants too often drove rates of some cur-
!
the boom in commodity prices "can reason-rencies sharply lower instead of stabilizing
ably be expected to taper off" so that the them at realistic levels, it complained, with
| speed with which wage increases are the large swings worsening the "inflation-
' granted again could become the main rea- ary atmosphere" by contributing "to a lack
son for varying rates of Inflation in differentof confidence in money."
countries, Mr. Larre said.
Nevertheless, the BIS view is optimistic
only against the background of fears of a
sharp recession or even an economic col-
i lapse akin to that of the 1930s. That cata-
| strophic view wasn't mentioned in the re-
[ port, although it was verbalized in the infor-
v mal conversations of central bankers at the
f BIS annual meeting. Mr. Larre did warn
{ that "problems loom ahead which may pose
f a real threat to the world economy and test
} the strength of Intergovernmental coopera-
j tion."
While the oil countries' surplus ''could in
principle be recycled to deficit countries by
private financial intermediation, the need
for prudence by both financial institutions
and the borrowing countries will present ob-
stacles," Mr. Larre cautioned. In effect, this
puts the BIS on the side of those who worry
that even the biggest banks could be endan-
i gered if Arabs pull out the very short-term

655
France and Iran Sign $4-Billion Accord;

Shah Will Receive Five Nuclear Reactors
Paris Payments Problem Rider Sees Saudi Switchj
Expected to Be Eased for Higher Oil Prices i
Lze Joint negotaatiani among!

PARIS, June 27Franc* end oil-coniurnirtg and oil-prxiu-j
I r a n signed a massive 10-ye*r cing countries, with a rtarw t o
development agreement today, lowering prices. |
The Shah of Iran has betn!
i n c l u d i n g provision foe the u l <
proMing for itiH higher price*,
to Iran of five 1,000-megawatt
against the reaiatanoe o< K l n g |
nuclear reactors worth $ l . l - b i l - Faisal of Saudi Arabia, w h o ha|
lion. been sympathetic t o A m e r i c a n
The over-all value of coc- arguments that continued rlaei
etracts and i n d u s t r i a l plans w a i endanger the fur>ctk*itn| at j
estimated at 54 b i l l i o n , m a k i n g the world's economy.
France Iran's leading industrial Nonetheless, the Shah Mid 1
partner. at a news conference in
Th- deal w i l l go a long w a y The Shah of Iran d l i c u m - Grand Trianon palace at Ver-
t o w a r d easing France's acute ing a f r * * n n t y a s t M d a y . sailles today that "Saudi Arabia
balarn_e- of -payments problem- w i l l have joined our camp"
p r o v o k e d p a r t l y by the rise in The agreements, aigned at the when it reache* 100 per c m t
oil prices. Far f r o m seeking conclunor ot a Jtate visit by take-over of the foreign-owned
credits, as is usual in vast in- the Shah of Iran and his' Em- oil companies, a reuJt, he said
d u s t r i a l purchases, Iran has presa, represent the f i r s t vast he hoped current Saudi nego-
agreed to make a_n advance de- iuccew of the French effort to tiations with tha companiei
p..,Mt of $1-billion i n the Bank oope independently with the oil- w o u l d effect.
<f France and to pay for three- price crisis through huge sales. The nuclear rtactori, each
quarters of the nuclear installa-j France has refused to join on a giant cale, represent the
tion cost in five years. Delivery the cooperative approach lruti-
is to be completed by 1985. ! ated by Washington to organ-; Continued

136
THE NEW YORK TIMES
FRIDAY, JUNE 28, 1974
France and Iran Sign $4-Billion Pact

for more than five years Iran estimates of the total value.
had declared herself '"ready to Other projects ace also being
largest part of the French- turn our area into a nonnudear Siscussed.
Iranian deal. Other aspects Of tone, that is, an area where no According to the doriununi-
the deal include the electrifica- nuclear weapons should be used qu, the agreement pledges
tion of Iranian railways and all or stored. And 1we stick to this additional quantities of Iranian
railway construction, the crea- policy." Oil to France, and. will toake
tion of a petrochemical Indus- The French-Iranian deal also France the leader of an en-
ry, building a subway system involved military sales. But the
n Teheran and perhaps other Shah said he could not give devSop Iranj^natural gas and
cities and construction of a gas details at this time, beyond transport it to Europe. France
liquefaction plant and pipeline. mentioning the purchase of a will also engage in further oil
The nuclear deal includes the group of nst motor boats, exploration m Iran.
training of Iranian scientists to Assure Passage Shah Favors Nationalization
and technicians and the estab- Iran's purpose, he said, was
lishment of a nuclear-research not to become policeman of the, The Shah saiid at his news
nter. <m Persian Gulf, as has been conference that he would like
There was no public mentkm charged, but to assure open to see the whole oil business
of safeguards against using the passage through the Gulf and nationalized and then have in-
reactors as a base for making the Straits of Hormuz, which ternational transactions con-
nuclear weapons. The French control the southern entry. ductedon attate-to-statebasis.
j Foreign Office spokesman said Since,that does not seem feasi-
the agreemnt had implied safe- *lfcis is a matter of life and ble, however, he said, it is
guards. death fqr us," he add, adding necessary to limit the com-
that Western Europfc and Japan panies" excessive profits.
Other ItMtles Signed also had a vital interest in free He defended the dramatic
, The agreement provides that navigation in that area. rise in oil prices, saying it was
both parties will respect President Valfcy Giscard no larger than in other com-
DTEstaing bailed the agreements modities such ad steel, cement
France has signed the as a sign that "in international or wheat and had been made
Treaty, which prohibits dis- affairs, Iran and France have inevitably by inflation In indus-
[ semination of weapons or parallel attitude* since both in- trial states.
weapon-making capacity to tend to maintain their bide- "We're trying to defend our-
non-nuclear powers, and Iran selves against your rampant in-
has signed and ratified the to cooperate in the advent of a flation," he said. "You tare
Nuclear Nonproliferation Treaty, new international order." going to blow up, and youte
1 which calls for the safeguard Finance Minister Jean-Pierre going to blow Us up with ytota."
system of the International Fourcade, said the accords Paris put on a grand show for
Atomic Energy Agecny. would mean "fabulous" earn- the three-day imperial visit The
Canada, however, is believed ings for French cojnpanies, highlight was a fete at Ver-
to have hpposed these safe- notably Creuzot-Loire, which sailles, With dinner, ballet and
guards when selling reactors to will be tile prime supplier of fireworks to which, for the first
India and India has since con- the nuclear plants and of a time/ the public was admitted.
ducted an underground nuclear steel $30-mHlioti plant The Shah and his Empress,
test. President Giscard's spokes- who have visited two French
The Shah was questioned man M d oply contracts already nuclear centers, are remaining
about his intentions at the news signed or far-advanced" in in France for two more days ,
conference. He assested that negotiation were included in as "private visitoift^. . |

137
From t h e W a l l Street Journal, June 17, 1974
OPEC Talks Suggest Oil-Price Postings

Won't Change Much; Saudis Back a Cut
B y JAMES C. TANNER I but are used by the producing country gov-
Staff Reporter of THB W A L L STREET JOURNAL ernments to circulate taxes paid them by
QUITO, EcuadorThe Organization of the oil companies. An increase in postings
Petroleum Exporting Countries will continue means an increase in taxes. This, in turn, is
deliberations today in an effort to reach a passed on by the oil companies to consum-
compromise on petroleum prices for the ers. Thus, a change in postings is directly
next three months. reflected in prices paid by the world's oil
Late last night, after OPEC delegates consumers.
completed a second day of deliberations, To resolve their differences over post-
there was little indication of what those ings, the OPEC delegates continued their
prices might be except that they aren't talks into last night. But Indications weê
likely to vary much from' the postings that that the thorny issue soon would be settled
have been frozen at current levels since through a compromise.
Jan. 1. ' Iran's interior minister, Jamshid Amouz-
Most of the 12 oil-producing countries egar, suggested p. decision was near. And
that make up OPEC and account for mqre Saudi Arabia's Mr. Yamani w^s, planning to
than 80% of the world's oil exports pushed leave today before the end of the meeting.
for an increase in petroleum postings for the Many of the other OPEC delegates, how-
third quarter or, alternatively, higher taxes ever, plan to 'remain in Ecuador for the
on the oil companies operating within their week after concluding their deliberations.
borders. / ' The deliberations began Saturday in
But While OPEC delegates attending the Ecuador's legislative palace, little used ex-
secret sessions denied a split had developed cept for international functions under the
over prices, Saudi Arabia is known to have country's military government. Because Ec- t
recommended a reduction In postings rather uador is the newest member of OPEC and 1
than an increase. host for the meeting, delegates named Ec-
In an interview, Sheikh Ahmed Zaki Ya< uador's minister of natural resources, Navy,
mani, Saudi Arabia's influential oil minis- Capt. Gustavo Jarrin, as president. Replac-
ter, pledged: "We won't Join them in in- ing Mr. Amouzegar of Iran, Capt. Jarrin
creasing prices or taxes." will serve ail president until the next OPEC
Posted prices aren't true market prices meeting.
In other actions over the weekend, the
OPEC delegates:
Appointed a seven-member commis-
sion to study, a restructuring of the OPEC
secretariat and statutes.
-Listened politely to pleas of representa-
tives of Guyana, Liberia, Sri Lanka and
Nepal for more assistance to developing
countries burdened by the tripling of oil
prices within the past year.
-Turned down applications of the Congo
and Trinidad and Tobago for membership to
OPEC. The countries, however, were
granted "observer" status at the Quito
meeting along with Bolivia, Colombia and
Pefru.
After the price deliberations, the OPEC
delegates will take up further discussions
today of an OPEC development fund and' an
OPEC bank.

138
FROM THE CONGRESSIONAL RECORD, JUNE ?4, 1974
Justments, of course, will gradually get tra- of these positions, I believe we must also
der way between the economies of the ofl be aware of their limitations. First of all, in-
producers and the consuming nations. Prloes flation has little hope of answering the prob-
may decline somewhat, and the oil producers lem since the purchases of even the largest
win step up their Imports and Increase the oil producers are so relatively smalL Second,
speed at their own Internal development. But X fear that relying solely on supply and de-
F I N A N C I A L ASPECTS O T in the Interim, they win be large accumula- mand can have disastrous results for many
SITUATION tors of reserves. Moreover, countries such as nationsleading to disruptive unemploy-
(By David Rockefeller) Saudi Arabia, Kuwait, and the united Arab ment and depression.
I n the final quarter of last yew the Orga- Emirates clearly lack Internal absorptive ca- Creating a mechanism to handle recycling
nization of Petroleum Exporting Countries pacities commensurate with the Incomes they of this scale and to determine acceptable
(OPEC) Increased the price of oil fourfold. will receive. On the contrary, one of their concessions and rides is exceedingly difficult.
Given these price* and present level* of pro- major alms is to accumulate a body of in- Perhaps the mission of the I M F could be ex-
duction. they will receive more than 100 vested wealth outside their countries which panded In this direction, or perhaps it would
billion yearly for their <41 exports. Of this will yield an Inoomo great enough to re- be beet to create a separate vehicle so as to
100 billion, the oil-producing nations will place their oil revenue as I t runs out. Natu- avoid burdening the IMF with the dual re-
spend some HO billion for goods and ssrviosa, rally they are concerned about such matters sponsibility of policing monetary affairs and
leaving $60 billion or so of surplus to be in- as world inflation, exchange risks, and the curbing unemployment. Whatever the means,
vested. Total reserves of the oil-producing possibility of expropriation of their assets. I believe it Is imperative that we develop
nations are likely to exoeed $70 billion by Though not yet large, long-term Invest- a new way at looking at world flnah-
the end of 1974. $140 billion by OTS. and ments by Middle Eastern countries In the
$200 billion by the end of 1976. These huge Industrial nations are beginning to build up
surpluses must of necessity be offset by cor- In real estate, selected securities, and some
responding deficits on the part of oil con- direct investments In industry. Yet th sums
requiring investment are so enormous, and
the Institutional facilities necessary to cany
Thls suggests a structural disequilibrium this out so limited, that I question whether appears that production is i
of major proportions in the balance of pay- such Investments will have much Impact on somewhat ahead at oonsun^ti
ments of countries around the worldons the gap for some time to oome. All at this on prices could very well
that could have serious implications for the clearly suggests that both the World Bank
and the I M F win increasingly bo called upon
to play key redes In the recycling process.
pluses of the oil producers must be recycled Iran, for instance, has already offered to
bade to the deficit on consumers. I f recycling lend funds to the World Bank and IMF, and , be large enough to solve the
does not occur, the oil consumers will bo . t i n to ^ ' ^ t direct loans to ^ f f ^ recycling problem. Indeed. I would guess that
forced eventually to deflate their economies, others at oonoessionary rates to finance oil we would need a price reduction of some 40%
with severe worldwide consequences. Imports. Similarly, the raoently announced or 80% to produce anything close to * new
I n considering this recycling problem I t willingness of the oil producers to establish structural equilibrium. Thus we have no
is helpful to distinguish between the short a $2.75 billion "oil facility" to help coun- choice but to free the recycling challenge
runsay the next year to 18 months and tries with balance-of-payments problems Is and, tn cooperation with the oil produoers,
the longer period. We already have soma a positive move, at least In the shorter term. to dsvtsa the Institutional arrangements nec-
experience of recycling In the short run. The I tear, however, that this oan only be seen essary to cope with It.
first steaMe payments were made by the oil as a modest first step when one The suuuussful creatkm of such mecha-
companies to the producer nations I n March. the magnitude of the fnnds that must be re- nisms wfll ba highly dependent on the po-
April, and May. and thus far they have been distributed. If we arrive at constructive long- litical climate. The Mlddft East countries,
recycled successfullyprincipally through range solutions, i r techniques, si by reason of a shift of wealth and resources,
the International banking system. The oil- are entering a new period I n which their
producing nations have been placing their a haw to ba 4
- -"teal lnflu ~ - " --
money mainly in the Eurodollar market or In .tit, wffl I
sterling. The banks have been the major have to ba plaoed on Interna-
recycling vehicles, taking this, money on do- tional cooperation. At the same time, the new wealth of the
- is likely to strengthen the hands
posit. usually at call or on very J ' of moderate t
turtty, and mending It to oil- orient them i
nations for periods at five to which would represent a basks* of XT sustained, this trend toward moderation
This oles and hence neutralise the exchange risk may well ba a highly desirable and significant
between major currencies. Perhaps this as- political dividend. I t will also be essential In
far this year. $13 billion or sat oottld play a cola In future invnslinut assuring the stability that must underlie an
committed to industrial nations to help plans at the ofl-producing nations, and. In- orderly approach to the redistribution of
cover their 1974 balance-of-payments deficits. deed, it is assumed that It win ba part of the . International capital.
While this process oan be suoessTul for a Qiven a dear realisation of the Interde-
limited period oC time, them a n at least now IMF "ott faculty." I t may also ba pos-
sible to work out International guarantee of an the nations Involved. I be-
four vary serious shortcomings to It, espe- an find ways to transform the prob-
cially In view at the lem of surplus capital tn the hands of some
nations Into many positive opportunities for
First, the banks cannot continue Indefi- grass and development worldwide. But
nitely to tain very short-term money and Investments abroadthey could leave the oft i wtn not happen by itself. I t wffl demand
lend it out for long periods. Second, and even in the ground. the invotvment and dedication of both the
more serious, 1* the likelihood that banks public and private sectors on a scale tar ex-
eventually will reach the limits of prudent I t Is highly desirable that ways be found ceeding that which exists now. Above aU. It
credit exposure, especially with regard to to channel surplus ofl revenues Into projects must Involve a degree of global teamwork
countries where tt Is not clear how balance- designed to create alternative souroea of en- which we have not seen up to this point. I f
of-payments problems can be solved. Third, ergy. This would not only help the wortjl at the nations of the world approach the.energy
the oil-producing countries cannot ba ex- large, but would also provide a source of con-
pected to build up their bank deposits In- tinuing revenues for the on-producing na- to hope that It oan ba use
definitely. They, too, will soon reach prudent tions- after their oil reserves are exhausted. catalyst and a rallying point for" a i
limits for individual banks or even for In- Finally, tt Is Imperative that the developed
dividual nations. My own view is that the countries Join with the ofl producers to as-
process of recycling through the banking sist the less-developed countries. Unless there
system may already ba Close to the and tor Is a far more concerted effort In this direc-
some countries, and in general It Is doubtful, tion. I fear that the result can only ba eco-
that this technique can bridge the gap for nomic and political chaos.
aaore than a year, or at most 18.months. Underlying aU of these requirements Is
Finally, this form of recycling is not even the fact that we must come up with a means
a temporary solution, for lesser-developed at recycling funds on a far mom massive
countries in a weak financial positioncoun- scale than now possible. Soma argua that we
tries like India, Bangladesh, and Sri Lanka should simply wait foe the fames at supply
which are not I n a position to borroy at all and demand to bring prioss down and there-
by create a new structural equilibrium.
lam. While there is some validity to both

139
FROM THE NEW YORK TIMES, JUNE 10, 1974
Oil Fueled U.S.-Arab Tie

But Milestone Pact Has Given Little
Glue to Future ior Prices or Output
By LEONARD SIElC
bo^ $tabl$ ,eopomic
t h S t S S V n r nfifitali growth and to WQrld mone-
agreements reached this past' tary order.
weekend between the United Yet there was no evidence
States and the Saudi Arabian that anything tangible has
Governments was oil. But oil yet been agreed to by the
was the catalyst that precipi- Saudis regarding the future
price or volume of oil produc-
tated this new "special relation. In an interview, Prince
tionship" between the Saudis Fahd Ibn Abdel Aziz, Second
and the Americans. Deputy Premier and half-
From the Aral*! stand- brother of the king; said, "we
point, ,the most faf-feaching wish the price of oil to go
result of the October war was down." But neither the
-the discovery of oU as a po- prince, who was the chief
litical weapon. Despite the negotiator here, nor any of
shock of the economies ofHhe his ministers present would
United States, Western Eu- indicate just how lower oil
rope and Japan, the oil weap- prices might come about.
on is leading to decisive Hisham Nazer, the Minister
changes in the bilateral rela- of State for Planning, indi-
tions between the rich indus- cated that the Saudis-in-
trial countries of the West tended only t^ fty to persuade
and the Middle Eastern oil other member governments
producers. The United States of the Organization of Pe-
agreement with $a*idi Arabia troleum Exporting Countries,
may be the lcey to a series who wiH meet in Quito,
of similar pacts. Ecuador this %eek, to lower
From the Americans' stand- oil prices. But Saudi Arabia,
point, access to oil in ade- he added, would not act
unilaterally to reduce its. own
quate volume and at lower price.
prices is regarded -as crucial Asked why Saudi Arabia
did not increase its oil pro-
ductiqp as a me4ns of putting
greater pressure on world oil
prices, Mr. Nazcr said his
country was already produc-
ing more than it should,
given long-hm needs to con-
serve oil resources. He said
that if Saudi Arabia were
prepared to break with its
partnerswhich it is not
if would simply reduce its
to Saudi Arabia, James Akins,

who was at a party ^t the
Saudi Embassy in Washing-
ton last Friday nigiht, said
Saudi Arabia is already pro-
ducing nine million barrels of
oil a day and that its full-
capacity production was only
9.2 million. The. American
hope in the negotiations was

140
NEW YORK TIMES
MONDAY, JUNE 10, 1974
Oil Pact Gives Little Clue to the Future for Prices

said, this "would' give rise tion, manpower and educa- the United States, the Saudis
to an unprecedented financial tion, technology, research and appear to accept the basic
to induce the Saudis to in- crisis in most Western development, and agriculture. United States policy line;;
crease their capacity and countries." The Saudi-American agree- enunciated last November by
daily output over the longer However, the Saudis them- ment seems more cautious in Mr. Kissinger
run, Mr. Akins indicated. selves appear adverse to suggesting that the joint "We have a special rela-
The atmosphere among the risking any such world mone- commission will seek ways to tionship with Israel an4, we
Arabs at the Saudi Embassy tary crisis. That is.why they encourage cooperation in fi- are committed tx> protect her
was* close to euphoria last are virtually alone among nance4he area of-greatest security, and we believe
weekend. Prince Fahd, who is the oil-producing countries in interest to the private invest- that Israel's security can.
considered the most likely favoring lower oil prices, ment community in this only be protected by respect
successor to the Saudi throne, However, Western finan- country. for your sovereignty. If we
said he was delighted with ciers and businessmen do However, Prince Fahd, like have a special relationship'
his trip to the United States not let them forget the his half-brother the king, with Israel,, we do not regard
and thought it had been "ve'ry power and 'attractiveness of seems far more concerned it as incompatible with the
successful." He said he found their vast and rapidly-grow- about political stability in the friendship we want to pro-
Mr. Kissinger*"brilliant" and, ing supply of oil dollars. Middle East, the "rights" of mote and consolidate with
referring t orecent changes The Arabs are receiving the Palestinian Arabs, anjl you . . . what we want is
in American policy toward more proposals for what access to the Arabs' holy that the peoples of this area
the Middle East, the prince they should do with their shrines in Jerusalem. should build their own sys-
added, "Mr. Kissinger should money than they can tem of life and security in
have done it sooner." quickly evaluate and process/ Basic U.S. Policy
conformity with what they
There was a great throng They appear to be in no Yet the Saudis appear to see fit and in harmony with
of top American Government huiry to do so. They insist be moving, without being world facts."
officialsvirtually the whole their priorities are, first, to willing to say so explicitly, The new Saudi-American
inet-present at the Saudi assure the security of their toward some sort of accom- agreement of this past week-
top layer of the Nixon Cab- country; second, to promote modation with Israel. end appears to represent real
Arfbian Embassy, together its economic and social de- In praising Mr. Kissinger's motion in that direction.
with many private American velopment and, thirdappar- diplomacy, and celebrating
bankers and industrialists. ently a poor third-to expand their own success in achiev-
Said one American banker: their long - range foreign ing^ new relationship with
"Fantastic imagine it, the investments.
great of the world coming to 2 Joint Commissions
kowtow to the Arabs." The pacts they have nego-
A Second Weapon tiated With the Americans
There was little reference reflect these .priorities. They
to what the Arabs wjll do have set up two joint com-
with, the billions of dollars missions on security and
they are receiving for their economies. The security com-
oil. However, there is general mission will be headed by
recognition that the oil Robert F. Ellsworth, who left '
weapon has given birth to a his post as President Nixon's ,
second bargaining weapon Ambassador to NATO to join 1
that may inspire as great re- Lazard Freres, the invest- '
pect as oil among the West- ment banking concren, and
ern officials and financiers. has now rejoined the Admin-
Salah al-Din al-Bitar, a istration as Director of Inter-
former Syrian Prime Minis- national Security Affairs at
ter, has suggested that the the Pentagon.
Arbs now Have a second , The joint economic com- 1
weapon, the'money weapon. mission, which will be headed
If billions of dollars of Arab by Secret ary of the Treasury i
money were to be withdrawn William E. Simon, will work
from European banks, he has on programs of industrializa- ;

141
N o t e : T h i s i s f r o m " I n t e r n a t i o n a l F i n a n c e " a b i - w e e k l y p u b l i c a t i o n o f Chase

M a n h a t t a n B a n k , June 3 , 197^*
W o r l d Payments Problems i n 1974 and 1975

Higher oil prices have thrown a financial monkey studies, to select projects, to develop engineering plans,
wrench into the world economy, with an unprece- and to order and receive equipment from abroad.
dented impact on the current account of the balances Therefore, in 1974 and 1975, the main problems posed
of payments of both the oil-producing and the oil- by the recent oil developments for the producing
consuming countries. The current account includes nations will be financialin which countries or mar-
the basic non-capital items in a nation's balance of kets to place their rapidly accumulating funds, which
paymentsthe import and export of goods, and re- intermediaries to use, which financial instruments to
ceipts and payments for services such as tourism, select, etc. Later, there will be the economic problem
shipping, and insurance. I t is generally a good indi- of transferring real resources from the oil-consuming
cator of the state of a nation's external financial health. to the oil-producing countries.
Forecasts of current account deficits also give a rough
Of course, oil-producing nations can record current
idea of external borrowing requirements, since the
account surpluses only if the oil-consuming countries
size of any country's deficit can only be as large as the
run an aggregate deficit of equal magnitude. Close
total that can be financed by capital inflowsinclud-
to $40 billion of this deficit, or two thirds, w i l l be
ing borrowing abroadand the drawing down of for-
borne by the developed countries, and the remaining
eign reserves.
$20 billion or so by the less developed and socialist
The problem of massive oil-related current account countries. Britain w i l l face the largest current account
imbalances w i l l not last forever. As higher prices in- deficitabout $9 billionthis year, followed by $6
duce greater conservation in energy use and the de- billion for Italy, $4 billion for France, $3.5 billion for
velopment of alternative energy sources, oil imports Japan and $3 billion for the United States^ Germany
w i l l eventually put less of a strain on nations' pay- should post a current account surplus of some $3 bil-
ments accounts. But in the meanwhile, the importing lion this year, due to continuing strong foreign trade
countries' deficits w i l l pose a major problem of world and a relatively moderate rate of inflation.
financial adjustment.
The current account deficits expected this year and
Clearly, this year and next are critical. According to next could be met, to some extent, by the drawing
latest estimates, the oil producers will achieve an down of reserves. However, most countries have mod-
aggregate current account surplus of roughly $60 erate or minimal reserve holdings. Thus, in 1974 and
billion in 1974 and again in 1975. This compares with 1975, the main problem facing most oil-consuming
a combined surplus of $4.6 billion in 1973 and only countries w i l l also be financialhow to finance their
$1.6 billion in 1972. Saudi Arabia is setting the pace very large current account deficits. A number of these
for the major oil producers, with its current account countries have already succeeded in obtaining financ-
surplus projected to soar from $2 billion last year to ing from foreign private banksthe so-called balance-
$17 billion in 1974. I n second place, Iran's surplus is of-payments loans. But the more that any one country
expected to grow from $200 million last year to $11.5 borrows, the more difficult it becomes for that country
billion this year. Other producers w i l l show smaller to obtain additional financing. Also, there is an overall
but still very substantialgains in 1974. limit to the volume of funds that private financial
institutions will want to recycleespecially if the
Future surpluses w i l l enable the oil-producing
process involves converting short-term borrowings into
countries to increase their financial assetstheir claims
longer-term loans.
on foreign resources. Over time, these countries w i l l
utilize their financial assets to purchase more goods Large current account deficits are expected to per-
and services from the oil-consuming countries. But sist through 1975 and probably throughout most of
during the next two years, none of the oil producers this decade. This makes the world financial system
can effectively absorb the huge increase in imports highly vulnerable to disturbances. If any important
that would be required to balance their current ac- financial institution becomes over-extended, or if one
counts. Even in those countries that have the poten- country is unable to repay its financial obligations,
tial, the Texperience, and the institutional framework or if one key country seeks to improve its current ac-
for undertaking import-using development projects- count position at the expense of othersthrough trade
such as Iran and Venezuelait w i l l be at least two controls or deliberately depressing the external value
years before a substantial volume of funds can be of its currencythen all countries and their financial
spent effectively. I t takes time to undertake feasibility institutions may be in difficulty. Richard H. Kaufman

142
Saudis Agree to Buy

Large U.S. Special Securities Issues
By JOHN 6ERRITY
WASHINGTONMuch more is riding on

the success or failure of President Nixon's
unprecented visit to four Arab states than
the mere erasure of tarnish from M r . Nixon's
political image at home, as many of his
critics have hinted or openly charged.
Perhaps the most delicate diplomatic ac-
complishment hanging in the balance, that
will be determined in the final assessment
of the President's dual journeys to the Mid-
dle East and Soviet Russia, is the new
THE MONfY MANA6EH "special relationship" accord reached be-
tween the United States and Saudi Arabia,
the world's largest exporter of oil.
JUNE 17. WW A key feature of this aecord, the "Money
Manager" learned last week, is a proviso
whereby the United States will play a very
dominant role in the so-called "recycling"
of vast amounts of new oil revenues by ab-
sorbing perhaps as much as $10 billion of
the Saudis' heavy cash accumulations an-
nually through the sale of new, possibly gold
backed, "special issues" of U.S. Government
securities to Saudi Arabia.
The accord, with its special proviso for
a U.S. Government securities swap for ex-
cess oil revenues was reached on Saturday
morning, June % at a formal signing cere-
mony at the State Department.
The principal' figures in the ceremony
were Secretary of Sttite Henry Kissinger and
Prince Fahd Ibn Abdul Aziz A1 Saud, re-
garded by Middle East experts to be the
second most important map in Saudi Arabia.
State Department and Treasury officials
refused to discuss specific details of the
securities-for-oil swap deal, such as whether
the Government's "special issues" may or
may not be gold-backed, rates of interest to
be paid, maturities, and so forth.
Neither is there any confirmation of an
absolute "fix" or "ceiling" on the total
amount the United States may issue in spe-
cial Government securities, to help drain off
currency accumulations Saudi Arabia would
acquire as a result of the 400% increase in
crude petroleum prices at the peak of the
fuel crisis earlier in the year.
Of the total increment in oil revenues to
Middle East countries, estimated generally
to be about $50 to $60 billion, approximately
one half, or $25 to $30 billion, would accrue
to Saudi Arabia as the largest exporter of
oil in the world.
I n light of other international monetary
Continued

Secretary Kissinger explained to new: compact will prove to be some- into some tough questioning and op-
ARAFRBMF both House and Senate Foreign Af- what overblown. position in Congress. -
faire Committees that, while some of But there can be no masking the "I'd like to know how far thest
this $100 million "special require- fact defense pacts are not sufficient commitments go," said Cong. H. R.
developments last week, most notably ments fund" might be given to Syria at this juncture of history. Of far Gross, R-Iowa, with respect to the
new gold arrangement contrived to help rebuild war-damaged areas, greater importance 'is the economic overall, agreements' resulting from.
%y the Group of Ten Industrialized particularly the provincial capital of assistance that can be made available, Mr. Kissinger's Cairo-to-Damascus
"Countries to help bail Italy out of Quneitra, no "hard commitment" for pins, Of course, the extent to which diplomatic junketing. "I am waiting
iter economic troubles, the possible such aid was made as part of the the United States is able to fill the to see' all of the commitments that
future use of gold-backed special U.S. peace pact ending, the seven-year war void left by the withdrawal of Soviet fiaye been made in the'Middle East.
Government Security issues to help between Israel and Hie Arab repub- Russia support for Arab states.
lics. Echoing a similar belief that the
<soak up an over-abundance of cash In all of this delicate maneuvering, President and Mr. Kissinger face a
Concentrated in a single country, is a Obviously Egypt, Syria and Jordan, the President's role and presence is tough selling job with Congress "un-
development that's bound to generate as well as Israel, which will share in important, and significantand is not, der the best circumstances," Peter
Imaginative reactions and conjurings. the (proposed $907.5 million aid pro- as some have asserted, an exercise in Frelinghuysen, R-NJ., said "if .expe-
gram for the area* "welcome the "political barnstorming," calculated to rience is any guide, some severe slash-
Just prior to the formal accord-
Signing ceremony, P r i n c e F a h d offset political damage caused by the ing will be made" in the total dollar
stressed to both President Nixon and- Watergate affair. request.
lo, Secretary Kissinger that long-
The Uftiterf State* Certainly, the President will draw Senator Barry Goldwater, R-Ariz.,
range development of good U.S. rela- Sagdi Affrftw t j r p t i f Bf political refurbishing from hia Middle one of Mr. Nixon's most stalwart
tions with Arab world would be East visit and: his summit meeting in backers throughout the entire Water*
"contingent" upon further Israeli proTUesftrfoeHS. Soviet Russia, that begins on June 27. gate matter, waa even more outspoken
Withdrawals from Arab-claimed lands. But whatever personal gains lb* on his personal hostility to any aid
" Additionally, the U.S.-Saudi Ara- recognitor $f Mestiatat Nixon makes on the home front, they that might be given to Syria.
bian agreement provides for the U.S. are regarded as "ancillary" to the Senator Goldwater sharply criti-
recognition of Palestinian "national
"Batfowl rights." larger achievement of new and vigor- cized t h e "Special Requirements
rights".a neat diplomatic phrase, ous links between the United States Fund" as an aid program "inappropri-
which means simply the ultimate prospects of U.S. aid flowing in," the and the Arab world. ate to a country we have never at-
establishment of a Palestinian state State Department official said. Moreover, Mr. INixon's direct par- tacked, never been particularly
op the lands now occupied by Israel's Oil-rich Saudi Arabia, which has ticipation in this new and highly sen- friendly to, Mid whose aid we have
forces in the west bank of the Jordan long nurtured strong pro-U.S. sym- sitive venture into geopolitics is con- never particularly sought."
River. pathies, is, in a very distinct sense, sidered a very important element in The Arizona -law-maker added that,
The President's visit to the Middle "special case to be regarded in a winning the necessary Congressional in his judgement, "it was time for a
East counties, in effect, certifies his special manner." support for his world-embracing dip- long, thoughtful discussion" of U.S.
personal involvement in the general This separate-but-contingent rela- lomatic endeavors. foreign aid programs, which he sus-
Agreement aimed at strengthening. tionship, is rooted in the simple fact But the excitement provoked by any pects have "been largely failures
economic ties between the U.S. and that Saudi Aaabia wants U.S. tech- securitiea-for-oil agreement is subject from their beginning."
the Arab world. nology and commitments for .markets to some serious caveats. Besides these sorts of obstacles,
Too much stress has very probably to help industrialize that desert king- The U.S.-SaUdi Arabia accord, no there's an. undefined mass of opinion,
been placed on the assumption tihat dom. more and no less than any other especially in the House of Representa-
the U.S. might beeome "militarily in- Indeed, according to the State De- agreement the United States might tives, that balks at the notion of the
volved" in the Middle East, accord- partment, increased American eco- reach with a foreign country is, in. U.S. rendering economic assistance to
ing ip'one State Department official. nomic involvement in the MiddleEast the final analysis, a treaty, subject the Arab fttates, which together with
;
"This is especially so," he said, "in was always considered to be a key to ratification by the Senate. Venezuela, were largely responsible
view ofthe erroneous interpretation component in whatever new diplomatic for the fuel crisis and inflated oil and
relations might evolve between the There's no gainsaying the fact that gas prices.
that some attached to a $100 million the President's massive foreign aud
*ftpecial requirements fund' provision U.S. and the Arab states. - "It jnst doesnt mike sense to me to
programto say nothing about such have the United States subsidizing
in the Pfesident's $6.19 billion fiscal It may be that expectations of far-rmdmc "apodal arrangements"
1975 fowigs aid pregxsm." benefitsflowing-to both sides in the as that with 8aadi Ar6i*-**m ran
C i i i h m Mat page

144
Arab Peal
rO>fctfnud from preeediag page
its <yonomie enemies," one member
of the House Foreign Affairs Com-
mittee said.
Committee Chairman Thomas R.
Morgan, D-Pa.. a long-time hacker of
foreign aid programs through Repub-
lican and Democratic administrations
alike, voiced sm similar concerns.
After a Jong, ol<wed-door session
with Secretary Kissinger, chairman
Morgan emerged, shaking MB head
thoughtfully, to aay to reporters that
he had some "serious reservations"
about the entire aid program for the
Middle E*t.
It was just because of *ueh com-
ments and fears as Mr. Morgan ex-
pressed that Secertary Kissinger went
to some pains to repeat on several oc-
casions that he would "consult
closely" with Congrasa on all specifics
such as the Saudi Arabian accrd, the
proposed 1350 million military aid
scheduled for Israel, the $207.f. million
military and -conumic aid for Jordan
and the $25<> milHon economic aid
program for Egypt.
Consequently, it can be taken for
granted that, si nee the a>.vord involves
the issuance of new instruments of
Federal Government dvbt, the Senate
Finance Committee, as well as the
Senate Foreign Relations Commit t.-v,
will sihare in the pre-ratiflcation
process.
In that sort of environment, close
questioning an-l fairly intense surveil-
lance can be regarded as matters of
fact, which won't be dealt with
casually.

145
THE WASHINGTON POST rrUv.Mv3.mi
Saudi Arabia Could

Buy Into Oil Companies
Reutar, . ' ""
NEW YORK, May 2Any <n buy oiir stock, IncludiHg
Saudi Arabian interest Jn Skudi Arabia."
buying into four; giant Amer- . One administration offi-
ican oil companies faces lit- cial saidthat the govern-
tle opposition, according to ment cofctd oppose the pur-
chases on grounds of na-
government and industry tional security, but even
sources. that seems unlikely at the
U.S. laws, designed to pre- moment. *
vent companies from lessen-
ing competition, "never en- "Since those companief-
visioned direct government sell fuel to the Defense D&*
purchases," a top Justice partment and have other
Department official said to- government contracts, thecf' J
day. retically, a foreign govern-
ment in control would cei*'
Deputy assistant attorney tainly not be in, our best tis-'j
general Keith Clearwaters terests," the official said."
pointed out teat present an- "Out since this is aU so hisT
titrust laws apply only to pothetical
cant see usatdoing
any anything:
rate, %
corporations, pot to- coUn- abput it yet". '
tries, which, In theory at If the Saudis actually go"
least, would give the Saudi ahead with the stock buyirifc"
government a free hand. plan the cost would be enor* *
Two newspapers in Ku- njous, even for a country
wait reported yseterday that that could earn $20,000 mil-
the Saudis are interested in lion this year from selling,
buying large stock intei*sts oil. *
in the four Ajnerican part- Exxon alone has close tp
ners of the Arabian Amerl- 250 million shares issuM
can Oil, '' Company selling for about $80 each.
(ARAMCO)Epxon Corpo- Just to bpy a 5 per cefit,
ration, Texaco, Mobil Oil interest in Exxon2' per
and Standard Oil of Califor- cent more than the amourit
nia. held by. Chase Manhattan
Spokesmen /or the four Bank, the biggest owner <afc
companies declined to offer preseni>T-the -Arabs would,;
any confirmation of the re- have to pay in the rfeighba^V
ports, but an Exxon official; hood of $1 billion,stoeTmat, '
lid "Anyone who wants ket encysts estimate.

146
CHAIRMAN OF T H E BOARD O F GOVERNORS

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
June 1 9 , 1974
The H o n o r a b l e Henry B . G o n z a l e z , Chairman

Subcommittee on I n t e r n a t i o n a l F i n a n c e
Committee on B a n k i n g and Currency
House o f R e p r e s e n t a t i v e s
W a s h i n g t o n , D . C. 20515
Dear M r . Chairman:
Thank you f o r your l e t t e r o f May 2 9 , r e q u e s t i n g my comments on

r e c e n t developments i n t h e p e t r o l e u m m a r k e t .
I s h a r e your v i e w t h a t t h e r e c e n t a c t i o n s o f OPEC c o u n t r i e s i n
m a n i p u l a t i n g p e t r o l e u m shipments and p r i c e s a r e h a r m f u l t o t h e
i n t e r e s t s of the United S t a t e s . I n d e e d , by weakening t h e i n t e r -
n a t i o n a l monetary system, OPEC c o u n t r i e s a r e a c t i n g a g a i n s t
t h e i r own b e s t i n t e r e s t s as w e l l .
For t h e l o n g e r - r u n , I see no v i a b l e a l t e r n a t i v e t o a r e d u c t i o n
i n the p r i c e of petroleum. The l o n g e r t h e p r e s e n t p r i c e i s
m a i n t a i n e d , t h e more i n t e n s e w i l l become t h e economic f o r c e s
operating to modify i t . Most c e r t a i n l y , a l t e r n a t i v e sources
o f energy w i l l be d e v e l o p e d and c o n s e r v a t i o n i n energy use
increasingly practiced.
An i m p o r t quota scheme, such as t h e one P r o f e s s o r Adelman has

s u g g e s t e d , has s e r i o u s l i m i t a t i o n s . A quota i n i t s e l f w o u l d ,
i f s e t a t a low enough l e v e l , r e d u c e our energy i m p o r t s . How-
e v e r , u n l e s s energy c o n s e r v a t i o n t e c h n i q u e s and expanded d o m e s t i c
energy p r o d u c t i o n were a l r e a d y i n p l a c e , cutbacks i n our energy
i m p o r t s c o u l d s u b j e c t our economy t o s e r i o u s s t r a i n s . Further-
more, s i n c e such a quota system c o u l d be i n t e r p r e t e d by t h e OPEC
n a t i o n s as an a g g r e s s i v e a c t on our p a r t , i t m i g h t s e r v e as a
r a l l y i n g point for t h e i r c a r t e l .
Sincerely yours
Arthur F. Burns

147
"3***.% Hfli
Burden of Oil Money Worries Bankers

By EDWIN L. DALE Jr. remarks were summarized later. q'This form of recycling is
SpcaUl to The New Yoffc Timet The one Arab speaker at the pot even a temporary solution
conference, Edward C. Awad, for lesser developed countries
WILLIAMSBURG. June in a weak financial position."
Two leading Bankers expressed technical manager of Petromin,
He mentioned such nations as
deep reservations today over the Saudi Arabian oil agency,! India and Bangladesh "which
how long the international told reporters that he generally are not in a position to borrow
banking network could carry agreed with the diagnosis of the i t all in commercial markets."
the burden of recycling the bankersthat short-term re- Mr. Rockefeller, injured in a
vast flows of money resulting cycling would only create a fall in Taiwan last month,
from the huge jump in "false financial atmosphere" moved about with aluminum
prices. and was not a long-term soli)-; crutches, but otherwise seemed
tion. in good condition.
At issue was the channeling But he had nothing to pro- Emphasis on Credit
back to oil-consuming coun pose on a longer-term invest- Mr. Guth also emphasized
tries of the tens of billions of ment strategy for oil-exporting the problem of creditworthiness
dollars that have begun to flow countries, saying only that "it that private banks could not
to a small group of oil-produc- is a question of education" and go on making loans to govern-
ing countries, particularly Arab that general policy had not yet ments where thfc prospect of
nations with small populations. been established. repayment was dim because of
The forum was a session to- According to the summary of a continuing deficit in national
day of the International Mone- the meeting, none of the ex- balance of payments. Payment
tary Conference here, which perts expressed the hope that a deficits reduce monetary re-
brings together bankers and drop in the price of oileven serves and thus the means Of
government officials from the though some decline was possi- repayment
United States, Europe and Ja- blewould be sufficient to At an earlier session today
pan. solve the financial problem of on the general problem of world
The doubts about the ability the vast flows of funds to oil- inflation Herbert Stein, chair-
of the international banking producers. man of President Nixon's Coun-
system, including the Eurocur- director of the Deutsche Bank Giving new estimates, Mr. cil of Economic Advisers, ar-
rency markets, to handle the of West Germany. Rockefeller said total monetary gued that the "fundamental" or
problem for more than about Mr. Rockefeller made public "reserves of the oil-producing "traditional" means for curbing
another year were expressed his address, although the ses- nations are likely to exceed inflationcontrol of govern-
by David Rockefeller, chairman sions of the conference are $70-billion by the end of 1974, ment spending and deficits, and
of the Chase Manhattan Bank, closed to the press. Mr. Guth's $14Q-billion by end-1975 and restraint on the growth of
and Wilfred Guth, managing money and credithad not
$200-billion by the end of failed in recent years but rather
1976." had not been sufficiently used.
"Our own history of acceler-
He added that "these are ating inflation in the past dec-
staggering amounts" and said ade," he said, "certainly is not
they "could have serious impli-j the history of a vigorous end
cations for the world economy1 unsuccessful adherence to the
and international financial old-time religion."
mechanisms." Mr. Stein cited figures on
large budget deficits and large
The payments to the oil increases in various definitions
countries have only just begun, of the nation's money supply
Mr. Rockefeller said, and "thus ovnr most of the period since
far they have been recycled 1965 to back up his point
back successfullyprincipally
through the international bank-
ing system." But he cited four
reasons for his doubt that this
could continue beyond "the
next year to eighteen months'
f"The banks cannot con-
tinue indefinitely to take very
short-term money and lend it
out for long periods of time."
This concern was also ex-
pressed at a session of the con-
ference here yesterday.
f'Banks eventually will
reach the limits of prudent
credit exposure, especially with
regard to countries where it
is not clear how present bal-
wc^f-payments problems can
3 "The oil-producing coun-
tries cannot be expected to
build up their bank deposits
indefinitely. They, too, will
soon reach prudent limits for
individual banks or even for
individual nations."

148
THE HEW YORK TIMES June 3, 1974
were to make such shifts, the money
Oil and the Cash Flow could readily be recycled through the
swap network.
Second, it is argued that some in-
dustrial countries may be unwilling to
By C. Fred Bergsten accept the needed shift in the struc-
ture of their balance-of-payments po-
WASHINGTONArab oil earnings Second, the prophets of doom con- sitions. It is certainly true that all of
will rise by $65 billion this year, the fuse the balance of trade and the their trade balances will deteriorate
amounts will get even bigger in fol- balance of payments. They ignore the and be offset by increases in capital
lowing years, the balance-of-payments simple but central fact that the oil inflows. But such a situation might
positions of the consuming countries exporters must invest in the industrial well be sustainable indefinitely since
will plunge into the abyss, the inter- world any of their increased earnings the capital inflow will by definition
national monetary system will col- that they do not spend. The Arabs continue as long as the trade imbal-
lapse, the Arabs will buy up all our will not bury the money in the ground. ances do. And it is certainly sustain-
companiesso goes the refrain heard Thus, there can be no deficit in the able for the interim period until en-
frequently since the dramatic increase balance of payments of the industrial orgy conservation and the develop-
in oil prices in December. world as a whole. ment of new sources of oil and
There are indeed extremely serious * To be sure, the flow of money from alternative forms of energy are
consequences of the oil crisis: the Arabs will not necessarily go to brought into play to change the energy
individual industrial countries in situation to its roots.
Inflation has spiraled upward; re- amounts that precisely match the de-
cessions are possible if governments cline in the trade balance of each. Third, some industrial countries
mistakenly cut back aggregate de- Some industrial countries may wind fear that many of their companies will
mand to cope with shortages of up with a sizable surplus; others may be taken over by the oil producers.
supply; countries producing other raw have deficits. They need not. Most of the oil coun-
materials have been encouraged to But this problem is solvable solely tries will soon find, ways to spend
emulate oil exporters; a few of the through action by the industrial coun- most of their income on goods and
poorest countries will suffer serious tries themselves to recycle the money services. And since they have decided
deprivations, and political tensions de- to where it is needed. Much financial to nationalize most of the foreign busi-
riving from the energy problems recycling will take place through nor- ness concerns within their boundaries,
could intensify among countries. mal market forces. Some can be they are quite unlikely to seek ma-
jority control of firms within the
But the international monetary situ- handled by government borrowing in boundariesand legal jurisdictionof
ation adds relatively little to the prob- the private capital markets. others. Even if they wanted to, they
lem. No industrial country will go The Eurocurrency markets those
that lend a variety of currencies from do not have the manpower to exert
bankrupt. The monetary system will much effect on the operations of very
not collapse. The prophets of financial European centershave grown as rap- many firms anyway. So the present
doom simplistically compare the in- idly in several past years as they will pattern of diffused and highly liquid
crease in each country's oil bill with have to grow now, and the United portfolio investment in a wide range
its existing monetary reserves. They States capital market is now fully of financial assets is likely to persist.
note that United States imports will available with the abolition of con-
rise by $15 billion and that its reserves trols. Together, they can handle the Finally, the proposed solution to
are $12 billion, and conclude that the vast bulk of the money on their own, the monetary problem requires the
United States cannot payeven for and are in fact doing so even as the full industrial countries to agree on at
one year. amount of the higher oil earnings is least a broad pattern of exchange-
Such observations are absurd. First, now being invested. rate relationships among them, around
they ignore that a sizable share of which the financial flows can be re-
the increased earnings of the oil-ex- The rest of the money can move cycled. It will be tricky to reach such
porting countries will be spent on im- , through such existing intergovernmen- agreements, which amount to taking
ports from the industrial world. Some tal institutions as the swap network oil out of each country's balance of
among central banks and the Inter- payments for the purpose of determin-
oil countries will spend virtually all of ing exchange rates.
their increased earnings themselves; national Monetary Fund. Indeed, such
backstopping will be needed for any However, there was already evi-
all are rapidly revising their develop- dence of progress toward such agree-
ment strategies and military plans to individual borrowers whose credit-
worthiness comes under doubt in the ments before oil prices soared. They
do so. Some will lend their monev to atfe a necessary component of any
others who will quickly spend it. private market. But Italy is the only
such case to date. stable monetary system for the future,
So even the trade balances of the and were thus already at the top of
industrial world will not decline by In any event, no special cooperation the agenda for monetary jeform. And
more than, say, half of the increase with the oil exporters is needed in history clearly shows thamhe alterna-
in its oil bill this year. Those trade this area. It helps for the International tive of competitive exch|nge-rate de-
balances will be even better in subse- Monetary Fund to borrow from them preciations will not work.
quent years, as any further increases to help finance members' deficits, but v
It seems clear from the series of
in oil countries' earnings are more there is no reason to give the oil ex- official pronouncements on the subject
than offset by their increased imports. porters better terms than other lenders. that all countries have recognized
Indeed, the United States appears to Doubts are sometimes raised about these facts and that this latest crisis
have already reached its new plateau the plausibility of such smooth han- like most/past criseswill speed
of oil imports in April at an annual rate dling of the oil money. First, it is feared rather than derail needed monetary
of $27 billion), but there was a surplus that the money, like th6 oil itself, wm reform. There is good reason for con-
in over-all trade as exports reached an be "politicized." But it is highly doubt- fidence that the mistakes of the nine-
annual rate of almost $100 billion. ful that .the Arabs will try to promote teen-thirties and the nineteen-sixties
monetary instability by shifting their can be avoided in resolving the latest
funds from place to place. Once in- international monetary crisis.
vested, the very size of the funds
will make it increasingly difficult for C. Fred Bergsten is a senior fellow
the Arabs to liquidate quickly with- at the Brookings Institution.
out incurring substantial losses. If they

149
FEDERAL ENERGY OFFICE

W A S H I N G T O N , D.C. 2 0 4 6 1
JUN 2 0 1974
THE ADMINISTRATOR
Honorable Henry B. Gonzalez

House of Representatives
Washington, D.C. 20510
Dear Mr. Gonzalez:
Thank you f o r your l e t t e r of May 28, 1974, i n which you
discuss Professor Morris Adelman's proposal f o r an o i l
import quota system to c u r t a i l the c a r t e l power of the
Organization of Petroleum Exporting Countries, and h i s
ideas on the r o l e of o i l companies.
Professor Adelman's suggestion that the US Government
should r e - e s t a b l i s h o i l import quotas, with quota r i g h t s
to be auctioned o f f by d i r e c t , sealed competitive bids
to o i l producing nations eager to gain access to the
US market, raises a number of questions.
Professor Adelman's theory that producing countries eager
to get access to the US market w i l l submit lower bids,
produce more crude, and thereby force down o i l prices,
neglects several points. F i r s t , i n a s e l l e r ' s market f o r
o i l , the OPEC countries are free to s e l l t h e i r o i l to more
than one prospective buyer. I f the US i s unwilling to
purchase t h e i r o i l , other countries may buy i t a t r e l a -
t i v e l y high prices. Most, i f not a l l , members of OPEC
would probably not favor a program that would increase
t h e i r own r i v a l r i e s .
Because of the small number of members (11) of the o i l
producers' c a r t e l , i t would be d i f f i c u l t to protect the
secrecy of the bids submitted by the producer countries.
Indeed, the national o i l companies of the producer
countries would f i n d i t i n t h e i r i n t e r e s t s , to exercise
collusion i n bidding on the quota r i g h t s . Thtis, the
fundamental problem i s to avoid collusion between pro-
ducer countries and somehow n e u t r a l i z e the effectiveness
of the OPEC c a r t e l .
CONSERVE
VAMERICA'S
1 ENERGY
Save Energy and You Serve America!

150
As you i n d i c a t e , Professor Adelman's ideas on the future

r o l e of o i l companies are i n t e r e s t i n g . However, he f a i l s
to give the companies s u f f i c i e n t c r e d i t for the important
l o g i s t i c a l and technological contributions that they have
made. At the same time, I share your concern over the
p o s s i b i l i t y of p r o f i t e e r i n g by some o i l companies i n t h e i r
foreign operations.
The Federal Energy O f f i c e recently i n i t i a t e d several
studies on the i n t e r n a t i o n a l o i l companies. One of the
studies involves a comprehensive survey of o i l company
cash flows and p r o f i t s from domestic and i n t e r n a t i o n a l
operations. Another study was r e f e r r e d to i n my recent
testimony before the Church Subcommittee on M u l t i n a t i o n a l
Corporations on June 5, 1974. I indicated that an i n -
depth study was to be undertaken on o i l company government
relationships around the world. I t s purpose i s to help
policy-makers by providing the a l t e r n a t i v e s open to the
US Government to have an e f f e c t i v e voice on the terms
under which o i l i s imported.
Unfortunately, both inquiries are presently a t an early

stage and, therefore, I am unable to respond f u l l y at
t h i s time to your request for information on the r o l e of
the o i l companies. The f i r s t study i s t e n t a t i v e l y
scheduled to be completed i n e a r l y July while the study
on the relationship between o i l companies and governments
w i l l be finished by next spring. When the p r o f i t s study
i s completed, a copy w i l l be sent to you.

151
HENfcY B. GONZALEZ, TEX.. CHAIRMAN

ALBERT W. JOHNSON, PA.
HENRY 8. REUSS. WIS. J. WILUAM STANTON, OHIO
WILUAM S. MOORHEAD, PA. PHIUP M. CRANE, ILL.
THOMAS M. REES, CALIF. BILL FRENZEL. MINN.
RICHARD T. HANNA, CALIF. JOHN B. CONLAN. ARIZ.
WALTER E. FAUNTROY, D.C. U.S. HOUSE OF REPRESENTATIVES CLAIR W. BURGENER, CAUF.
ANDREW YOUNG, OA.
FORTNEY H. (PETE) STARK. JR.. CAUF. SUBCOMMITTEE ON INTERNATIONAL FINANCE
ROBERT G. STEPHENS. JR.. OA.
OF THE

W A S H I N G T O N , D.C. 20515
May 28, 1974

B4a
The Honorable John Sawhlll
Administrator
Federal Energy Office
Room 3^00 - Post Office Building
12th & Pennsylvania Avenue, N.W.
Washington, D. C. 20044
Dear Mr. Sawhlll:
As Chairman of the Subcommittee on I n t e r n a t i o n a l Finance,
I am becoming Increasingly concerned about the lack of action
by the United States and other o i l consuming nations against the
price increases imposed by the Organization of Petroleum Export-
ing Countries. My Subcommittee has l e g i s l a t i v e r e s p o n s i b i l i t y
i n two areas seriously affected by the o i l price increases: the
i n t e r n a t i o n a l monetary system and the m u l t i l a t e r a l development
lending i n s t i t u t i o n s .
I am not sure how w e l l the world monetary system w i l l hold
up under the strains of the approaching petrodollar glut and how
i t can accommodate the d i s t i n c t p r o b a b i l i t y of the Arab o i l pro-
ducers owning 70# of t o t a l world monetary reserves by 1980. While
there i s a number of schemes f o r recycling the petrodollars i n the
works, I question t h e i r v i a b i l i t y .
I am sure that you are f a m i l i a r with what the o i l price increases
w i l l do t o the economies of the less developed countries. They now
face a sad f a t e , a f t e r so many years of economic growth aided by the
United States through b i l a t e r a l a i d , m u l t i l a t e r a l aid and private
foreign investment. Yet we seem powerless t o do anything about i t
except beg the o i l producers t o give some a i d t o those countries
which the OPEC group i s i n the process of bankrupting. But the aid
funds being set up by the o i l producers w i l l be only a minor help
to the developing countries.

152
The Honorable John Sawhlll

Page - 2 - May 28, 1974
I t seems t h a t the Administration I s reconciled to the

o i l c a r t e l and the prices I t has set and that I t f e e l s that
somehow through cooperation the disastrous e f f e c t s of OPEC
price Increases can be minimized. I am not sure t h a t the
evidence supports t h i s p o s i t i o n . I t would appear t h a t we
are being f a r too weak I n the face of a price gouging, i n t e r -
n a t i o n a l monopoly which is c l e a r l y harmful t o American i n t e r e s t s .
I am impressed with the proposal by MIT Professor M. A.

Adelman t h a t the U.S. auction Import t i c k e t s f o r o i l as a means
of undermining the c a r t e l , or at least protecting ourselves
p a r t l y against I t . He f e e l s t h a t the U.S. should Impose o i l
Import quotas to be sold by sealed competitive bid to anybody
who I s w i l l i n g to pay cash f o r a s e l l i n g l i c e n s e .
Professor Adelman also feels that high o i l prices are e a s i l y

maintained under the present system wherein the o i l companies i n
e f f e c t act as agents f o r the o i l producing nations. He f e e l s t h a t
i f i t can be done i n unison with i o t h e r countries, the U.S. should
get I t s o i l companies out of the crude o i l marketing business and
leave t h i s function t o the OPEC countries.
I would l i k e t o know your opinion of Professor Adelman^

proposal f o r an Import t i c k e t system and his Ideas on the r o l e
of o i l companies. Your ideas would be very much appreciated as
w e l l as most h e l p f u l .
With best regards, I am
Sincerely yours,
Henry B. Gonzalez
Member of Congress
Chairman
Enclosure

153
F r o m FORBES m a g a z i n e , June 1, 1974
and the balance from Saudi Arabia

Enlightened Self-Interest and Iraq. Under the terms of the five-
year agreement, Iran w i l l supply all
the needs of India's Madras refinery,
What can the oil-rich countries do to help w h i c h ran 2 1 million barrels last year
b u t w i l l be expanded, perhaps even-
the poor countries? In his deal with India, tually to 4 1 million barrels. The Na-
the Shah of Iran is showing what can be done. tional Iranian O i l Co. is a partner in
the refinery. Iran w i l l also provide at
W H I
L E the Arab oil-billionaires preach the turbulent years when it achieved least 7.4 m i l l i o n barrels a year over
Islamic solidarity and the brotherhood independence f r o m Britain. the refinery's needs.
of the T h i r d W o r l d , Muslims are I n 1972 I n d i a ' s ' o i l b i l l was $250 For India, the best part of the
starving to death i n Central Africa. million, already a heavy burden for a agreement involves price. Officially,
Perhaps out of t i m i d i t y , perhaps out country that has chronic troubles India w i l l be paying the m a r k e t price.
of greed, the Arab oil magnates have making ends meet. But last year it Unofficially, she w i l l be getting a
done little b u t talk about sharing their soared to $625 million, and this year huge discount. T h e deal works like
wealthor even lending it outin any it could go as high as $1.5 billion. T o this: India pays $3.50 a barrelin
b u t the most conventional ways. p u t it in perspective, it is as though the cash. But the balance, $6.50 or so a
Iran, however, is a different mat- U.S. spent $35 billion to import oil. barrel, is deferred, w i t h no payments
ter. I n a shrewd mixture of self-in- A n d India wastes little oil: O n l y a for five years and w i t h a nominal
terest and benevolence, the Shah's t i n y share goes for private motoring. interest rate, 2.5%. T h e principal is
government last m o n t h committed The bulk is needed for India's indus- payable over five yearsafter the five-
over $1 billion to help I n d i a t h r o u g h tries and public transportation. year grace period. Looked at as a
the crisis created b y swollen oil But where can India find the ex- hard business deal, the discounted
prices. I n the long run, the deal w i l l tra $1 billion-plus? India simply does present value of India's deferred pay-
mean more to India than the atomic not have this k i n d of money. A n d ments cannot be more than 60 cents on
bomb it recently detonated. w h o is there to lend it? the dollar. Thus, in effect, India is get-
India desperately needs the help. Enter Iran. India's needs are not t i n g the Iranian oil at $7.50 or so a
Its runaway inflation and food short- huge: less than 500,000 barrels a barrel, 25% below the going market
ages are especially hard on the al- day, about what the U.S. uses every price. This is a way to cut prices
ready suffering poorest classes. Thus 40 minutes. India produces about a w i t h o u t openly cutting them. A n d it
India's social stability may be serious- buys India time to adjust.
t h i r d of those needs indigenously; it
ly threatened for the first time since imports 70% of the rest from Iran Iran stands to benefit from the
print. India w i l l repay the loans in fact that Iran is not one of the tra-
the products of the expanded indus- ditional imperialist powers or one of
tries. Again, the interest rate w i l l be the principal Cold W a r antago-
a nominal 2.5% w i t h 20 years to repay. nists. The main motivation, however,
The products that India w i l l supply is that I r a n is an oil-exporting nation.
to Iran are i n short supply throughout " W e are doing this iron-ore deal be-
the w o r l d and desperately short i n In- cause it is I r a n that wants i t , " says a
dia. "These things are needed at home h i g h I n d i a n government official. " W e
also," concedes C. Subramanian, In- wouldn't do it for anyone else."
dia's Minister for Industrial Develop- There are other signs of a loosening
ment, " b u t we must strike a balance u p i n India's old policy of economic
on how far we should starve the home isolation. After years of waffling on
market to get the fuel we need to whether Western o i l companies w o u l d
keep our industries going." be allowed to d r i l l offshore, the In-
Prime Minister dian government has given the Na-
The first t w o projects involve iron
Gandhi of India tomas Co. d r i l l i n g rights on 7 million
ore and bauxite. I r a n w i l l p u t u p near-
deal, too. I t locks I n d i a i n as a cus- ly $140 million for a plant to extract acres i n the Bay of Bengal. T h e gov-
tomer against the day when oil may alumina f r o m bauxite; I r a n w i l l get ernment is also t r y i n g to streamline
be in surplus and hard to sell. I t also two-thirds of the expected 330,000- the almost unbelievably bureaucratic
strengthens I n d i a at a time w h e n the ton annual output. I r a n has also procedures that are required of any-
Arabs, the Shah's enemies, are pledged around $500 million to de- one wishing to invest i n India. I n
strengthening Pakistan, India's enemy, velop a low-grade iron ore deposit i n the past a "yes" or "no" could take
Beyond politics and price, how- Kudremukh, i n the south I n d i a n state as long as six years; now they some-
ever, the deal also gives Iran access of Karnataka. W h e n the project is i n times come i n as little as 90 days.
to India's potentially rich b u t unde- f u l l operation it w i l l produce 8 mil- T h e Iranian deal, the d r i l l i n g contract
veloped raw materials. Iran, on a lion-plus tons of i r o n pellets yearly, and the liberalized license rules sug-
crash course to industrialization, w i l l all of it for export to Iran. gest the Indians are finally facing
need all kinds of basic products. The I n making these deals, I n d i a has reality: T h e Iranians offered to help
deal between the Shah and Mrs. I n d i - quietly abandoned the r i g i d socialist India, b u t asked that India, i n turn,
ra Gandhi provides for Iran to l e n d planning that has characterized her bend some of its socialist dogma. In-
over $1 billion over 20 years to ex- economic policy ever since independ- dia accepted. For India, the situation
pand India's basic industries: cement, ence. The softening of India's stand remains desperate, b u t perhaps it is
sugar, steel products, paper and news- is undoubtedly made easier b y the not too late.
FORBES, JUNE 1, 1974

154
AMERICAN PETROLEUM INSTITUTE

1801 K STREET, NORTHWEST WASHINGTON, D.C. 20006
(202) 833-5580
Frank N. Ikard
PRESIDENT June 1 4 , 1974
The H o n o r a b l e H e n r y B . G o n z a l e z
U . S . House o f R e p r e s e n t a t i v e s
2446 R a y b u r n House O f f i c e B u i l d i n g
W a s h i n g t o n , D . C . 20515
Dear Congressman Gonzalez:
I a p p r e c i a t e d r e c e i v i n g y o u r l e t t e r o f May 2 8 r e l a t i n g
t o y o u r concerns a b o u t t h e i m p a c t o f o i l p r i c e i n c r e a s e s upon
the i n t e r n a t i o n a l monetary system and t h e m u l t i l a t e r a l develop-
ment l e n d i n g i n s t i t u t i o n s .
I f u l l y share i n your a p p r a i s a l o f t h e possible impact

o f these abnormal p r i c e s . Up u n t i l r e c e n t l y , many k n o w l e d g e a b l e
people urged us t o use "cheap and abundant" f o r e i g n o i l and
f o r g e t domestic development. I r e p e a t e d l y warned o f heavy r e -
l i a n c e upon f o r e i g n o i l , n o t i n g t h a t once t h e U . S . became e x c e s -
s i v e l y dependent t h i s o i l would p r o b a b l y be n e i t h e r cheap n o r
abundant. As y o u n o t e , t h i s impact i s f a r g r e a t e r upon n a t i o n s
a l m o s t w h o l l y d e p e n d e n t u p o n OPEC o i l t h a n u p o n t h e U . S . , a n d
h i t s h a r d e s t a t weak d e v e l o p i n g c o u n t r i e s .
The A P I h a s n o t f o r m u l a t e d a n y p o s i t i o n w i t h r e g a r d t o
t h e p r o p o s a l s o f P r o f e s s o r Adelman. Consequently, a l l I can do
i s give you a few personal thoughts f o r whatever they are worth.
I t i s d i f f i c u l t f o r me t o s e e how r e i n s t a t i n g a n o i l
import quota program could b e h e l p f u l a t t h i s t i m e . Uncertainty
a b o u t s u p p l y , stemming f r o m t h e o l d i m p o r t q u o t a p r o g r a m , was
a f a c t o r w h i c h a c t e d t o d i s c o u r a g e new r e f i n e r y c o n s t r u c t i o n a n d
c o n t r i b u t e d t o our energy problems. Moreover, i t c o u l d have
some u n f o r e s e e n a n d s e r i o u s i m p a c t s u p o n c r u d e o i l s u p p l i e s .
T h i s p r o p o s a l w o u l d need l o n g and s e r i o u s s t u d y b e f o r e a d o p t i o n .
I know P r o f e s s o r Adelman and have h i g h r e s p e c t f o r h i m a s a n
economist. O n t h e q u e s t i o n o f OPEC, h o w e v e r , h i s p r e d i c t i o n s
a b o u t t h e f a t e o f such a c a r t e l have n o t , u p t o now, m a t e r i a l i z e d .
H i s p r o p o s a l f o r b r e a k i n g i t u p seems a l i t t l e t o o s i m p l i s t i c .

155
Hon. H e n r y B . Gonzalez
Page - 2 - June 14, 1974
W i t h r e g a r d t o the r o l e o f o i l companies, i t i s e v i d e n t
t h a t a m a j o r and permanent s h i f t i s t a k i n g p l a c e i n t h e w o r l d
marketing of o i l . However, I would q u e s t i o n a b l a n k e t r u l e
r e q u i r i n g U.S. f i r m s t o get out o f crude o i l marketing i n
foreign nations. Such a r u l e m i g h t m e r e l y r e s u l t i n a s u b s t i -
t u t i o n o f o t h e r f o r e i g n o i l companies f o r U.S. f i r m s . I ques-
t i o n whether a simultaneous withdrawal of i n t e r n a t i o n a l o i l
companies c o u l d be a c h i e v e d . I t w o u l d seem t o me i n t h e i n t e -
r e s t s o f our n a t i o n t o t a k e advantage o f the access t o o i l
s u p p l i e s w h i c h U . S . o i l companies a r e a b l e t o m a i n t a i n . I
c o n t i n u e t o b e l i e v e t h a t t h e U . S . o i l i n d u s t r y has t h e t e c h -
n i c a l , f i n a n c i a l , a n d human r e s o u r c e s w h i c h c a n p e r m i t i t t o
c o n t i n u e t o p l a y a n i m p o r t a n t and u s e f u l r o l e i n t h e d e v e l o p -
m e n t o f n a t i o n a l e c o n o m i e s , and w o n d e r i f i t i s n e c e s s a r i l y
d e s i r a b l e t o r e s t r i c t t h e a c t i v i t i e s o f o i l c o m p a n i e s a n y more
t h a n t h e y w i l l be r e s t r i c t e d by h o s t g o v e r n m e n t s .
I recognize the importance o f the issues r a i s e d i n

your l e t t e r . A l l o f us a r e g r a p p l i n g w i t h t h e s e d i f f i c u l t
and c o m p l e x p r o b l e m s w h i c h a f f e c t n o t o n l y o u r i n d u s t r y and
t h e n a t i o n , b u t c o u l d l e a d t o w o r l d m o n e t a r y i n s t a b i l i t y and
serious hardships f o r developing nations.

156
THE WHITE HOUSE

WA S H I N G TO N
Dear Mr. Chairman:
The P r e s i d e n t has asked me t o r e p l y t o your l e t t e r o f A p r i l 3 0 , 1974,

concerning t h e impact o f o i l p r i c e i n c r e a s e s and t h e problem t h i s has
c r e a t e d f o r t h e s t a b i l i t y o f t h e i n t e r n a t i o n a l monetary system and,
more p a r t i c u l a r l y , f o r o i l - i m p o r t i n g l e s s developed c o u n t r i e s .
I n response t o your q u e s t i o n as t o what t h e U n i t e d S t a t e s i s doing

about the o i l p r i c e i n c r e a s e s , t h e most d e s i r a b l e s o l u t i o n t o t h e
whole problem would b e , o f course, a s u b s t a n t i a l s o f t e n i n g or r o l l -
back i n petroleum p r i c e s ; and I can assure you t h a t t h e U n i t e d S t a t e s
i s endeavoring t o promote t h i s s o l u t i o n . Short o f adequate movement
i n t h i s d i r e c t i o n , however, t h e most i m p o r t a n t t h i n g t h e U . S . can do
i s t o develop our own n a t i o n a l energy r e s o u r c e s i n o r d e r t o m i n i m i z e
U.S. v u l n e r a b i l i t y , i n c r e a s e t o t a l w o r l d energy s u p p l i e s , and reduce
t h e impact o f U . S . demand on the energy m a r k e t . The Congress c l e a r l y
has a c r u c i a l r o l e and an immense r e s p o n s i b i l i t y i n advancing t h i s
" P r o j e c t Independence."
I n r e s p e c t t o t h e i n c r e a s e d pressures on t h e i n t e r n a t i o n a l monetary
system as a r e s u l t o f t h e quantum jump i n o i l producers* income,
I b e l i e v e t h a t t h i s i s a manageable problem; a l t h o u g h i t i s one t h a t
must be r e s o l v e d on t h e b a s i s o f i n t e r n a t i o n a l c o o p e r a t i o n . The
U n i t e d S t a t e s i s working c l o s e l y w i t h o t h e r developed n a t i o n s , as
w e l l as w i t h t h e o i l p r o d u c e r s , t o develop and s t r e n g t h e n t h e f i -
n a n c i a l mechanisms and i n s t i t u t i o n a l arrangements needed t o p e r m i t
t h e r e c h a n n e l i n g o f t h e o i l funds t o p r o d u c t i v e uses w i t h o u t d i s -
r u p t i n g t h e i n t e r n a t i o n a l monetary system. We have a l s o i n i t i a t e d
a c o o p e r a t i v e e f f o r t among consuming n a t i o n s t o a v o i d d i s r u p t i v e
c o m p e t i t i o n i n t r a d e and monetary p o l i c i e s designed t o manage
i n d i v i d u a l balance of payments problems; and we have proposed a
program t o e x p l o r e means f o r a c c e l e r a t i n g development o f a l t e r n a t i v e
energy resources and expanding t h e p o s s i b i l i t i e s f o r energy con-
servation. I n a d d i t i o n t o these e f f o r t s w i t h t h e major consuming
n a t i o n s , we a r e a l s o i n i t i a t i n g c o n s u l t a t i o n s w i t h t h e Government
o f Saudi A r a b i a c o v e r i n g a range o f s u b j e c t s o f mutual i n t e r e s t ,
i n c l u d i n g o i l p r i c e s and p r o d u c t i o n .

157
Page 2
W i t h regard t o t h e l e s s developed c o u n t r i e s , t h e higher cost of

i m p o r t e d f u e l and p e t r o l e u m based p r o d u c t s has c r e a t e d n o t o n l y
a d j u s t m e n t d i f f i c u l t i e s , b u t a l s o , as y o u r l e t t e r p o i n t s o u t ,
s e r i o u s b a l a n c e o f payments problems f o r t h o s e LDCs w h i c h have
n e i t h e r a r e s e r v e c u s h i o n nor s t r o n g e x p o r t e a r n i n g s from O t h e r
products. T h e r e i s , as you know, a l r e a d y a number o f i n t e r n a t i o n a l
schemes and p r o p o s a l s t h a t have been p u t f o r w a r d t o meet t h e a d -
d i t i o n a l LDC f i n a n c i n g r e q u i r e m e n t s . The U . S . p o s i t i o n i s t h a t
the primary r e s p o n s i b i l i t y f o r r e s o l v i n g t h e o i l r e l a t e d problem
l i e s w i t h t h e o i l e x p o r t e r s , and t h a t t h e y have an o b l i g a t i o n t o
ease t h e burden by l o w e r i n g o i l p r i c e s and by p r o v i d i n g f i n a n c i a l
assistance. W i t h i n t h i s framework, t h e U n i t e d S t a t e s i s working
a c t i v e l y t h r o u g h m u l t i l a t e r a l as w e l l as b i l a t e r a l channels t o
d e f i n e t h e magnitude and t i m i n g o f t h e problem f o r each o f t h e
h a r d e s t h i t LDCs. However, t h e m a j o r c o n t r i b u t i o n of t h e U . S .
must be t o c o n t i n u e t h e a s s i s t a n c e l e v e l s we c o n t e m p l a t e d b e f o r e
the events of l a s t F a l l . The i n c r e a s e i n o i l p r i c e s makes our
development a s s i s t a n c e more n o t l e s s e s s e n t i a l . Our a b i l i t y
t o c o n t i n u e development a s s i s t a n c e a t p r e v i o u s l e v e l s i s , however,
handicapped by t h e Congress* r e l u c t a n c e t o meet c u r r e n t f o r e i g n
aid funding requests, including t h a t for the I n t e r n a t i o n a l
Development A s s o c i a t i o n .
P e t e r M. F l a n i g a n
Assistant to the President
f o r I n t e r n a t i o n a l Economic Affairs
The H o n o r a b l e Henry B. Gonzalez

Chairman
Subcommittee on I n t e r n a t i o n a l F i n a n c e
House o f R e p r e s e n t a t i v e s
Washington, D . C . 20515

158
HENRY B. GONZALEZ
20TH DISTRICT, TEXAS GAIL J. BEAGLE
*ITXAR COUNTY KELSAY R. MEEK
MRS. BONNIE CALDWELL
RAYMOND I. CANTU
C o n g r e s s o f tfie m t e b & t a t e * ELLA M. WONG
IRMA DE LEON
$ou*e ot Dtepreaentattoetf LUCIA GONZALES
MRS. CHRISTINA MOONEY
Wasfofogton, 3B.C. 20515 MRS. LORRAINE G. INMAN
SAN ANTONIO. TEXAS 78205

5 1 2 - 2 2 9 - 5 5 1 1 , EXT. 4 3 8 9
OR 5 1 2 - 2 2 3 - 8 8 5 1
MRS. LUZ G. TAMEZ

A p r i l 30, 1974 MRS. CORA FAYE CLAYTON
MARY JESSIE GONZALEZ
B4a
The Honorable Richard M. Nixon

President of the United States
The White House
Dear Mr. President:
As Chairman of the Subcommittee on I n t e r n a t i o n a l
Finance, I am becoming increasingly concerned about:
( 1 ) the disastrous e f f e c t s of the OPEC o i l price i n -
creases, and ( 2 ) the p o t e n t i a l damege t o the i n t e r n a t i o n a l
monetary system and the woxld economy as a r e s u l t of the
petrodollar glut.
I am sure t h a t you are f a m i l i a r w i t h what the o i l
price Increases w i l l do to the economies of the less developed
countries. They now face a sad f a t e , a f t e r so many years of
economic growth aided by the United States through b i l a t e r a l
a i d , m u l t i l a t e r a l a i d and p r i v a t e foreign investment. Yet we
seem powerless t o do anything about i t except beg the o i l pro-
ducers to give sjme aid t o those countries which the OPEC
group i s i n the process of bankrupting. And I seriously
question the v i a b i l i t y of the a i d funds being set up by the
o i l producing countries.
Secondly, I am not sure how w e l l the world monetary

system w i l l hold up under the strains of the approaching p e t r o -
d o l l a r glut and how i t can accommodate the Arab o i l producers 1
owning 60$ of t o t a l world monetary reserves by 1980. While
there have been some suggestions f o r recycling the p e t r o d o l l a r s ,
I also question t h e i r v i a b i l i t y .

159
The P r e s i d e n t
Page - 2 - April 30, 197^
I n t h e U . S . , we h a v e w o r r i e s a b o u t g a s o l i n e p r i c e s
and l o n g - t e r m programs f o r development o f o u r abundant
energy resources. W h i l e s o l v i n g t h e s e p r o b l e m s we c a n n o t
l e t t h e r e s t o f the w o r l d s i n k around us. Based on t h e
t h o r o u g h i n f o r m a t i o n c o l l e c t e d b y my S t a f f , I c a n see f e w
reasons f o r o p t i m i s m . S o m e t h i n g m u s t be done a b o u t t h e
c a r t e l a c t i v i t y o f OPEC a n d t h e r e s u l t a n t o i l p r i c e s .
I w o u l d a p p r e c i a t e y o u r a d v i s i n g us w h a t t h e U n i t e d
S t a t e s i s d o i n g o r i s g o i n g t o do a b o u t t h e o u t r a g e o u s
p r i c e i n c r e a s e s b y OPEC a n d t h e a p p r o a c h i n g p e t r o d o l l a r
glut.
With best wishes, I am
Respectfully yours,
Henry B. Gonzalez
Member o f C o n g r e s s
Chairman

160
THE NEW YORK TIMES. MONDAY, MAY 13, 1)74
Recycling Petrodollars
The enormous increase In oil prices and resulting
transfer of purchasing power to the oil-exporting nations
has confronted the world with "an over-all disequilib-
rium in trade accounts of unprecedented magnitude."
Behind that temperate estimate by H. Johannes Wit-
teveen, managing director of the International Monetary
Fund, lies the staggering reality that the balance-of- The International Monetary Fund has taken the ini-
payments deficits of oil-importing countries this year tiative of persuading the oil-exporting countries to re-
alone may amount to $65 billion. The sum is so large cycle part of their oil money back to the importers via
that it threatens the world economy with simultaneously a new "oil facility." According to Dr. Witteveen, Arab
contractionary and inflationary forces. For the moment, and other oil exporters have just "indicated their willing-
the forces of Inflation are most evident. But if the drain ness" to the I.M.F. to lend that facility about $2.75 billioh.
continues; many oil-importing countries will suffer a But even excluding the developed nations, the develop-
devastating blow-to their real incomes and living standing countries face extra oil deficits of at least $20 billion
ards. The danger affects such developed countries as in 1974 aloneseven times as much as the oil producers
IfcdywulBritain but is greatest for the developing na- are offering to lend.
tions of South; Asia arid Central Africa where massive
starvation and death could result I t is far'from sure, that even this modest amount will
be forthcoming. The.Saudi Arabian oil minister, Sheik
This world payments problem will not automatically Zaki al-Yamani, has expressed coolness toward the I.M.F.
be corrected by ail increase in imports by the oil- plan. Since his country had initially offered Dr. Wit-
exporters or by their investment of funds in the deficit teveen more than $1 billion, a Saudi Arabian decision to
countries. The situation is analogous to the critical pe- withdraw could undermine the proposal. Actually, how-
riod after World War II, when a devastated world ever, the oil-exporting countries have strong reasons of
economy was dependent for its reconstruction on a their own to lend, under appropriate terms that would
recycling of funds by the United Stateswhich this give them security and a reasonable rate of return. That
country carried out through the Marshall Plan and other is precisely what the I.M.F. hopes to provide.
aid and loan programs.
Given the difficulties and risks of placing their enor-
Will the oil-producing states, which created the pres- mous gains in secure foreign loans and investments
ent payments disequilibrium, now participate in a gen- and their common,stake in the viability of the world
uine effort to resolve it? monetary system-*the oil. exporters have a powerful in-
On the face of it, the answer would appear to be no. centive to help make the i.M.F.'s "oil facility" succeed.
Obviously, the simplest method of. solving the problem It could help tide over for: the next year or so the poorest
would be a major cut in oil prices. Yet the nature of the of the developing nations. In the long run, however,
cartel andttie^pofitfcs' of"manyof its members makes lending back hundreds of billions of dollars to the deficit
a large enough price rollback unlikely unless there de- countries seems out of the question. The disequilibrium
velops a breakdown in the world economyand an at- is too great..
tendant shattering of the oil cartel.

161
T H E WASHINGTON POST A p r i l 13, 1974
By Brace Handler ers, further diversity their 1963, the United States bought, of this decade-long struggle
SpecialtoThe Washington Post economies and coordinate in- and sold 43 per cent of the to- in less than two years.
GUATEMALA CITYThe dustrial development tal imports and exports. By Guatemala, the most popu-
world oil crisis is threatening Despite some rocky spots- 1972, this figure had fallen to lous country, had $213 million
the economies of the Central El Salvador and Honduras 33 per cent.
American countries, wiping {ought a mini-war in 1969 and in its treasury at the end of
Gold, and hard currency re- 1973. But it spent $30 million
out 13 years of economic prog- stopped trading with each serves climbed slowly from on oil products last year-
ress they had made by joining otherthe Central- American $130 million in 1961 to $416 compared to $15 million in
in a common market. Common Market has survived. million in 1972, but the oil 1971and its estimated Oil bill
Central America, including A new social class of busi- crisis could erase the results for 1974 is $105 million:
Guatemala, El Salvador, Hon- nessmen, independent farmers
duras, Nicaragua and: Costa and ranchers, and white-collar
Rica, produces no oil. workers has started to emerge
If crude oil prices remain at and industrial production tri-
current levels or go up, ex- pled between 1960 and 1972..
perts say all five of these The value of textile output
small republics could be dowrr rose from $25 million to $116
to their last centavo in re- million. Production of shoes
serves by 1975. and clothing rose from $49
A U.S. economist here put it million to $111 million. Light
this way: "If the international machinery and home appli-i
oil picture continues _ ance maufacturing output in-
changed, it's all over for Cen- creased from $1.4 million to
tral America." $26 pillion. (
"The oil crisis is a serious Central America's total for-j
problem in places like the eign trade rose from $1.2 bil-j
I United States and Europe, of lion in 1963 to $2.7 billion in
course," an American busi- 1972. Trade within Central
nessman in Guatemala City America skyrocketed from $16
said, "But in underdeveloped million in 1950 to $64 million
countries, its effects are far, in 1960 to $611 million in 1972.
far worse.
RoadS and communications
"Central America's economy improved-greatly, and direct-
is baaed on agriculture," he distance-dial telephone link
explained. "Governments in Tegucigalpa, Honduras, and
this region have been trying Guatemala Cityan impossi-
to modernize farming methods ble dream only a few years
aid increase production, and ago.
they've made progress. But to
do this, you need tractors and Despite some rocky spots-
fertilizer.' Well. ^ half the El Salvador and Honduras
world's fertilizers are made fought a mini-war in 1969 and
from petrochemicals, and trac- stopped trading with teach
tors don't run on bananas." othgrthe Central American
Ustil the lMQs, Central Common Market has survived.
America slightly larger A new social class of bwi-
than California and with 16 nessmen, independent farm-
million peoplewas a remote, ers and ranchers, and whitf-
backward and economically collar workers has started to
stagnant region. emerge and industrial ptfc-
Its economy depended on duction tripled between 1960
coffee and bananas. Power lay and 1972.
with a few local millionaire The value of textile output
landowners and large foreign rose from $25 million to $116
fruit exporters, Most others million. Production of shoes
were illiterate, underfed peas- and clothing- rdse from $49
! ants. million to $111 million. Light
j During World War n, the machinery and home appli-
I United States financed the ance manufacturing o u t p u t
| building of a highway through increased from $1.4 million to
! Central America, to gate a stra- $26 million.
tegic overland route to the Central America's total for-
Panama Canal. Panama itself elgn trade rose from $1.2 bil-
is not considered part of Cen- lion in 1963 to $2.7 billion in
tral America. 1972. Trade within Central
This road made .trade among America skyrocketed from $16
the Central American repub- million in 1960 to $64 million
lics possible for the first time. in 1960 to $611 million in 1972.
It also- allowed medium-size Roads and communications
agricultural entrepreneurs to improved greatly, and direct-
open the rich Pacific coastal distance-dial telephones link
-plain to cattle ranching and Tegucigalpa, Honduras and
growing of cotton, sugar and Guatemala Cityan impc
vegetable oil seeds. ble dream only a few years
In 1960, the five countries *go.
formed a Central American The Common Market, alio
Common Market. The purpose made this region less depend-
frarto eliminate trade barri- ent on the United States. In

T H E WASHINGTON POST TkmnJky.MviS.im
HobartRowen
The Oil Cartel and Development Aid

Despite the noble efforts of IMF
Managing Director H. Johannes Wit- of the hardeethit countries is so 4ea*
teveen, the oil cartel countries have perate that the World Bank is scraping
bpeii willing to cough up only small "The lack of generosity of other countries together about $160 million tar divert-
amounts of money to help the oil-im- ing some of the International Develop-
porting countries meet the outrigeous does not excuse the OPEC for the burden ment Agency (IDA) fundspitifully
prices that the cartel itself has set small to . begin wtthHto the poorest
The defense offered by the Organi- they placed on the rest of the world*9 countries on the list.
sation of Petroleum Exporting Coun- International agencies calculate that
tries (OPEC) is a mixture of clever, higher oiVfOed, fertilizer, and capital
chetoric and sheer , arrogance. In es- enough leverage on the market to get serftf adviser Robert Solomon said lit a goods casta to the poor nations this
sence, they argue tHat the cartel coun- |20 a bushel. thoughtful speech the other day, 1 year will rim about 90 button mora
tries have not become truly rich, like But there is little doubt that the ma- haw. found it useful to view It as a than what the? will recover in higher
the industrialized West, but merely jor countries of the world, especially sales tax on consumption. Hie imposi- export price* -
<nore "liquid"; that oil prices are still the United States, must be faulted for tion of this tax* has raised the price of
below the level that should be lack of generosity in development aid. Assistance by theIMF-and other in-
petroleum products." teraationar agencies, plus a reduction O
achieved to balance off inflation in Far from meeting the recommended
other commodities; and that the West goal of 1 per cent of total Gross Na- Solomon, vice chairman of the Com- of reserves will cover f t bllBon, Wav to
-r-notably the United States and Can- tional Product, UJ3. development aid is mittee of Twenty Deputies, points out ing a minimum of $2 billion in new as-
adaare soaking the poor countries by about one-fourth of that figure, rank- that the OPEC countries "must lend sistance needed by the poor countries.
extortionate prices for food. ing 19th in a list of 16 wealthy coun- their enlarged revenues" back to those Projections are that this
Dr. Abderrahman Khene, the Secre- tries. who are paying through the nose for "gap" will increase to f * J WIHon In
taryOeneral of OPEC, made the their oil. 1975, and run to $4 or $5 billion a year
That does not excuse the OPEC from 1976 to 198&.
rounds here recently, delivering this countries for the special and sudden But not much it coming hack.
pitch. He argues that the industrial na- burden they have placed on the rest of Against the $58 billion increase in In the immediate and desperate pe-
tions have been raising the prices of the world, notably on the poor coun- OPEC surpluses this year alone pro- riod ahead, the United Nations is try-
their manufactured goods and food, tries, by a fourfold increase in the jected by Witteveen (to a total of $65 ing to get contributionsin any form
and that the problem of the poor coun- price of oil within a year's time. billion), the total amount pledged for a that would work out to roughly a 60>
tries thus didnt start with OPEC. When Dr. Khene talks of OPECs special IMF 'facility" is some $2.8.bfl- 50 share between the industrUized
; Agriculture policy in this country, of "moderation" and "wisdom" in lion. world and OPEC.
course, has stupidly contributed to in- "limiting" the price of oil to provide a
flation. But as Dr. Khene knows, the Much has been made of some sales . But the industrialized world, even if
government-take of $7 a barrel, he is of oil at concessional terms to India.* it comes through with contributions -
price of wheat bears a close relation- talking economic nonsense. The abrupt
ship to weather and crop yieldsa BUt the concessions dontseem overly this year equal to OPEO's, is likely to
shift of $50 to $60 billion of resources generousand in total, are a drop In resist carrying an equal share into the
matter quite different from a half- from the oil-consuming countries to
dozen oil sheikhs sitting down in Te- the bucket. For example, India will get future.
OPEC (even if some of the burden is about $100 million worth of oil from
heran, arbitrarily deciding on a price postponed byfinancingschemes) is be- The strong view of the United
for oil that costs 10 to 30 cents a barrel Iraq and a similar amount from Iran States, as it sees new OPECs over the
ginning to raise havoc in industrial as in special deals. Against that, India's
to producea cost that hasn't Varied. well as less developed nations. horizon for bauxite and other commod-
If tbe United States decided to price extra cost for oil this year is move ities, is that the btgge^ p * v m m
"In thinking about the effects of the than $1 billion. burden outfit to Jail en thee* w e r e -
wheat the way OPEC prices oil, it has sharply higher oil price," Federal Re- The need to get cash into the hands ate the problem. h'

163
T H E W A L L S T R E E T JOURNAL May 6, 1973

Editorial
Attracting Petrodollars
With one easy stroke, the United the sheiks cqugh up 30% of their in-
states can go a long way toward im- tome from investments here when
proving its eminence as an interna- they can keepi it all when their in-
tianal capital market, with financial vestments are cycled through Lon-
benefits that would exceed the $200 doi*?
'million the Treasury would lose i n We are not prepare^ to atgu*
tax revenues. The necessary step is that this simple tax change will
the elimination of withholding taxes mean an extra $4 billion to $6 billion
on. interest and dividends that flow a y e a r of investment in the United
out ,<Df the U.S. to foreigners holding States, as some proponents of the
US. securities. The prograun change a r e ' forecasting. A1EW& all,
ambunts to a tariff on foreign cafci- whichever market is recycling the
oil money will put" it here, directly or
These taxes have been on the indirectly, when that market finds
books a long time, but until t h e r - superior opportunities here. The
rival of petrodollars have been of withholding tfexes simply insure that
relatively little significance. The Landon^nd Geneva will do the pick-
l e rate 6i 30% applies to all resi- ing and choosing, not New York. I f
dents (other than Americans) of the zxiost promising investment for a
Countries that don't ^have tax Kuwait dollar is in Niger or Bolivia,
treaties with the United States. Most it won't be banked through New
of our m a j o r trading partners do York
have treaties with us which lessen Thia - no ^vial consideration.
S^Tdln . S or two of banking profits

tors and on capital flows Butthe 6Very recycled petrodollar adds
wlrproducmg nations of the MidcUe to % ^ ^ ^ the gross
reserves through v the .Eurodollar ^ ^ ^ ^ financial interme-

merket. . , . diation.
What this means is that as a mat- v.,,. -
ter of natidhal.policy, the United P * * of rebuilding i h e
States is protecting the Eurodollar U.S. capital market began earher
and Eurobond market to the detrf- ^ i s year when Treasury elumnated
m t e
ment of its domestic capital market. A equalizafaon tax and.
The $200 million t r e a s u r y would ^ ^ q ^ i S ^ ?
ment
forego by eliminating these taxes is ' P>gram* that
admittedly a lot of money, but it is
E
. m a l l potatoes compared to the tens ^0^1.mar!cft\ B 7 j
w
Tag
of billions in petrodollar business will be further aided if U.S. tax laws
that the U.S. is throwing away to . invite, rather than discourage, all
foreign capital markets. Why should that oil money.

164
FROM THE WALL STREET JOURNAL, JUNE 19, 1974
REVIEW &> OUTLOOK
Squeezing the Goose i n Quito

Having acquired the golden agree to cut back production, and as
ffoose, the Organization of Petro- fast as they cut production, and the
leum Exporting Countries is discov- world economy continues to soften,
ering that the* bird has . to< be they'll have to cut again. With the
squeezed harder and harder to pro- Saudis refusing to go along, even
duce the same size eggs. Global in- toying with increased production,
flation coupled with decreased de- there's not much chance the other
mand for crude keeps nibbling away producers would commit thexn-
at the real incomes they'd projected selves to that kind of play. And if
for themselves. they don't, the marketplace itself
force
So the cartel met in Quito, Eeua- ^ Production cutbacks. Con-
nor these past few days to plan its u m e r s W * y won't buy all the oil
squeeze for the next three months. * * * Producers want to sell at the
While it couldn't resist h ^ g the P n c e s on
charging,
royalty rate on crude by 23 cfents a The strains in the cartel result
barrel, it wisely decided against the because each of the OPEC nations
inclination of 11 of its 12 members to has its own optimum timetable for
cut into the goose. All but Saudi Ara- selling its oil. Those who want reve-
bla favored another sizeable in- nues now, fast, for internal develop-
crease of the tax on the crude ment are the most stubborn about >
shipped by foreign companies. sticking to the high cartel prices.
I t occurs to Saudi's Sheik Ya- B u t to d o *> tkey have to bet I
a ainst n e w
mani, who went to school at Har- ^ supplies and oil substi-1
yard, that OPEC's 300% price in- t u t e s coming along before they no
00 1
crease over the last nine months may J " need expanding oil revenues
have had something to do with both to finance development. A global re-
global inflation and faltering de* cession throws all their schedules
mand for crude7~ Although be of Pitting them closer by that
couldn't manage to impart this wis- m u c ? time
competition from
dom to his fellows, he did get them and North Sea oil, as well as
now
to hold off merely by refusMg to go unknown > technological break-
along with them on the tax increase. tkroughs < ^ demand side. A re-
He won't apply the royalty increase cession of serious proportions or du-
aither, and because Saudi Arabia r a t n ^ bl w
P ?PEC "Pa*\.
can by itself control the world price, Mr. Yamam understands all this,
this split in OPEC is bound to widen B u t colleagues insist on learning
Mr. Yamani was turned down way Eventoally they will
when he recommended a Cut, rather ^ v e to learn that while a successful
than an increase in price postings, cartel has its obvious advantages, it
But give him time. The sharp drop ? a n t ^ ^ u l a t o d from fiie prob-
from projected demand for crude* in l e m f *?rld ^coômy mte
"
response to its higher price is now g r a t e d s np ^
8
accelerating in reaction to a soften- S T ? ' ^ J f ^ be prepared to see
ing Wold economy. Treasury Secre- f a c i a l assete it accumulates
tary Simon says second quarter real ^ ^ ^ T ' ' <*;
GNP growth in the United States ? r a l h a ? k a c a n n o t Po^cally resist
will be close to zero. If it remains money growth to pay the
flat the rest of the year, simple P 1 *! 18 - And if the cartel insists on
arithmetic suggests there ^ i l l soon ^ ^ protection, tying its oil
be more oil around than anyone F " c e ? to 8 1 1 m . d e x o f l t s choosing, ,
there 8 no can
wants to buy. escape driving |
. oc/ orrf t " " son. Increased price postings now

f m a
f ? .yCar a
have had a chilling effect on
I n order to maintain the current even clearer picture of how destruc-

Vosimgs, obviously some tive and self-defeating that would I
OPEC countries would have to be.

165
BUSN
I ESS WEEK May 11, 1974
Commentary by John Pearson
The crisis of paying for the oil

When the gasoline queues disappeared far, the oil-rich states have shown a
from the filling stations a few weeks marked preference for putting their
ago, it may have appeared to many money into short-term "Eurocurrency"
consumers that the worst of the energy deposits that bankers in London and
crisis was over. Italy's abrupt restric- other financial centers then lend out to
tions on imports, aimed at stemming a oil users.
sharp deterioration in its balance of The trouble with this system is that
payments, are a reminder that the the borrowers, even i f they are finan-
crisis is only beginning. The problem cially respectable European govern-
now is not the availability of oil, but ments, will eventually exhaust their
how to pay for it. credit. No banker in his right mind will
A t least half of I t a l y ' s average keep supplying money to a client who
monthly trade deficit of $l-billion in uses i t to meet current expenses, unless
the first four months this year stem- the borrower has a credible plan for
med from the steep rise in the cost of getting his income and expenditures
oil imports. But the Italian trade curbs back into balance and paying off the
will not slow the inflow of vital oil. In- loans. The oil consuming nations, un-
stead, the measures will cut back im- fortunately, have no such plan. In-
ports of other products, from meat to stead, they are looking desperately for
automobiles, and thus shift the trade financial gimmicks, including the re-
deficit to Italy's traditional trading valuation of official gold reserves in or-
partners. The result could be increas- der to create new money that could be
i n g pressure on countries such as used to pay for oil. But more than mon-
France to take similar steps to shore up etary wizardry is needed to deal w i t h
their balance of payments. the energy crisis that underlies the fi-
Thus Italy's unilateral action could nancial threat.
set a precedent for beggar-thy-neigh- Wishful thinking. Of course, the oil short-
bor protectionism without doing any- age "scare" and the rising cost of fuel
t h i n g to solve the oil crisis. The oil con- have slowed the dizzy growth of energy
suming countries, taken together, will consumption in industrial countries
run a deficit of $40-billion or so in trade from 5% annually in recent years to an
w i t h the oil exporters in the year estimated 2% to 3% this year. But un-
ahead, and they cannot diminish it by less economic growth comes to a com-
buying less from each other or selling plete standstill, oil imports are bound
each other more. Such protectionism to keep rising until alternate sources of
poses a real threat of a trade war. energy are developed.
Heavy borrowing. Even i f such a conflict Faced with this bleak prospect, Ad-
is averted, European bankers such as ministration officials are taking the of-
Dr. Andries Batenburg, president of ficial line that oil prices will have to
the Dutch Bankers Assn., are warning come down. More and more, this sounds
that the energy crisis may reappear in like wishful thinking.
the shape of an international financial There is, in fact, no cheap and easy
crisis. That is because most oil consum- solution. I f a new crisis is to be
ing countries can finance the increased avoided, it wifl require a combination
cost of energy imports only by borrow- of energy programs and financial mea-
ing heavily. The Italians, British, and sures, including heavy investments to
French have already done so by tap- develop new sources of e n e r g y ;
ping international financial markets stepped-up recycling of "petrodollars"
for billions of dollars in loans. Ulti- through intermediaries such as the IMF
mately, a big part of the funds for such that can make loans w i t h longer matu-
loans will have to come from the oil ex- rities than private banks; and encour-
porting countries themselves. agement of long-term investments by
Managing Director Johannes Witte- the oil producers in the U. S. and other
veen of the International Monetary consuming countries.
Fund announced this week that he has Even so, tougher energy conserva-
persuaded Saudi Arabia, Iran, and tion measures may be unavoidable. The
other nations to contribute $2.8-billion Italian government is talking about re-
to a special fund that will make me- viving restrictions on automobile use
dium-term loans to member nations to and cutting back on home heating next
help pay their oil bills., But much more fall. While curbs on energy use are po-
will be needed, and private capital litically unpopular, the alternative may
markets are the only other mechanism be financial and economic turmoil that
available for "recycling" large amounts would lower oil consumption by plung-
of the oil producers' surplus money. So ing the world into a recession.

166
BUSINESSWEEK A p r i l 6, 1974
Oil:
How the poor nations
hope to pay their Mils
The world's poor nations are scram-
bling frantically to find ways to pay
their sharply higher oil bills. And while
the outlook is grim, some of these ef-
forts promise to show results. This
week, Hassan Shash, Egypt's ambassa-
dor to Ghana, announced in Accra that
the Arab oil states have set aside more
than $800-million to help African econ-
omies. Last week, Libya's fiery leader,
Mu'ammer al Qadafi, announced a
three-tier price system for Libyan oil
that would favor less-developed and
Muslim nations. Meanwhile, a com-
mittee of the Organization of Petro-
leum Exporting Countries (OPEC) are
discussing ways to recycle Arab oil
money to the developing nations in the
form of cheap loans.
Individual governments also are ac-
tive. Prime Minister Zulfikar Ali
Bhutto of Pakistan, whose country will
benefit from Libyan price adjustments
two ways-as a less developed country
(LDC) and as a Muslim state-made
plans to visit Iran this week for talks
with the Shah.
Export earnings. Certainly the LDCs need
all the help they can get. The London- strong enough to pay for expensive oil. nations have pretty strong little econo-
based Overseas Development Institute Thus, the Philippines had no trouble mies. But all they produce are agricul-
estimates that their 1974 oil bill will raising a $500-million loan from a tural products. What do you do if you
soar to $12.2-biUion from last year's group of U. S. banks led by New York's can't get a higher price for bananas?"
$2.2-billion. Singapore will be nicked Manufacturers Hanover Trust Co. Easy term*. No country, of course, faces
for an extra $517-million, while Kenya, Roughly $150-million of the money will so gloomy an outlook as India. The oil-
Tanzania, and Uganda as a group must help Manila pay its oil bill. "Even poor nation has a large industrial base
fork over $178-million more. though the Philippines now pays three that needs energy, and it may have to
Tiny Jamaica will have to ante up an times the price for its oil," says Tristan spend as much as 60% of this year's an-
additional $123-million, roughly half E. Beplat, senior vice-president of ticipated export earnings of $1.4-billion
the island's export earnings. The bite Manufacturers Hanover, "it is selling to buy oil. So New Delhi is hustling to
explains Prime Minister Michael Man- copper at $1.50 a lb. instead of 40* or
stave off disaster. One deal calls for the
ley's widely publicized efforts to obtain 50*. I t will sell sugar at high prices, too.
purchase of Iranian oil for $3.50 per
higher prices for his country's bauxite And the same goes for lumber, copra,
bbl. in cash and the balance in deferred
exports. Manley would like to join that and nickel." Nations without resource
exports essential to industrial coun- payments of 2.5% interest or in barter
select group of lucky LDCs that either
tries are in more serious trouble. Says arrangements. Last week, India ar-
have their own existing or developing
William J. McDonough, senior vice- ranged a similar deal with I r a q - a $10-
oil reserves-chiefly Indonesia, Nigeria,
and Malaysia-or that have other valu- president of First National Bank of million loan to purchase 2.S-million
able resource exports whose prices are Chicago: "Some of the Latin American tons of Iraqi crude this year.
The Indian government also is hop-
ing to roll over some of its inter-
national debt at a meeting with cred-
itor nations this month. Yet it still may
have to draw on its nearly $l-billion in
reserves. Tapping reserves is a delicate
matter for an LDC. Commenting on
what may be the Catch-22 of inter-
national banking, M a n u f a c t u r e r s
Hanover's' Beplat notes that "if these
countries pay cash and get their re-
serves down, then everybody will be so
damned scared it will become hard for
them to borrow money."

T H E W A S H I N G T O N POST Sunday, May 19, 1974
Inadequate Plans in Payments Crisis

the fund's top brass have made to and other experts have been pointing currencies they are accumulating now.
By C. Gordon Teiher these countries to interest them in pro- And in this connection, it is as well
Financial Tima
out, it is an unsuitable vehicle for mas-
viding financial backing for its pro- sive medium-term and long-term opera- to recognize that the new-look Special
For all the efforts of Managing Di- posed special oil loans to oil-importing Drawing Bight, "denominated in a bas-
rectors. J. Witteveen to put a brave tions.
countries seem to have produced ket of currencies," which the fund
face on ^t, the drive the International plenty of expressions of good inten- j The fund's chief was certainly not
exaggerating, therefore, when hp con- plans to offer them in exchange for
Monetary Fund has emfoarked lipon to tions but remarkably little money. I n donations to its "oil facility" futnd in a
enftet tbe cooperation of the oil-produc- cluded a recent progress report on the
fact, the total promised for 1974 so far attempt to resolve the recycling prob- few months time, can have no more ap-
ing countries in resolving the mam- amounts to a bare $3 billion. lem with the assertion that "we cannot peal than a typical currency. For it,.
moth international payments crisis
The IMF has, of course, some money see with any clarity what arrange- too, will be losing value at the average
their price increases have sparked does of itis own it can throw into the battle. ments will eventually be made to pro- inflation rate. O*
not eetfea to be getting us very far. But the fact is that its total funds vide for an orderly investment of oij
amounteven valuing its gold stock at This points to a way in which the
And aa the fund itself can only per- revenues in the medium term." speedy remonetization of gold could do
form a-;, bridging, operation and - the the current free market priceto ma-
lt The fund is affecting to believe that great service for the frorld in a double
Euro-oufency market is ill-suited to the best hope lies in getting the oil-im- sense: For it seem^more than likely
do morel than fill the breach temporar- porting countries to open their mar- that the oil-producing countries would
ily, the further outlook remains grim News Analysis kets to long-term foreign investment. be prepared to think in terms of ac-
unless t&at is, Wo can quickly think up And to this end, it is proposing to cepting gold in settlement of a sizeable
some entirely newrecyclingideas. terially less than the oil-importing make a member's access 'to the pro- part of their vast surpluses for a while
According to îtteveen's latest ap- countries' 1974 deficit alone. So Wit- posed oil facility conditional upon it always provided this was part of an
praisal, the oil producers are going to teveen is doing no more than stating "taking measures to encourage capital international monetary stabilization
shcrW an overall surplus in the region the obvious when he says that his pro- inflows in the required amounts." But program which guaranteed that the
of # billion in 1074 or about $58 bil- jected oil facility can only be "a bridg- these things are far easier said than purchasing power of the metal they ab-
lion more than they did last year. The ing operation while longer-term solu- done. sorbed would itself be maintained.
corresponding deficit elsewhere will tions are worked out." What we really have to aim to do in Since such a plan could pave the
be distributed in a ratio of about two The Euro-market might appear to be the Interim is to provide the surplus way for all-out attack on the global in-
to one between the advanced countries a better bet, being seemingly able to countries with a way of investing their flation menace now threatening our
and the less-developed world. generate money like water to meet money that meets their present prefer- entire planet, it would be serving the
The f i l producers' are thus best each and every need, provided there is ence for keeping it in relatively liquid interests of the peoples of the oil-im-
plaeedto help sort out this monumen- a willingness to pay the interest rates form yet is not so exposed to rapid porting countries hb less than those of
t a l new payments mess. Yet the visits demanded. But, as Witteveen himself purchasing power erosion as the paper the exporters.

168
FROM THE WASHINGTON POST, MAY 2 5 , 1974
Arab Money Seen

Moving Into U.S.
Real Properties
Oil rich Arab nations may Providing $200 million
soon become stiff competi- .n capital for the develop-
tors with Japanese inves- ment of a mammoth apart-;
tors in the acquisition of ment project in St. Louis.
real estate investment prop-
Providing $50 million in
erties in the United States, investment capital by Ku-
according to a leading real wait dnd Lebanese sources
estate research firm. to a Louisville investment
, SfidcQe East oil nations company for the purchase
this year alone will accu- of U. S. real estate.
mulate $80 billion in invest-
ment capital, a study by Financing oflhe devel-
New Orleans-based Robert opment of an islahd xeaoEt
L. Siegel firm reveals. off the coast of South Caro-
lina by Kuwait money.
"At least $2 billion will
flow into the United States, Purchase of raw land in
most of it for real estate," California by Saudi Ara-
said SiegeL bian investors for future de-
velopment <
The firm's study found
that Arab investors are Siegel also 'reported that
seeking the same types of Middle East oil money has
Javestments that have at- flowed into Atlanta for the
tracted Japanese funds for financing of new retail and
more than two years: in- hotel facilities in the down-
come producing residential town area.
housing and retail facilities, "The American motorist
resort proiperties, hotels and was the first to feel the
other transient facilities pinch when the Arab na-
and land developments. tions raised the prices of
So far, the bulk of Arab crude oil. Now, the funds
investments have been con- are coming back into the
centrated mainly in the United States and the real
East, Midwest and South, estate industry is the first
while most Japanese funds to feel the effect," he said.
have been invested in Ha- While Siegel sees an
waii, California and other Increasing flow of Arab in-
parts of the West. u vestment funds into the
One factor the fear of United States, he 'believes
nationalization has made that few, if any, of these
the Arab investor more p r o j e c t s actually will be
cautious than his Japanese developed or managed by
counterpart in placing his the Middle East nations.
fundaJaMthe United States, "These off-shore investors
the sinfey reported. need the expertise of the
American developer, who
"Some Arab nations have can put the entire package
nationalized their oil indus- together for toe group pro-
tries so they tend to be viding the money," hejsaid.
mewhate fearful that the
S me tactic could be used
against them when they in-
vest funds in another na-
tion," Siegel said.
Some examples of Middle
East real estate investments
in the United States, the
survey reveals, include:
Financing of a major
office building on New
York's Fifth Avenue by the
Iranian government.

169
T H E WASHINGTON POST May 14, 1974
Impact of Massive Oil Price

Seen Hitting Gradually
Jg** By Hobart Rowen be delayediorever, Solomon Solomon declared, "as indi-
tiuWuhlnctoB Fort Staff Writer stressed, and the deficits vidual ell-importing coun-
M h e real burden on the , must befinancedpreferably tries' go into debt to finance
^JNSonsuming world caused by co-ordinated moves in
fer^massive boosts in oil which countries try to di- their unavoidable trade defi-
S e e s will be gradual rather vide <tp the debt burden cits."
A immediate because of equitably, and not try to He pointed out that the
k inability of the oil-ex- shift it to each other. consuming cquntries as a
g countries to quickly In finding ways of financ- group will be able to repay
e their imports, ing the debtwhich could be their debts only when the
i, according to Robert in the neighborhood of exporters are in a pos-
lemon, deputy chairman biljieoS&ldmon said "it may tiOft to buy mop goods from
~ IMF's Committee of become necessary to alter a world markets.
y Deputies and senior number of conventional "Thus, we come back to
r to the Federal Be- ways of thinking." the question of the real bur-
i Board* "the real im- For example, he said it den of the oil price in-
gsct on the standard of liv
Ipg of the rest of the world may be necessary to set crease," Solomon said. "Just
gill be mitigated." aside usual fears about fi- as; the real burden is de-
nancial institutions that bor- lved by the inability of
He. made these observa- row "short" and lend in the many oil exporters to accel-
tions in a speech prepared long term. erate their imports, their
r delivery to a conference
New York yesterday. A
dbpy of the text was made
ability to collect their debts
- He pointed out that funds to accept repayment-will
placed by the oil exporters , be delayed until they are
in what are. usually termed able to generate an excess
available here.
short-term assets (as in of imports over exports." *
Solomon, who will leave Euro-currency) are likely to
the C-20 to resume full-time
duties at the Fed after mid- be held for a long time,
year, was actually in Paris while the exporting nations
for the deputies' meeting develop the capacity to ab-
prior to the full committee sorb large imports.
session here June 1243. His At the same time, what-
speech was read for him by ever form the borrowing by
Edwin M. Trtiman of the oil consumers takes, "tile
Fed. fact is that they are likely to
Solomon said that the oil- be debtors for a long
exporting countries, even time...
those with more diversified v "All this means that con-
economies, will develop ventional fears about finan-
large surpluses because it cial Institutions borrowing
will take time to "increase short and lending long
their imports in line with ought to be looked at ana
their increased export earn- tempered in the light of the
ings." likely patterns over time of
Thus, the consuming na- the balance of 'payments
tions for the time being will positions of oil consumers
be paying for their higher- and oil exporters," Solomon
priced oil with debt, rather said.
than transferring goods and Conventional attitudes to-
services. ward creditworthiness may
But the rfeal effect can not have to be revised, as well,

170
T H E W A L L S T R E E T JOURNAL January 2 2 , 1974
REVIEW and OUTLOOK

The Robin Hoods of OPEC
Fundamental to the oil problem is to subscribe to romantic notions about
who will lose and who will gain from where the OPEC winnings will be rein-
the seemingly imminent sudden trans- vested. I t is likely that most of them
fer of an added $50 billion a year from will be reinvested right back in the in-
oil consumers to oil producers. I t can dustrial world, where there are estab-
be said with some assurance that if the lished capital markets, experienced
OPEC price boosts stick, few people in bankers, political stability and any
the world will not feel aome effect. number of viable projects. For exam-
There can be less assurance in trying ple, a Kuwaiti investment company has
to assess specific effects. bought a 20% interest in an Atlanta
But economics being what they are, firm that plans' to finance a resort in
history shows that the poor are usually South Carolina.
the first affected by adversity. I t is a None of this is to say that the indus-
reasonable bet that it will be already trial world won't suffer as well from
underprivileged places like Recife, the big oil payoff. Economist Walter
Bombay and Mombasa, rather than . J. Levy, one of the soundest oil experts
Paris or Atlanta, that will feel the around, fears that the sudden move-
worst effects of the OPEC price grab. ment of that much money out of the
For that reason, the leaders of nations foreign exchange coffers of the indus-
like Brazil, India and Kenya might do trial nations could precipitate a world-
well to re-examine the notion that wide recession. His view may be
there is any real community of interest overly pessimistic; if money managers
among the so-called "Third World" na- in the industrial lands don't become
tions, of which both they and the OPEC too panicky and over-inflate their cur-
countries are a part. Their best inter- rencies to compensate for the loss,
ests may well lie in joining with the in- there might even be some beneficial
dustrial nations to persuade oil nations effects from damping down industrial
of the unwisdom of their cartel-type en- world consumption and applying some
deavor. of the OPEC bank deposits to capital
The OPEC nations, have, of course, projects. But the large foreign ex-
not been unmindful of the opinion of change dislocation could indeed be dis-
the other Third World nations. At a ruptive to industrial economies.
meeting of the so-called "Committee of Conversely, there could be some
24" Third World nations, held in Rome benefits to the non-oil producing Third
last week concurrently with a meeting World. Some of oil capital may well
of the International Monetary Fund go to Niger or Zaire in search of new
"Committee of 20" industrial coun-, oil or other mineral resources. The re-
tries, a delegate from India voiced his sources they already have may prove
fears. But an oil nation representative more valuable than money in the bank
on the Committee of 24 is said to have in an inflationary world.
offered assurances that oil nations But by and large, the effects on
would divide their new riches with Zaire, Niger and similar places are
other Third World countries through likely to be bad. With foreign exchange
special aid and lending programs. The reserves crimped, there will be less
Committee of 20, in the rather vaguely money for foreign aid and develop-
worded communique issued after its ment in the Third World. The U.S.,
meeting, also recognized the special having been burned by the Third World
problems of the oil-poor of the Third oil producers, has become more in-
World and proposed that developed na- clined to develop its domestic re-
tions, the World Bank and the I M F all sources rather than seek projects
seek ways to help out. abroad. Outside help for nation build-
As to the Committee of 24 promises, ing might become hard to find.
indeed it is a noble thought that the We suspect that a good many Third
OPEC nations will play Robin Hood. World countries are having difficulty
But historians have ungenerously sug- deciding whose side they shoufd be on.
gested that for even the real Robin We can offer a suggestion: Cartels are
Hood, helping the poor was rather sec- seldom good for anyone, even the na-
ondary to the main object, which was tions who build them, in the long run.
robbing the rich. Taking a stand for law and order is
I n other words, we would suggest much more realistic than' expecting a
that the Third World not be too quick handout from Robin Hood.

171
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
DEPARTMENT OF ECONOMICS CAMBRIDGE, MASSACHUSETTS 02139

*
E52-350 May 14, 1974
Honorable Henry P. Gonzalez

Subcommittee on I n t e r n a t i o n a l Finance
Dear R e p r e s e n t a t i v e Gonzalez:
Thank you f o r y o u r l e t t e r o f May 9 . Enclosed are (1) a l e t t e r t o

Honorable Henry S. Reuss, and (2) a t a l k g i v e n i n Washington l a s t week,
(3) an a r t i c l e from F o r e i g n P o l i c y , and (4) a f o r t h c o m i n g paper from the
American Economic Review. These summarize my suggestions about how t o
b e g i n undermining or a t l e a s t s t o p p i n g the i n t e r n a t i o n a l o i l monopoly.
I do n o t see any o t h e r method by which we can s t a r t t o b r i n g a l i t t l e

c o m p e t i t i o n i n t o :the w o r l d o i l m a r k e t . But I t h i n k t h e more I m p o r t a n t
t a s k i s t o convince more people of your o p i n i o n , which I s h a r e , t h a t w h a t ' s
bad f o r the c a r t e l i s good f o r the U.S.A.
I t seems q u i t e c l e a r t o me t h a t the a d m i n i s t r a t i o n i s n o t o n l y
r e c o n c i l e d t o t h e c a r t e l and the intended h i g h p r i c e s b u t has a c t u a l l y
helped them from the s t a r t and i s a r g u i n g i n f a v o r o f g i v i n g them what
they w a n t , so long as they " r e c y c l e " enough d o l l a r s back t o t h e U n i t e d
S t a t e s , and p e r m i t us t o pay f o r o i l by handing over our c a p i t a l e q u i p -
ment. I have even seen ( i n t o d a y ' s New York Times (May 13)) a h i g h
a d m i n i s t r a t i o n o f f i c i a l quoted as b e l i e v i n g t h a t s e c u r i t y o f o i l supply
i s b e s t achieved by b e i n g dependent on Saudi A r a b i a , and s h i p p i n g them
arms and o t h e r goods.
I t h i n k t h e panic about shortages w i l l g r a d u a l l y s u b s i d e , and more

of your colleagues w i l l share your o p i n i o n t h a t t h e problem i s one o f a
w o r l d monopoly which can be thwarted and broken up i n t i m e . The o n l y
i r r e p a r a b l e damage would be done by t h e k i n d of a long term commodity
agreement a t which Mr. K i s s i n g e r seems vaguely t o h i n t , a t a " j u s t p r i c e " .
I f e a r the loss of d i s c r e t i o n on t h i s c o u n t r y ' s p a r t . So long as we
remain uncommitted I t h i n k common sense w i l l p r e v a i l b e f o r e t o o much
time has passed.
Yours s i n c e r e l y
M. A . Adelman
Professor

172
derstandably reluctant to make long-

term loans out of money that may be
The Petrocurrency Peril swiftly snatched away. Indeed, the Arab

strategy carries its own danger: that bil-
lions in Arab cash switching suddenly
The oil-supply emergency ended form of purchases, loans and invest- out of one currency into another could
this spring with the lifting of the Arab ments. It is fairly easy in the case of set off an international monetary crisis.
petroleum embargo, but a different kind four oil producers, Algeria, Indonesia, Several ways out of the bind are un-
of world oil crisis is approaching with Iran and Venezuela, which have large der consideration. H. Johannes Wittev-
onrushing speed. It is a potential mon- populations and ambitious industrializa- een, managing director of the Interna-
ey crisis caused by the quadrupling of tion plans. They can be counted on to tional Monetary Fund, is setting up an
oil prices orchestrated last fall and win- spend much of their wealth buying goods "oil facility" that would accept deposits
ter by the Organization of Petroleum and services from the U.S., Europe and from oil producers and lend the money
Exporting Countries. The threat that Japan. But the richest oil producers, Sau- at bargain rates of about 7% interest to
these increases pose to world financial di Arabia, Kuwait, the United Arab nations that have trouble paying for pe-
mechanisms absorbed much of the at- Emirates and Libya, have small popu- troleum. Unfortunately, he has collected
tention of bankers and government of-
ficials from the U.S., Europe and Japan pledges for only $3 billion in deposits, an
who gathered in Williamsburg, Va., last amount far too small to be of much help.
week, but their deliberations produced Some European countries want to
no clear solution. quadruple the $42.22-an-ounce "offi-
The dimensions of the threat are cial" price of the gold stored in their cen-
simply stated. This year the twelve OPEC tral banks, putting it about in line with
countries stand to run up a trade sur- the free-market price of gold. That
plus of $65 billion, v. a mere $7 billion would in effect give Italy more than $10
last year, and the money will come out billion, and France almost $ 13 billion, of
of the financial hide of the rest of the new reserves to cover oil deficits. The
world. Underdeveloped countries that U S. opposes the idea, fearing that it
do not happen to be oil producers, such might help restore gold to an unwarrant-
as India, Kenya and Bangladesh, could ed special position in world monetary af-
run up a combined trade deficit of $20 fairs. Some highly technical compromis-
billion or moreif they can beg or bor- es have been suggested that would hold
row the money to pay for oil. The in- the official price in theory while allow-
dustrialized nations of the non-Commu- ing countries in effect to pay for oil with
nist world, which enjoyed a combined revalued golda sensible idea.
trade surplus of $12 billion last year, The best solution of all might be for
likely will swing this year to a deficit of the Arabs to launch a massive program
around $40 billion. of loans and aid to poor countries that
Costly Debts. Financing such enor- have no oil. The poor countries could,
mous deficits puts a heavy strain on the
(hen build up their economies with
Western banking system. Already,
frany purchases of industrial goods and
many European nations are having to
msrh'mery from the U.S., Europe and
borrow at interest rates of 10% or so to
Japan. But the Arabs so far have shown
pay for their oil. Though most have good
iir-ue interest in helping the Third
credit, Italy recently had trouble rais-
World. Perhaps that attitude will
ing $1.2 billion; it wound up borrowing
change, and the reluctance to make
from no fewer than 110 banks. Franz As-
long-term investments in the industri-
chinger, economic adviser of the Swiss
alized world will diminish as the Arabs
Bank Corp., warns that over the next
become more sophisticated in handling
eight years "the accumulated debt [of lations and preindustrial economies;
immense wealth. The question is wheth-
the industrialized oil-burning nations] they can spend on imports only a mi-
er a change in attitudes will come quick-
would be $400 billion with annual in- nor part of the $100 billion oil revenues
ly enough to avoid bankruptcy for some
terest payments of $30 billion." that they will collect this year.
of the Arabs" best customers.
European bankers worry that some So for, the Arabs have been reluc-
day one government, most likely Italy's, tant to put their excess cash into long-
will default on paying interest oh its term investments, where it would help
loans, putting several banks under and stabilize world finance. Western stocks
setting off a Continent-wide banking and bonds, they believe, do not pay
panic. Even if that is avoided, the most enough to be a good hedge against sky-
strapped nations will be sorely tempted rocketing inflation, and real estate hold-
to cut their imports of non-petroleum ings could be seized by Western gov-
goods so that they can save cash to pay ernments. Instead, the Arabs have been
for the oil, a strategy that could cripple putting most of their money into the
world trade. Italy in April did in fact shortest-term investments possible: U.S.
clamp restrictions on many non-oil im- Treasury bills, New York and London
ports, to the anger of its eight partners bank certificates of deposit, and Euro-
in the European Common Market, who dollar bank accountsmany of them
fortunately did not follow suit. "call" accounts from which the money
The solution is to somehow "recy- may be withdrawn instantly without ad-
cle" the oil moneyor, more bluntly, vance notice. That is a form of recy-
get it back from the oil producers in the cling that does little good; banks are un-
TIME, JUNE 17,1974

173
WASHINGTON STAR-NEWS
Washington, D. C., Sunday, March 10,1974
Super-Rich Arab Oil Sheiks

Begin Bringing $$$ Back
By John Hotasha
Star-News Stall Writer
American businessmen keep hav-

ing this bad dream. I t involves a
dark-eyed man who steps unan-
nounced one night from an airplane
at New York's Kennedy Airport. He
carried a briefcase bulging with
checks bearing the imprints of com-
panies like Exxon and Texaco.
Quietly he sets off on a-series of
clandestine meetings with manag-
ers of major pension and mutual
funds. A few days and a few billion
dollars later, the United States
learns that the ruler of an obscure
Arab principality has taken over
General Motors. Or U.S. Steel. Or
DuPont. Or all three.
Although it is the feeling of most
Arab watchers that the newly su-
per-rich sheiks don't presently plan
to seize control of important U.S. '
companies, it is clear they will have
the financial capacity.
Right now, the Arab oil producers
are estimated to have $50 billion in
liquid capital. All the outstanding
common shares of G M could be pur- only half its 1972 income of $3 bil-
chased for about $15 billion at cur- lion, even with welfare state pro-
rent prices. grams such as interest-free home
And their wealth continues to loans. This year it may have as
mount. The oil producers will take much as $10 billion in surplus for-
in an estimated $40 billion to $60 bil-
lion this year alone. By 1980, some The situation is even more acute
experts project they will have taken in Kuwait which has one-fifth as big
> in as much as $750 billion. a population as Saudi Arabia (less
than 1 million) and an estimated
T H E Q U E S T I O N is, what a r e income of $9 billion to $10 billion.
they going to do with that ocean of The Arab leaders' problem is how
money? to preserve that wealth against the
A vast amount, of corirse, will be day the oil runs outnot an easy
spent to develop industries in the task in an uncertain world. H i e les-
producing countries and to improve son of Spain, which squandered its
the quality of life of Arabs in gener- New World gold in a few genera- .
al. But some of the biggest produc- tions pf opulence and then sunk
ing states are sparsely populated. back into poverty, is not overlooked.
Saudi Arabia Was able to absorb See ARABS, A-12
3 7 - 2 1 1 O - 7 4 - 12

174
u.2>. tanks mm tear retalia-

tion against their overseas
The overseas brandies of
U.S. banks, particularly in
FINANCIAL sophistic* 1 WILLIAMSON estimated London and Beirut, profita-
. tion varies greatly from that the Kuwaitis, using bly handle largfe amounts of
country to country, al- , both public and private Arab deposits. Ova-half the
though all have progressed I funds, have already invest- 70 banks operating in Beirut
beyond the thinking of Abu ed about $SOO million direct- are reported to be partially-
Dhabi's, Sheik Shakbut who ly in. the UnfcedStates. An- foreign owned.
was overthrown in 1966 for other $3.5 billion 1*8 gone A Commerce Department
keeping the national treas- into portfolio investments official, recently returned
ury in cash under htebed. stocks, bonds, Treasury from a Mideast investment
Nevertheless, according to. securities, etc. he esti- conference, said the Arab
the British magazine mates. participants scoffed at the
Economist: "The typical He said the Kuwaitis idea of massive takeovers
Arab investment strategy is j aren't interested in take- of U.S. companies. "Why
still to put funds OQ bank ' overs. "We're looking for *b09l**Make oveMSM,"
deposit while waiting for passive investments that he quoted one as -saying,
the ^brainwave to come/' will just leave us in a posi- "What would we oo with
One brainwave that has tion to participate in te it?" He slid the Arabs were
struck some Arabs is U.S. discussions if something aware they lack the
real estate. The experienced oes sour. We're not the managerial talent to run
and fabulously wealthy
KuwaitjThaifls turned up in
J apanese,"
said.
Williamson sucha massive enterprise.
In Saudi Arabia, for
-several p r o j e c f r r ^ - * ^ ^ Massive Japanese pur- example, there are less
The goverument-pnrate-- chases of propety and re- than 5,000 college gradu-
Kuwait Investment Qo> re- sorts in Hawaii and West ates..
cently paid $J7.3 million for Coast states in the last few
Kiawah I s l & d off Charles- years have prompted calls ONE EXCEPTION to the
ton,. S.C. It plans to spend , for laws restricting foreign no-takeover policy thatrwas
$100 million over the next investment in the United discussed; the official said,
decade developing it as a States. Ironically, the mas- was "downstream petro-
resort. The same company sive oil bills due the Arabs chemical operations." This
put up $10 million for a half has taken the steam out of includes everything from oil
interest in the new Atlanta the Japanese buying binge. refineries to neighborhood
Hilton. Other reported Arab real gas stations and plants us-
A peal estate company in estate investments include ing oil/based fee-stocks.
Louisville, Ky., says it is an office building on Fifth . An indication of what the
dickering through inter- Avenue inf New York pur- future might hold is a deal
mediaries for SSO mfllioh in chased by the Shah of Iran made last year by Ashland
Kuwaiti .money to be invest- and $1 million in California Oil, Inc. In return fora half
ed in properties such as of-; land bought by Adnan Kha- interest in a Buffalo, N.Y.
fice buildings, shopping shoggi, a flamboyant Saudi refinery and a chain of
centers, and apartments. service stations, the Shah of
Iran agreed to supply 60,000
Arabian thought to be close
B. M. HOLLINGS- barrels of oil a day to the
to the ruling family.
WORTH, of Enck, Holling- refinery. .
Last year Khashoggi
sworth & Reveau said there bought Security National As their experience with
were indications the deal' Bank of Walnut Creek, refining and marketing in-
might eventually swell to Calif, from Democratic creases, it is not unreasona-
$500 million. He said the Rep. Fortney H. Stark. At . ble to expect that the oil
investors don't care about that time, Stark expressed producers will seek to con-
income now. They want "se- surprise that Khashoggi trol and profit from their
cure positions; they aren't was willing to pay $29 a product from the well to the
share for the bank's stock gas pump.
Richard WlllUtrason, when die open market price It appears likely that
represents the Kuwait Lb- was in the $10-$12 range.. Arab purchases of real
vestment Go. in tiie United property in the United
States describes its invest- T H E R E HAVE been , States is likely to continue.
ment program as "extreme- some reports that Arab For one thing, the dollars
ly broad." He adds: interests favor buying into we pay for oil have got to
"They're not especially American banks or organiz- come home eventually. And.
concerned aoout casn now ing their own to help control buying something substan-
now; they're looking for a their investments here. tial is a good way to pre-
solid investment with up- Foreign-owned banks with serve the wealth represent-
side potential" Nor are head offices overseas have ed by those dollars.
their appetites confined to an advantage over domestic Currencies are fragile.
real estate. "There's very banks since they can Inflation erodes their value.
little we're not interested in branch nationwide. U.S. If the United States has 10
as long as it is attractive banks are not allowed to percent inflation this year,
and the people involved are branch across state lines,. an investor in a 9 percent-
ethical." bond actually loses 1 per-
Rep. Wright Patman, D- cent.
Money, he makes it plain, Texas, the chairman of the
is not a problem. He doesn't House Banking Committee,
have a budget. "We receive DEVALUATION is a con-
has introduced a bill to stant threat. Some cynics
the money as it is required. regulate and restrict for-
If we find a good invest- have suggested that we pay
eign branch banking in this the Arabs anything they ask
ment, the money is there." countrya move which has for oil and than just devalue
sent tremors through major the dollar drastically.
It is improbable the U.S

175
government would ever else into your area. Its' Initial investment counts
adopt such a plan. Never- happened here already." as an inflow, but as profits
theless. Saudi Arabia, Lybia Investment in the United are taken back by the inves-
and Kuwait were reported States isn't confined to the tor, it results in a cadi out-
hurt badly try the two re- Arabs or Japanese. In these flow from the United States.
cent 10 percent dollar unsettled economic times, "Over the long term, for-
devaluations. the U.S has become a havea eign direct investment will
" K u w a i t . . . lost a half a for nervous money. Just have a negative effect on
billion dollars'as a conse- last Week, a New York the balance of payments
quence of its extraordinary banker reported that a West and result in a dollar out-
conservatism" in sticking, German group was pre- flow," a staff report for the
with dollar securities' pared to pour up to $100 mil- House banking subcommit-
through the devaluations, lion into U.S. real estate. tee on international finance
Harvard Prof. Howard They are particularly inter- concluded last year.
Stauffer told a congression- ested' in shopping centers, A NUMBER of bills have
al panel last November. he said . v been introduced to control
Nationalization of proper- Direct foreign investment foreign investment in the
ty is always a risk, too, but in the United Statesa United States including one
the oil producers are count- category which does not in- by Rep. John H. Dent, D-
ing on their control of crude clude stocks and bonds- Pa., which would bar non-
production to prevent any has soared from less than citizens from buying more
retaliation for the seizure of $500 million in 1971 to an than 5 percent of the voting
western-owned facilities in estimated $2 ft billion last stock of any publicly-traded
their countries. year. s corporation.
Moreover, it is their prac- The influx, which is ex- A series ot Key Hearings
tice to maintain a low pro- pected to accelerate, has wi the entire issue of for-
file. Investments in stocks prompted a growing debate eign investment in the
, and bonds, Wall Streetecs on its effect on the U.S. United States are planned
: for April and May by sub-
say, are made via the economy.
untra-secret Swiss through committees headed by
select New York banks. ON ONE SIDE are U.S. Reps. Henry Reuss, D-
business interests which Wisc., Henry B. Gonzales,
PARTICIPANTS in the are fearful about the mud) D-Texas and Rep. John E.
few real estate deals which larger U.S. investment Moss, D-Calif., > himself
have' surfaced indicate overseas ($94 billion com- sponsor erf proposed restric-
there may be many better pared to about $16.5 billion tive legislation.
camouflaged investments owned by foreigners here.)
underway. On the other is the con-
"If anyone else is talking cern of some elected offi-
with the Arabs, they're cials that foreign interests
doing it in secret," real es- could take over key sectors
tate operative Hollings- of the economy and that
worth said. " I t makes ultimately their invest-
sense. Publicity about Arab ments could worsen the bal-
money brings everybody ance of payments.

176
THE. N&W V^ Twtes
AID TO POOR LANDS

URGED BYEXPERTS
$3-Biltior> From Industrial
and Oil Nations Asked
By EDWIN L. DALE Jr. The report refers to the in-

SpccUl to The New York TlmM bOStrial countries of Europe,
WASHINGTON, June 9 A North America and Japan as
Report prepared by three eco- the "trilateral world" and says:
nomic experts proposes that the "W must not allow the plight
industrial nations of Europe, of the non-oil-producing devel-
North America and Japan join oping countries to worsen while
the oil-producing nations in the trilateral world and the
contributing $3-billion to aid [oil-producing] countries argue
kome 30 poor countries that about who is to blame for the
present crisis, nor will any-
have been hard hit by higher thing be gained by controver-
oil and food prices. sies about what is a 'fair* price
Under the proposal, the for oil."
emergency relief would be pro-
vided in 1974 and 1975, with Urging an "extraordinary act
the oil-producing nations giv- of cooperation" that would not
)ng half the aid and the indus- strain the finances of either the
trial nations the other half. The trilateral world or the oil coun-
kid could be in money or food tries, the report says'.
or, from the oil countries, in "Time is now of the essence.
the form<of easy credit terms The full impact of the plight
tor oil sales. of the developing countries has
J The proposal is the highlight not registered so far because
of a 23-page report prepared financial settlements for oil are
for the Trilateral Commission, made quarterly and bills for
I n organization established last oil shipped at the new high
5ear of leading citizens and prices are only just coming
Some government officeholders due. .
from Europe, North America 'Crunch' This Summer
fmd Japan. The report, which i - "The 'crunch' will come this
Vas made available to /pie summer when accounts for the
W York Times, was wntten second quarter of the year have
&y Richard N. Gardner of the tp be settled," the report says.
United States, Saburo Olota of I The report suggests that the
Japan and B. J. Udink of the industrial countries divide their
Netherlands. All have held gov- $1.5-billion contribution accord-
ernment positions and have ing to the formula of their
otherwise been involved m in- Shares in the World Bank's In-
ternational economic affairs. ternational Development Associ-
'Fourth World' ation. This would mean one-
The report says: "The plight fftird for the United States, or
of the 'fourth world' countries i500-million. No specific sug-
cannot wait for a general re- gestion was made as to how
structuring of the internation- the oil-producing countries
Should share their $1.5-billion
al economic ordera task that ontribution.
may take years. Without emer-
gency measures in the next few ; The 50-50 sharing of respon-
months, the shortage of food, sibility "should be accepted as
energy and other essential sup- fin ad hoc measure appropriate
plies will bring mass starva- only to the present emergency
tion, unemployment and in- and without prejudice to bur-
creased hardship for millions clen-sharing arrangements for
already at the economic mar- {he longer term, the report-says.
gin."

177
lUashinaton StarHems
SATURDAY, MAY 11,1974
Plan for Petroleum

A sense of utmost urgency is reflect- It proposes a collective effort by the insuring against devaluation through
ed in a new British proposal for get- major oil consuming states in dealing inflation.
ting some kind of control over oil with the producers. The six major con- It is a bold and imaginative scheme
pHces and putting some order into the sumers (the United States, Britain, and it just might work. The objections,
anarchic conditions that prevail today France, West Germany, Italy and of course, are largely political, the
in the world oil and money markets. Japan) would bargain collectively suspicion of the producers that the
The problem, as the British govern- with the major producers for most of West is ganging up on them in forming
ment sees it, must be dealt with im- the world's oil production. They would a consumers' cartel the tendency of
mediately if the world is to avoid a then resell the oil to consuming coun- some countries, notably France, to go
possible collapse of the West's finan- tries at cost, plus a small surcharge. it alone in such matters the fact
cial system before the end of the year The main idea is not to force down that the scheme is certain to require
on the same proportions as that which the price of crude by hard collective an enormous amount of American dol-
followed the stock market crash in bargaining, but rather to put an end to lars, a preferred currency.
1928. Especially among the developing unrestrained competition among con- Still, if .the situation is anything like
poorer countries such as India, it is sumers for oil and credits that as critical as it appears to be, with all
believed that bankruptcy is a real promises to force prices even higher. that is implied in terms of economic
possibility in a matter of weeks. And The surcharge on the huge cash turn- and social dislocation among the oil
the industrialized nations would feel over would be used to offset the price consuming nations, there is no time to
the crunch soon thereafter increases by loans or outright gifts to be lost. Certainly the British proposal
The British plan still not formally the poorer countries. The producers, deserves the most prompt, careful and
approved by the Wilson government furthermore, would be encouraged to sympathetic consideration by adminis-
is being outlined to administration take in cash only what they can useful- tration experts.
officials here by Harold Lever, a ly use to buy commodities and in-
minister without portfolio and finan- crease their reserves perhaps about
cial adviser in fhe Labor cabinet. It is $15 billion. The balance about $50
being billed as the first European re- ' billion would be deposited with the
sponse to Secretary of State Henry six-nation agency to be loaned out as
Kissinger's plea for cooperation be- needed to cover deficits among con-
tween oil producers and consumers in suming nations, rich and poor. All
meeting the crisis precipitated by the payments and deposits would be tied
skyrocketing price of crude. to the export commodities index,

178
Expert Urges ILS. to Adopt

New Oil Import Quota Setup
By Daniel Q. Haney you can't control the people It vastly enriches the Arab
Ausclated PrM * who are going to cheat, , nations and makes it easier,
CAMBRIDGE, Mass., April ' "If it works well ip the for them to impose future
7The United States should Unitecl States, other coun- embargoes, he says. It alio
start a new oil import quota tries wiU try it, and that will
makes a scramble for j&l
system to. make it easy for be the end of the cartel.
members of the internation- This would bring oil prices that creates hard feelings
al Oil monopoly to cheat on baek down. How far, I dont - between the United States
ea<^h other, says a world oil know, but there's lots of and its allies in Europe and
expert. room to go down." Asia. (
Such a policy could lead The price of oil produced Adelman maintains that-
to the downfall of the Or- by the Cartel now . hovers U.S. foreign policy os par-
ganization of Petroleum Ex- around $8 a barrel, and tially to blame for the cur-
porting Countries, the car- OPEC says this price will be rent Strength of OPEC. He
tel that has quadrupled the maintained until June when says that because of fears in
price of foreign oil in the it will meet again to con-' thcf 1850s that the Soviet Un-
past year, says Maurice A. sider adjustments. .
Adelman, an economist at ion would gain too much in-
Massachusetts Institute of There is no wbrldwide oil fluence with Arab oil-produc-
Technology. shortage, pqly a market arti- ing states, the United States
M. A. ADELMAN. ficially controlled by the embarked on a policy of
But before this can hap- , < . * way to cheat cartel, Adeftnan says. Arab appeasement. One of
pen, American foreign pol- Iran, Iraq, Saudi Arabia, the results of this policy was
icy makers must acknowl- Kuwait and Abu Dhabi the development of a system
edge tjiat the oil cartel isr a controversial, but #}dely "have a huge excess of po- whereby American oil com-
bad for American interests, respected authority on the tential production capacity
says Adelman, whose views panies can deduct , from
international oil market. which can be made into ac- their U.S. incom tax royal-
on OPEC often run oppo- M
site to fellow oil economists My suggestion is that we tual capacity in a relatively ties paid on oil from OPEC
and N i x o n administration put this limit in the form of short time. c o u n t r i e s . OPEC w a s
policy. a quota and that we put "Always the problem has founded in 19(J0 with the en-
parts of the quota up for been how do you keep up couragement of the U.S.
OPEC is made up of 11 of sale by direct, sealed com- the price by containing this
the 12 biggest oil exporting government, Adelman says.
petitive bids," he says. "The potential and not letting it
countries in the world and become actual?" Adelman's view that
controls m o r e t h a n two- higher the price, the more
profitable it is to export oil . OPEC should be actively op-
thirds of the world's known And herein lie the seeds posed by the United States
oil'reserves. The most im- into the United States. of disagreement that could a n d o t h e r oil-consuming
portant members a r e t h e "Anyone w i t h potential lead to the cartel's downfall, countries has been heavily
Persian Gulf countries which oil knows lie can find a Adelman says. criticized by some of his fel-
inblude Saudi Arabia, the home for it in the U.S.A. All "There are some countries low economists. The Nixon
world's largest producer of you require of a bidder is Iran is the most important administration itself seems
oil after the United Statfes. that he plunk down some with fairly sizable popula- disinclined to take an adver-
Also included In the mem- good, hard cash" for oil-sell- tions, Water and natural re- sary posture agrtist OPEC.
bership are all the major ing licenses: sources who can put -tb very The U.S. oU import quota
Arab oil-producing s t a t e s This system would magni- profitable use all of the rev- law, in effect since the Eis-
which only recently lifted fy the tensions that already enues they can get, building enhower administration, was
an embargo on oil shipments exist Among OPEC coun- the infrastructure of a civi- lifted last year Ijy the Presi-
to the United States. Can- tries( he says. Some of them lized society," he says. "Foi
ada is not a member of dent as oil shortages began
want to sell as much oil as every dollar they .invest, to appear. There have been
OPEC. possible now so that they they can probably get a re- no indications that the quo-
The OPEC countries de- can invest the profits, while turn of 20 per cent a year if tas will be reinstated in the
cide among themselves how others want to hang onto it's done sensibly. near future.
much oil they will sell and their oil to keep prices up. "Other countries, such as The Nixon administration
how much they will charge This way, any government Abu Dhabi, have to invest in has called for consuming-
for it. Their goal is to sell as that wants to do some chisel- the international financial country unity in the face of
much oil as possible without ing has a perfect vehicle for market. They cannot hope OPEC price increases, but
creating a s u rp 1 u s that it," Adelman says. No coun- to get any such high rate of with little success. The
would drive down prices, try would know how much return. Between those coun- American government as
Adelman says. its colleagues were selling tries who want to make repeatedly warned its Euro-
"There is no question that to the Americans, he says. money as fast as possible pean allies not to make
oil imports into the United "This mould shake the car- and those who don't, there country-to-country deals for
States are going to be limit- tel," he says. "It means you is a big difference of opin- oil. But several European
ed" as the nation moves to- cannot make any kind of ion." countries are in the midst of
ward its goal of energy in- agreement to keep the price The cartel is bad for negotiating separate deals
dependence, says Adelman, at a certain level, because American interests, because for oil with OPEC countries.

179
THE WALL STREET JOURNAL,

Wdnedmy, My 8, 1974
Britain Leaning to Oil Purchases, Sales
By IMF to Attack World Monetary Woes
B y RICHARD F . JANSSEN
Staff Reporter of THE WALL STREET JOURNAL Cooperation by the U.S. would be crucial
Fear that the world's banking system to preventing or arresting such a process,
will break down by year-end is impelling British strategists say, if the idea spreads
British government officials to broach a that dollars aren't safe to hold outside the
drastic new approach to the oil money prob- U.S. Theyvcould imagine a drain from the
7 London-centered market in Eurodollars (dol-
lem.
The idea surfacing in the Labor Party lars on deposit in banks anywhere outside
government's highest circles is that the In- the U.S.) and back to New York. That would
ternational Monetary Fund should swiftly be mean that the countries hi direct needf of
empowered to buy oil from producer "nations Eurodollar credits to offset their enlarged
and resell it to consumer countries to assure oil bills wouldn't b* getting them.
that both oil prices and currency flows are The consequences, sources who couldn't:
kept under orderly multilateral control. be quoted directly say, would be akin to
those afflicting the secondary or fringe
Top U.S. officials are sure to be sounded banks in Britain, which have suffered runs
out on the British thinking this week,when by major creditors. The rescue operations
Harold Lever, special economic and finan- that central banks and governments would
cial adviser to Prime Minister Harold Wil- have to mount on a global scale would be so
son, is on a mission to Washington. In Lon- va?t and so sensitive, they warn, that mis-
don, it is hoped he may find some support- handling could easily cause results ranging
ers in incoming Treasury Secretary William from a major mishap to catastrophic eco-
Simon and in Chairman Arthur Burns of the nomic slumps in major nations.
Federal Reserve Board.
Whether the IMF's Committee of 20 dep-
Earlier this week, the IMF's managing uties will discuss the British ideas during
director, Johannes Witteveen, described a their meeting this week in Paris remains to
plan for his agency to borrow funds to re-
lend to oil-consuming countries. The British | be seen. The deputies already are, b g di-
idea, being described as a brainchild of Mr. verted from their once-ambitious long-range
Lever rather than official government pol- planning for a new monetary system to
icy, goes further by suggesting that the IMF doing some Interim patching up and to pre-
purchase the oil outright. The two ideas, In paring standby plans that may need a shelf
the British view, aren't incompatible. life of some years before conditions become
British officials privy to the plan concede calm enough to try putting stabler exchange
it sounds incredibly ambitious, but some of rates into being.
them, at least, contend that continuation of It is conceivable, though, some Paris
current uncertainties about currency move- participants say, that the desire of Common
ments and values poses the gravest risk to Market finance ministers to make use of
the Western world's financial stability since gold reserves at something closer to the
World War n , and with economic conse- market price, currently $163 an ounce, than
quences that could be comparable to the de- to the nominal official price of $42.22 an
pression that followed the 1929 financial ounce, could lead to a breakthrough on the
crash. long-standing demand of the poorer coun-
Basically, the worriers reason that tries for an extra share of the IMF's "paper
nearly all the extra $50 billion that oil-pro- gold," or Special Drawing Rights.
ducing nations are apt to receive this year Should it appear that the richer ones are
due to higher prices will be placed in the about to hand themselves a windfall by
commercial banks of the U.S., Britain and roughly quadrupling the worth of their gold
other industrial countries. The deposits, and reserves to market levels,, planners worry,
the need to find lending opportunities for the poorer or developing nations may block
them quickly, will Increase far faster than agreement on anything else unless they get
the underlying capital of the banks, they fig- their long-sought "link" between SDRs and
ure. This is a concern that some other foreign aid. The U.S. and West Germany in
sources separately attribute to the Fed, as particular are against using SDRs as aid,
well. preferring to limit them to a reserve asset
The banking system's soundness could function.
succumb more swiftly, the reasoning goes, The rich countries will be watching the
if some of the non-oil poor countries and poor ones for clues during the deputy-level
some of the hardest-hit industrial countries, sessions, so they'll have an idea whether a
such as Italy, launch dollar borrowings out- ministerial meeting June 12-13 in Washing-
side the U.S.'that flop. Attempts by major ton may get bogged down an the link issue.
banks to call existing debts of such coun- If the Europeans feel strongly enough on
tries for immediate repayment would fail, making use c^ their gold, though, some In-
too, it's figured, possibly triggering a pan- siders figure it Is possible that a grand-slain
icky chain reaction of financial collapses of compromise could be worked out, givinff the
governments and banks alike. rich what amounts to a richer Msard of gold
and giving the poor an extra ration of SDRs.

180
MARCH 21, 1974
Ibe toasijington fwt

AN INDEPENDENT NEWSPAPER
Pavlovian Politics and Arab Oil

P RESIDENT NIXON was evidently caught between
two opposite impulses at his Houston press confer-
ence when he talked about the end of the Arab oil em-
opportunity to end our present discomfort by re-estab-
lishing our dependence on them.
Everything comes down to Saudi Arabia and its
bargo. There was the strong temptation to play up the position. The Saudis command vastly the largest and
good news and tell the country that Its oil troubles are most accessible oil reserves in the world. It is not
over.. But Mr. Nixon knew, of course* that our oil trou- really a matter of a cartel, because very little depends
bles are anything but over; the Arabs mean to keep the on what the other Arab producers choose to do. Saudi
shipments lower than this country had expected. As it Arabia is by itself a large enough element in world
turned out, Mr. Nixon chose his words skillfully and oil trade that when it holds, down production there is
managed to harvest several rounds of applause from a worldwide shortage, and if it pumps to capacity
Bis audience without giving away any substantial part of there will be a worldwide glut. A lot of oil exporting
his position. He announced, for example, that he was countries are going to be pressing the Saudis to restrict
rescinding his "order" to close gas stations on Sundays. shipments in order to keep up the prices for everybody
But the order was never anything more than a request else. More dangerous, every setback in the Arabs'
for voluntary compliance, and it was being increasingly negotiations with Israel will immediately bring an out-
Ignored. The important parts of the oil conservation cry from other Arab governments and political move-
program all stay in placethe allocations, the low speed ments to invoke the oil weapon again. With every rise
limits, the mandatory savings in industry. Prices will in their level of frustration, and with every rebuff to
Continue to rise, the strongest force of all for conserva- the Palestinian cause, the more militant and radical
It is unpleasant but absolutely necessary to hold Arabs will begin to lean on the Saudis to turn off the
oil consumption. In view of the Arabs' public state- oil; Saudi Arabia, a small country in terms of popula-
ments, this country has no reason whatever to rely on tion and military strength, is in no position to stand up
the continuity of their future oil shipments to us. to unlimited pressure from its neighbors. That truth
The Arab oil producers now say that they are go- needs to be kept very much in mind by Americans as
ing to end their embargo against the United States they consider the stability of our future oil supplies.
temporarily, depending upon our good behavior. Dr.
PaVlov rings the bell, and the dog salivates. In order Now that the Saudis are going to ship to us again,
to keep the dog salivating on signal, it is necessary for the time being, what ought we do? First of all, we
to give him a morsel from time to time. In the same need to keep the present conservation rules in force.
orderly and scientific spirit, the Arabs evidently in- If we drop these precautions, after having been plainly
tend to train us to identify our interests with their warned that the Arab oil ministers are taking up the
purposes. When we are obedient, the oil will flow. embargo question again in June, we are foolish to the
When we are refractory, the oil will stop.' But if the point of negligence. Next, we ought to store at least
some proportion of the new imports. Building oil stor-
oil is stopped too long, there is a dangerfrom the
age capacity is expensive, but it is not as expensive as
Arabs' point of viewthat Americans will learn to
the anxieties and uncertainties of recent months.
live without the embargoed oil. It follows that the
canny Arabs do not intend to leave the oil turned off The oil weapon has been a great success in terms
Indefinitely, even though progress toward a firm peace of raising prices, dismaying consumers and disrupting
in the Mideast continues to 'be very slow. But to under- economies in the industrial countries. But it has had no
line their intention, the ministers mean to meet again visible effect on .the pace or direction of the peace
on June 1, less than three months from now, to "re- negotiations between Israel and its Arab neighbors.
view" the decision on the embargo. The United States is trying earnestly to assist the
- The Pavlovian politics of oil requires not only con- negotiations and speed both sides toward a stable
tinuous uncertainty regarding the embargo but, much peace agreement. But it has been slow work, and it
more important, a lower flow of oil than the world was will continue to be slow work. The oil weapon has been
expecting. Saudi Arabia has said that It will ship 1 mil- effective for everything except the one purpose fpr
lion barrels a day to the United States, an amount not which it was evoked. The United States can readily
quite sufficient to bring our oil imports back up to agree to continue to deal with both sides in good
the level of last fall. Until last fall, American oil faith, but it cannot promise rapid or dramatic results.
policy assumed relatively low prices and a massive We must assume that the oil embargo may flicker on
increase in oil consumption. Most of that increase was and off over the months to come. If it catches us un-
to come from abroad and, specifically, from' Saudi prepared a second time, we shall have no one to blame
Arabia. The Arab exporters are now offering us the but ourselves.

181
Address Co N a t i o n a l Press Club, Washington, D. C . , Thursday Hay 9 t h , 1 P.M.
COPING WITH THE OIL CARTEL

M. A . Adelman
M.I.T.
I am honored t o address the N a t i o n a l Press Club, a l s o g r a t e f u l . The
press has created the p u b l i c record o f the w o r l d 611 market, d i r e c t l y and
i n d i r e c t l y , o f t e n i n t e r a c t i n g w i t h Congress. I f i t were not f o r you,
academic i n d u s t r y study would be i m p o s s i b l e , which some people t h i n k would
not be a bad i d e a .
1974 may be the year o f r e t u r n i n g s a n i t y . There seems a t l e a s t the
beginning of understanding t h a t surging demand pushing us a g a i n s t l i m i t e d
resources i s a f a n t a s y . World o i l remains i n huge p o t e n t i a l s u r p l u s , as i t
has been f o r a t l e a s t 50 y e a r s . The problem f o r the i n d u s t r y has always been
how t o c o n t a i n t h a t s u r p l u s . Before the g r e a t turbulence began i n 1970-71,
the Persian Gulf p r i c e was about $1.20 per b a r r e l . There was a chronic
s u r p l u s , w i t h more o i l a v a i l a b l e than demanded, because a t t h a t p r i c e i t was
enormously p r o f i t a b l e t o expand p r o d u c t i o n by d r i l l i n g new w e l l s . Now t h a t
the p r i c e has been m u l t i p l i e d by a f a c t o r of 7 or 8 , t h e r e i s a f a r bigger
p o t e n t i a l s u r p l u s , but a l s o a much stronger b a r r i e r t o h o l d i t back, namely,
the c a r t e l of the producing n a t i o n s , the members o f OPEC.
A good p i c t u r e of the market f i v e years ago i s the memorandum released by
Senator Church's subcommittee, w r i t t e n i n December 1968 f o r the top management
o f the Standard O i l Company of C a l i f o r n i a , which f o r some obscure reason is
t r y i n g t o b e l i t t l e i t and shove i t under the r u g . I t confirms o t h e r evidence,
o f people doing t h e i r best t o c o n t a i n the surplus b u t unable t o p r a c t i c e
c o l l u s i o n w i t h the other companies. From 1947 t o 1969 the Persian G u l f p r i c e
came down, i n r e a l terms, by about 65 p e r c e n t . The o i l companies were beating
a 8low but long r e t r e a t . The c u r r e n t f u r o r against the o i l i n d u s t r y d i s t r a c t s
our a t t e n t i o n w h i l e the c a r t e l nations l i f t $100 b i l l i o n every y e a r .

182
- 2 -
The b i g change since 1969 I s t h a t a group o f governments have taken over
from the companies the j o b o f c o n t a i n i n g the s u r p l u s . This i s something
r e a l l y new. A p r i v a t e monopoly can r e s t r i c t output and r a i s e p r i c e s , but
o n l y w i t h i n l i m i t s p e r m i t t e d by the coercive power of government. Monopolists
may l o s e t h e i r monopoly, o r go t o j a i l . But a group of sovereign s t a t e s can
do as they please. There i s nobody t o stop them from charging what the
t r a f f i c w i l l b e a r , which i s the cost o f the cheapest a l t e r n a t i v e .
When somebody says i n defense, i n a c c u s a t i o n , o r as a simple f a c t - t h a t oil
producers set a p r i c e equal t o the " r e a l v a l u e " o f t h e i r p r o d u c t , as s e t by
competing products, he i s saying t h a t they are monopolists. I f the farmers
could m a i n t a i n a monopoly, they would charge us whatever we were w i l l i n g t o
pay f o r the p r i v i l e g e o f e a t i n g . The p r i n c i p l e i s : w h a t ' s i t worth t o you?
The man who p o i n t s a gun i n d says "Your money or your l i f e " i s a l s o g i v i n g us
a lesson i n monopoly p r i c i n g .
Right now the governments a t the Persian Gulf are t a k i n g between $7 t o
$11, and p r i c e s range from $8 to $12. I w i l l not waste your time I n t r y i n g
t o d i s t i n g u i s h between taxes and r o y a l t i e s and buybacks and d i r e c t s a l e s , nor
about ownership and p a r t i c i p a t i o n 4nd j u s t compensation. The
governments are completely I n charge, but they have not y e t s e t t l e d the p r i c e
a t which they convey the o i l t o the companies who do the a c t u a l work o f
f i n d i n g , developing, and producing. The average w i l l probably s e t t l e out c l o s e r
tQj&7 than $11,

183
-3-
Today producing capacity a t the Persian Gulf i s already 20 percent
above p r o d u c t i o n . As f o r the years t o 1980, a number o f people are now
doing a few sums. They use v a r i o u s methods, and come out w i t h v a r i o u s
answers. But estimates o f consumption and p r o d u c t i o n i n consuming c o u n t r i e s
suggest t h a t the demand f o r o i l from the OPEC c o u n t r i e s w i l l not be much
l a r g e r i n 1980 than i t was l a s t y e a r . Among the OPEC n a t i o n s some are
d r i v i n g as hard as they can f o r g r e a t e r o u t p u t . In*prudence, count o n l y
the announced p r o d u c t i o n p l a n s , n e a r l y a l l f o r 1976, which have not been
c r i t i c i z e d as i m p r a c t i c a l . This assumes no Increase a t a l l f o r A l g e r i a ;
and i t assumes t h a t I r a n , Indonesia, and N i g e r i a , w i l l take seven years
to expand as much as they have i n the past t h r e e . Venezuela, L i b y a , Kuwait,
and Abu Dhabi are assumed unchanged. What's l e f t f o r Saudi Arabia i s l e s s
than what they a c t u a l l y produced l a s t year* There I s even a good chance
t h a t i f a l l the OPEC nations but Saudi Arabia produced a t r a t e s which they
can e a s i l y reach before 1980, t h a t country could shut down completely, and
y e t the amount supplied would equal the amount demanded a t c u r r e n t o r l e s s
than c u r r e n t p r i c e s .
Of course, Saudi Arabia i s not going t o shut down. Nor w i l l they be
content w i t h 5 m i l l i o n b a r r e l s d a l l y when t h e i r capacity i s already twice t h a t
and growing. Of course, we have heard from Americans and Saudis t h a t Saudi
Arabia i s producing f a r more than I s i n t h e i r economic I n t e r e s t - t h a t they
are s a c r i f i c i n g , producing f o r sweet c h a r i t y . Some people w i l l b e l i e v e
anything. The p o i n t i s , Saudi Arabia cannot by i t s e l f c o n t a i n the surplus
by r e l a t i v e l y s m a l l and manageable cutbacks. Therefore other OPEC nations
must share the burden o f r e s t r a i n t . The nations must n e g o t i a t e , and compose
their differences. The only argument any w i l l heed i s the t h r e a t o f damage.
The best way t o make t h r e a t s c r e d i b l e i s t o b u i l d excess c a p a c i t y i n case o f
a fight.

184
-4-
I w i l l not guess how much excess capacity w i l l a c t u a l l y accumulate
by 1976 o r 1980. But assume the Investment needed f o r one b a r r e l per day
added c a p a c i t y stays around 1972 l e v e l s . For a Persian Gulf country which
enjoys average costs - n o t the lowest l e v e l - one d a l l y b a r r e l o f o i l s o l d
a t $8 a b a r r e l pays back the Investment I n 16 days. (This i s 23,000 percent
per year p r o f i t on Investment.) I f the p r i c e has dropped t o $5, i t takes
32 days (only 14,000 p e r c e n t . ) I f there i s any chance o f ever f i n d i n g a
market, the excess capacity I s w e l l w o r t h b u i l d i n g and s i t t i n g on.
The c a r t e l w i l l t h e r e f o r e b u i l d a l o t o f a c t u a l excess c a p a c i t y . The
sooner the governments r e a a l y n a t i o n a l i z e and take over the investment
d e c i s i o n s , the f a s t e r the b u i l d u p o f excess c a p a c i t y . But the c a r t e l w i l l
probably not c o l l a p s e by i t s e l f . The gains are too enormous t o g i v e up
easily. One must i n common prudence assume the OPEC nations w i l l h o l d
t o g e t h e r ; i f they q u a r r e l they can r e c o n s t i t u t e the scheme.
What the surplus does promise i s a great t.emptatlon on each o f them
t o c h i s e l and cheat, t o make Incremental sales a t lower p r i c e s t o get
additional p r o f i t . This i s the t r a d i t i o n a l nemesis o f c a r t e l s . When
producing nations b u i l d r e f i n e r i e s and buy t a n k e r s , there w i l l be many
more o p p o r t u n i t i e s to shade p r i c e s . And the Impulse i s i r r e s i s t i b l e when
f e a r r e i n f o r c e s hope - the f e a r t h a t others are p r o f i t i n g by your s c r u p l e s .
D i s t r u s t melts the glue t h a t holds the monopolists t o g e t h e r ; each can
reflect: When you have a f r i e n d t r i e d and t r u e , do him q u i c k before he
does you.
The temptation to c h i s e l and cheat i s a l l the s t r o n g e r when t h e r e e x i s t s
a very l a r g e market which any producing n a t i o n can hope t o p e n e t r a t e , t o get
l a r g e blocks of a d d i t i o n a l business by rebates which do not a f f e c t p r i c e s
elsewhere. This i s the t r a d i t i o n a l r o l e of the l a r g e b u y e r , which the U n i t e d
States can play i f I t so d e s i r e s .

185
-5-
Zero Imports f o r the United States are a mirage. There w i l l be Imports,
and those Imports must be l i m i t e d f o r the sake o f n a t i o n a l s e c u r i t y . A tariff
w i l l not do because one cannot p r e d i c t I n advance how much I t w i l l reduce
Imports. Domestic producers w i l l have no f i r m ideai of how much they can s e l l .
Hence there must be an absolute Import l i m i t . The t o t a l o f p e r m i t t e d Imports
must be d i v i d e d up and a l l o c a t e d somehow.
Consider a t i c k e t which permits the holder t o import a given amount o f
oil. The value o f the t i c k e t i s the d i f f e r e n c e between the United States p r i c e
of o i l , on the one hand, and the cost o f o b t a i n i n g and t r a n s p o r t i n g o i l on the
other. Producing governments can b i d several d o l l a r s per b a r r e l , i n f a c t t h e i r
l i m i t i s t h e i r take.
Import quota t i c k e t s are e x a c t l y l i k e other valuable r i g h t s , l i k e leases
to produce. They should be awarded i n e x a c t l y the same way? for flexibility
they should be s o l d i n assortments:, from 3 months t o perhaps three y e a r s .
Anybody a t a l l ought t o be permitted to b i d , the only requirement being a
c a s h i e r ' s check f o r the amount b i d . Nobody need know who was p u t t i n g : v
up the money. Resale o f quota t i c k e t s should be p e r m i t t e d . I n t h i s way, any
government which wanted sales i n the United States could have them, by r e b a t i n g
p a r t o f i t s gains t o the United States Treasury. They would have t o f u r n i s h
t i c k e t s to the producing companies who otherwise could not import here. We
could o f f e r a home f o r o i l a l l over the w o r l d , and an i n c e n t i v e t o expand
output. Since our imports would be a minor f r a c t i o n of world p r o d u c t i o n , it
would take only a small m i n o r i t y , under cover o f anonymity, t o b i d f o r a l l the
tickets offered. Those who put p r o f i t s higher than l o y a l t y t o the c a r t e l would
get the business.

186
- 6 -
Thia scheme would n o t a f f e c t t h e domestic p r i c e of o i l , which w i l l for
t h e foreseeable f u t u r e be f a r above p r o d u c t i o n costs a l l over the w o r l d , and
much higher than a t any time since World War. I I . The sooner we face t h i s ,
the b e t t e r ; b u t i t i s an issue separate from our a p p r o p r i a t i n g a s l i c e o f the
monopoly g a i n s . The consumer i s n e i t h e r helped nor h u r t - as a consumer -
because t h i s scheme has no e f f e c t on the domestic p r i c e . The consumer
b e n e f i t s as a taxpayer.
The immediate reward t o t h i s country o f a quota t i c k e t system would be
a l a r g e r e d u c t i o n i n the economic burden of o i l i m p o r t s . A l s o , we would
s t a r t the war o f a l l against a l l and put the c a r t e l on the s l i p p e r y s l o p e .
Once i t b e g i n s , the s l i d e can a c c e l e r a t e .
Those OPEC nations which c u r t a i l p r o d u c t i o n can only a f f o r d t o do so
because o f the h i g h p r i c e s they r e c e i v e . Hence a r e d u c t i o n i n p r i c e s i s
t w i c e blessed f o r us and o t h e r consuming c o u n t r i e s . I t reduces the burden
and i t a l s o makes the producers w i l l i n g o r anxious t o expand o u t p u t .
This idea i s p r a c t i c a l but t h a t does not n e c e s s a r i l y make i t good. Do
we want the c a r t e l to f l o u r i s h or fade? My own o p i n i o n i s t h a t w h a t ' s bad
f o r the c a r t e l i s good f o r the United S t a t e s . The burden o f paying f o r oil
imports has been much exaggerated b u t i s s t i l l very g r e a t . For most o f the
underdeveloped c o u n t r i e s , i t i s r u i n o u s . There i s no way they can pay, and
we w i l l need t o b a i l them o u t . We are embroiled w i t h our f r i e n d s and t r a d i n g
p a r t n e r s i n attempts to shove the burden o f higher p r i c e on each o t h e r . Our
government denounces the b i l a t e r a l deals o f armaments o r other goods f o r oil,
tfille we ourselves n e g o t i a t e the b i g g e s t b i l a t e r a l deal o f all.

187
-7-
The c a r t e l I s a l s o making the w o r l d a much more dangerous p l a c e . A vast
arms b u i l d u p i s j u s t beginning a t the Persian G u l f . Every l i t t l e patch o f
barren ground i s worth f i g h t i n g over because of i t s p o t e n t i a l w e a l t h . The
Arabs w i l l be out o f the c o n t r o l of e i t h e r the Soviet Union or the United
States because they can buy arms from a l l the w o r l d . When Saudi Arabian
revenues were o n l y $4.5 b i l l i o n per y e a r , i n 1973, we got one shooting war
and one economic war. Imagine what we w i l l get when t h e i r revenues are m u l t i p l i e d .
U n l i m i t e d arms, plus the " o i l weapon" which made the consuming c o u n t r i e s
shake liKje j e l l y , do not add up t o peace.
O i l supply i s very Insecure because the producing nations are saving so
much money t h a t they can a f f o r d t o c u t back p r o d u c t i o n and pass up the revenues
f o r a t i m e , i n order to i n f l i c t damage on consuming n a t i o n s .
A l l of these dangers and burdens are simply unneccessary. High p r i c e s o f oil
do not r e s u l t from s c a r c i t y , imposed by n a t u r e . Men have made them and other
men can un-make them.
I t w i l l not be easy or quick work to remove t h i s t h r e a t . I t w i l l be
years before the c a r t e l can be pronounced w e l l and t r u l y dead, because the OPEC
nations have learned the enormous rewards of a successful monopoly. They w i l l
not soon g i v e up, and they are encouraged today as they have been f o r years
by consuming country governments' t a l k o f "cooperation".
The producing c o u n t r i e s are amused not Impressed by American warnings
t h a t they may go too f a r . n h e i r experience has been t h a t they can go as f a r
as they please and they w i l l get nothing but meek deference from the United
States whose p o l i c y I s t o see, hear and speak no e v i l o f them.
Any move t o i n j e c t competition i n t o the w o r l d market w i l l of course
s t i r b i t t e r complaints: What a v i c i o u s animal! When a t t a c k e d , he defends
himself!

188
- 8 -
Our government seems t o have I n mind some vague grand design f o r a w o r l d
commodity agreement t o f i x what Mr. K i s s i n g e r c a l l s "a j u s t p r i c e , " whatever
t h a t means. Such an agreement would be a f l o o r b u t not a c e i l i n g , a one way
street. The Persian Gulf n a t i o n s have a clean r e c o r d ; they have never y e t
f a i l e d t o v i o l a t e an agreement on o i l . I f they can r i g the p r i c e h i g h e r , up
i t w i l l go; the agreement w i l l merely keep us from t a k i n g defensive a c t i o n .
I n 1971, the State Department r i g h t l y claimed c r e d i t f o r the T r i p o l i and
Tehran s o - c a l l e d "agreements", which they t o l d us would b r i n g " s t a b i l i t y " and
"durability". Those wonderful people who brought you the f i r s t Tehran are
now preparing a super-Tehran which w i l l freeze a dismal present i n t o the
indefinite future.
I t h i n k we can do much b e t t e r ; i t ' s hard t o see how we can do any worse.
Thank you.

189
The Washington Post

Indeed, after New York it becomes a |
1
May 3, 1974 real question whether there is much
advantage for the poor in coming to- j
gether in a big political forum such as-
; ;i the United Natidns and trying to get j
, the rich to agree to come across on do- i
Stephen S. Rosenfeld j velopment financing, trade, food, en- i
ergy, emergency aid, and > so on.'Noth-
ing useful can happen in a political fo-
rurri on such issues unless there is a
Aiding consensus, and there is no consensus.

Algeria's President Boumediene,
opening the session, cited the postwar
Marshall Plan for Europe as a hopeful
Developing
model. But, as Secretary of State, Kis-
singer replied, "then tfce driving force
was a shared' sense of' purpose, of val-
ues and of destination. As yet, we lack
a comparable sense of purpose with re-
spect to development."
Nations He could have added that the stir-

rings of detente have rendered anti-
communism inoperative as a source of
The special session of the United Na-
tions General Assembly on the world
economy has dealt a heavy blow to the
enlightened "liberal" notion of eco- "Partisans of inter-
nomic interdependencethe notion
that we're all in the same basket and dependence warn that the
that we therefore must Cooperate for
our common good. alternative is confrontation.
For what the session seems to have The warning is fair*'
demonstrated is that some nations, es- -
peciallj poor ones, are more in that
basket than other nations; that what
economic interdependence there is is
not matched by a corresponding recog- such a sense of purpose. Oil inflation,
nition of political interdependence; turning publics and governments in-
and that the organized international ward, has nipped even more cruelly
community is not likely to act signifi- that common sense. So has the Western
public's keen awareness that the .Mid-
cantly to ease the critical condition
east oil states have billions of dollars
brought to some 40 of the poorest rattling around in their bank accounts
countries by, principally, the massive that they have no conceivable way to
price increases laid down last winter put to rational use now at home.
by the oil cartel.
These are the political realities which
A member of that cartel, Algeria, . crush worthy appeals to interdepen-
took the lead in calling the special ses- dence.
sion, apparently for the purpose of di-
verting oppobrium and responsibility Partisans of interdependence warn
for the new misery from the oil cartel that the alternative is confrontation.
to/the good old "imperialists." The warning is fair. No one can say
just who will be the target but it
I t is not yet clear who will be seems to me inconceivable that coun-
blamed for the limp and inadequate tries like India, Pakistan or Bangla-
steps actually taken at the special ses- desh, to cite three of those worst hit,
sion but it is clear that very little ben- will sink meekly into deep public catas-
efit has been gained by what the trophe without blaming someone and
United Nations calls the "MSA" coun- perhaps wildly casting about.
tries, those "most seriously affected"
by the higher energy costs. Something A second alternative to recognition
like a billion people live in those coun- of interdependence will surely be mass
tries. suffering on a scale heretofore un-
imagined. I t becomes even more tGffi-
To some goodwilled observers, the cult to see how millions of people are
resultindeed, the general reluc- going to avoid dying by starvation and
tance of old rich and new rich alike associated causes, soon.
to do much more than make speeches
for the poorreflects a shortfall not The best available answer is simple.
only of moral values but of an under- The newly rich oil states should take
standing of the close link between the their excess billions and apply' them
economic and political fortunes of rich immediately to the relief of the.
and poor. This is the interdependence world's poor. Then and only then will
argument: the rich, needing the re- it be possible for all nations to apply
sources, markets and investment op- the mbral and political dictates for in-
portunities of the poor, should help terdependence and to fnove forward on
them. Thus is self-interest hitched to , real development.
internationalism and human dignity. j
3 7 - 2 1 1 O - 74 - 13

190
cope w i t h the huge funds we w i l l

have." UBAF is expected to attract a
substantial share of the $50-billion in
annual Arab oil earnings that will re-
sult from oil price hikes last October
and December.
A cool billion. The UBAF group, estab-
lished in 1970, is 40% owned by the
BUSINESSWEEK: May 11. W * French banks Credit Lyonnais and
Banque Francaise du Commerce Ex-
terieur. The rest is held by 25 Arab
banks and governments, of which the
Abushadi: The New York

market 'can cope with the
huge funds we will have'
main shareholders are the Arab Bank
(Jordan), the Banque E x t e r i e u r
d'Algerie, the Commercial Bank of
Syria, the Libyan Arab Foreign Bank,
the Rafidain Bank (Iraq), the Central
Bank of Egypt, and the Arab African
Bank (mainly Kuwaiti and Egyptian
interests). Total deposits, mostly in
short and medium-term funds, are
about $l-billion.
Abushadi, former chairman of the
National Bank of Egypt, says he has
already launched a search for New
York office space on F i f t h Avenue and
in the Wall Street area. He is also look-
ing into salary levels and personnel
availability. And while he declines to
name the U. S. banks he is negotiating
with, banking sources in Paris say
Bankers Trust, Irving Trust, and First
National Bank of Chicago are among
An Arab bank shops them.
"We need qualified Arabs to share in
, for a New York off ice the management of our operations," he
says. "They are very hard to get. And
- One of the Arab world's newest and we don't want to operate under a false
most aggressive banking groups, the Arab image, with Arabs playing no ef-
Union des Banques Arabes et Fran- fective role in management."
caises (UBAF), is wrapping up negotia- Fast expansion. Abushadi plans UBAF af-
tions this month to open its first New filiates in India, Latin America,
York operation-a joint venture w i t h at Greece, and Spain. "We will go wher-
least two U. S. banks. ever there is a great need for credit
Significantly, the Paris-based bank and project financing," he says, UBAF
is 60% owned by Arab governments has a joint venture in Germany with
and banks, many of which are scrambl- Commerzbank and Bayerische Vereins-
ing to find places to invest the fiow of bank, in Britain with Midland Bank,
new oil money into their coffers. The Ltd., and in Rome with Banco di Roma
new office would give them a window and Banca Nazionale del Lavoro. Total
1
into the U. S. capital and money mar- deposited funds of all three ventures
kets. come to about $730-million.
"There's a great deal of enthusiasm Some recent UBAF major deals range
on the Arab side, and the Americans from co-management of a $1.5-billion
seem quite receptive, too," says Mo- Eurodollar loan to the Italian govern-
hamed Abushadi, the Egyptian chair- ment, to a $200-million loan to Al-
man of UBAF. "We expect to file for a geria's national shipping company for
New York license in June." Six months building liquefied natural gas tankers.
later the bank could be in business. The UBAF-American venture also will
E x p l a i n i n g the New York pene- keep its activities diversified. Besides
tration, Abushadi says: "There has recycling Arab dollars back to the
recently been great improvement in re- Middle East and Europe, i t will prob-
lations between Arab countries and the ably invest in U. S. securities and real
United States. So the flow of trade jus- estate. " I t ' s in both our interests to go
tifies i t . " Abushadi says the New York ahead w i t h our New York operation,"
financial market is best suited to the says Abushadi. " I t is essential to at-
Arabs' needs " i n the sense that it can tract Arab funds to the U. S."

191
OIL MONEY AND THE POOR
HON. HENRYITGONZALEZ
OP TEXAS
I N T H E HOUSE OP REPRESENTATIVES
Wednesday, May 8, 1974
M r . G O N Z A L E Z . M r . Speaker, every-
one I n this c o u n t r y realizes t h e awesome
i m p a c t of oil price increases imposed by
t h e O r g a n i z a t i o n of P e t r o l e u m E x p o r t i n g
C o u n t r i e s o n o u r o w n e c o n o m y . Less w e l l
r e c o g n i z e d is h o w m u c h t h e poor c o u n -
tries h a v e been a n d will be affected by
t h e oil price hikes. W e h e a r m u c h about
w h a t t h e exporting countries m i g h t do
I n b e h a l f of t h e poor, b u t one l i t m u s test
o f t h e i r r e a l i n t e n t i o n s is w h a t t h e A r a b
n a t i o n s a r e doing for their t r u l y des-
perate Moslem brothers in the sub-
S a h a r a regions of A f r i c a w h e r e mass
s t a r v a t i o n is n o t m e r e l y a t h r e a t b u t a
d a i l y f a c t . H e r e is a r e g i o n w h e r e t h e
wealthy M o s l e m countries m i g h t well
show t h e i r c o n c e r n f o r t h e f a t e of t h e
poor a n d helpless.
B u t as a r e c e n t a r t i c l e i n t h e N e w Y o r k
T i m e s points out, little or n o t h i n g h a s
been f o r t h c o m i n g f r o m the oil w e a l t h y
6tates to relieve the e x t r a o r d i n a r y a n d
t e r r i f y i n g disaster t h a t has o v e r t a k e n
t h e S a h e l a r e a of Africa. I f t h e A r a b
n a t i o n s h a v e d o n e so l i t t l e f o r t h e i r M o s -
l e m brothers, I can only wonder how
sincere t h e y are i n their proclamations
of willingness to help other poor coun-
tries meet the extraordinary demands
placed on t h e m by t h e O P E C increases
to p e t r o l e u m p r i c e s .
T h e article follows:
[ F r o m t h e N e w Y o r k T i m e s , A p r . 3, 1974]
On, BILLIONS FOR THE FEWSAND POE THE O n hie r e t u r n recently f r o m t h e sub- f r o m t h e $2,130 b l U l o n of its o i l e a r n i n g s i n
STABVXNQ S a h a r a r e g i o n of A f r i c a , S e c r e t a r y - G e n e r a l 1973. B u t w h a t of S a u d i A r a b i a , w h i c h e a r n e d
( B y Chester L . C o o p e r ) W a l d h e l m o f t h e U n i t e d N a t i o n s was a g h a s t t w i c e as m u c h as L i b y a ? N o t a d o l l a r I n 1973,
WASHINGTON.By t h e grace o f A l l a h , a a t w h a t he h a d witnessed, "peoples a n d a n d o n l y $2 m i l l i o n so f a r t h i s year.
f e w M i d d l e E a s t e r n n a t i o n s h a r e become r i c h c o u n t r i e s c o u l d disappear f r o m t h e face o f
A n d I r a q , w h i c h e a r n e d as m u c h as
b e y o n d even t h e w i l d e s t d r e a m s of t h e f a - t h e m a p , " h e said. " T h i s r e g i o n h a s n o t seen
K u w a i t ? Not a penny. A b u Dhabi, which
b l e d p o t e n t a t e s of a n c i e n t A r a b y . T h r o u g h s u c h a disaster i n t w o c e n t u r i e s . "
e a r n e d over $7 b i l l i o n , or a b o u t $23,000 f o r
l i t t l e effort of t h e i r o w n , 65 m i l l i o n p e o p l e T h e international c o m m u n i t y , or rather a every o n e of i t s i n h a b i t a n t s ? N o t h i n g . A n d
or, m o r e a c c u r a t e l y , t h e i r l e a d e r s o f S a u d i p a r t of i t h a s n o t r e m a i n e d u n c o n c e r n e d . Q a t a r , w h i c h e a r n e d a l m o s t $400 m i l l i o n , or
Arabia, K u w a i t , I r a n , Iraq, A b u Dhabi, Q a t - A p p r o x i m a t e l y $350 m i l l i o n i n a i d f o o d ,
m o n e y a n d services ( n o t i n c l u d i n g a i r l i f t s )
about $3,600 p e r c a p i t a ? Zero. B a h r a i n ? Zero.
a r a n d L i b y a "earned" '$16 b i l l i o n I n 1973 a n d Algeria? A n o t h e r z e r o A n d w h a t of I r a n , w i t h
h a v e b e e n c o n t r i b u t e d to t h e s t r i c k e n c o u n - a l m o s t $4 b i l l i o n i n o i l revenues i n 1973 a n d
are expected t o " e a r n " a l m o s t $65 b i l l i o n
t r i e s of Senegal, M a l l , M a u r i t a n i a , C h a d , $15 b i l l i o n p r o j e c t e d f o r t h i s year? A f u r t h e r
t h i s year. T h e spice t r a d e was b u t salt a n d
Niger a n d Upper Volte. O f this, t h e U n i t e d zero.
pepper c o m p a r e d w i t h c o m m e r c e i n b l a c k S t a t e s , despite d o m e s t i c p r o b l e m s , h a s c o n -
gold. tributed more t h a n a third. T h e European Altogether, t h e n , t h e Middle Eastern oll-
Economic C o m m u n i t y , racked by balance-of- e x p o r t l n g n a t i o n s h a v e c o n t r i b u t e d less t h a n
T h e roll of t h e dice a n d t h e leaders' greed l per c e n t of t h e t o t a l a i d t o t h e s t a r v i n g
h a v e c o m b i n e d t o raise Havoc w i t h t h e e n - p a y m e n t problems a n d Inflation, has con-
t r i b u t e d s l i g h t l y less t h a n a t h i r d . people s o u t h of t h e S a h a r a .
e r g y - i n t e n s i v e , i n t e r d e p e n d e n t economies of
T h i s is n o t t o say t h a t t h e y r e m a i n e d e n -
Western Europe. J a p a n a n d the U n i t e d States T h e U n i t e d N a t i o n s a n d i t s subsidiaries,
t i r e l y aloof. N o t a t all. T h e y raised t h e price
a n d t o Jeopardize t h e d e v e l o p m e n t prospects n o t including t h e Food a n d Agriculture
of oil, n o t o n l y f o r t h e r i c h I n d u s t r i a l c o u n -
of scores of countries I n A f r i c a , L a t i n A m e r - O r g a n i z a t i o n , h a s given a p p r o x i m a t e l y 7
t r i e s b u t f o r t h e desperately poor ones as
ica a n d Asia. Because o f q u a n t u m Jumps i n p e r cent. T h e F A . O . has p r o v i d e d separate
weU. As a consequence, v i r t u a l l y aU of t h e
oil prices, w o r l d w i d e i n f l a t i o n la s h a r p l y ac- assistance, l a r g e l y f r o m A m e r i c a n a n d E u r o -
A m e r i c a n financial assistance t o t h e s t r i c k e n
celerating. I n t e r n a t i o n a l m o n e t a r y arrange- pean contributions. France, West Germany,
c o u n t r i e s of s u b - S a h a r a A f r i c a w i l l be a b -
m e n t s , c h r o n i c a l l y f r a g i l e i n t h e m o s t stable Canada, C h i n a , Nigeria and t h e Soviet U n i o n
sorbed b y t h e Increased cost of t h e i r oil I m -
o f times, are u n d e r severe stress. T h e specter have made up t h e remainder.
p o r t s a " c o n t r i b u t i o n " b y t h e oU exporters
of a w o r l d w i d e depression is b e c o m i n g a l l t o o O n r e r e a d i n g t h e roster o f c o n t r i b u t o r s ,
t o t h e needy t h a t s h o u l d n o t go u n n o t i c e d .
real. one h a s t h e f e e l i n g t h a t i t m u s t be i n c o m -
plete. A r e t h e r e n o t some c o u n t r i e s missing? T o be sure, t h e A r a b League, w i t h a l l d e -
M e a n w h i l e , l i f e goes on, a t least f o r s o m o l i b e r a t e speed, has b e e n discussing easing t h e
Some of t h e v e r y r i c h pertiaps? Some M o s -
t h e l u c k y ones whose o n l y u r g e n t need la o i l . b o r r o w i n g t e r m s a n d d o u b l i n g t o a b o u t $400
l e m oountrlee, since m o s t of t h e s t r i c k e n
B u t m i l l i o n s of A f r i c a n s are f a c i n g a n o t h e r , m i l l i o n , t h e c a p i t a l of t h e A r a b B a n k f o r E c o -
people s o u t h o f t h e S a h a r a are also Moslems?
m o r e t e r r i f y i n g crisis. T h e y a r e d y i n g of n o m i c D e v e l o p m e n t I n A f r i c a . A n d t h e r e has
Some f e l l o w A f r i c a n countries, possibly? W e
thirst and hunger. U n k n o w n thousands have been t a l k of p r e f e r e n t i a l o i l prices f o r some
h a d b e t t e r r e v i e w t h e official d a t a .
p e r i s h e d over t h e last year a n d scores o f of t h e d e v e l o p i n g c o u n t r i e s a n d some desul-
t h o u s a n d s h a v e fled f r o m b a k e d fields a n d Strictly speaking, three countries were
t o r y discussion o f e v e n t u a l l y d o i n g some-
destroyed h e r d s t o r o t slowly a w a y i n u n f a - overlooked: L i b y a c o n t r i b u t e d $7 0,000
t h i n g a b o u t t h e f a m i n e . B u t , m e a n w h i l e , by
m i l i a r , f r i g h t e n i n g cities. f r o m t h e $2 SI b l U l o n I t collected i n o i l r e v e -
t h e grace of A l l a h , t h e o i l flows o u t a n d t h e
n u e s last year. K u w a i t c o n t r i b u t e d $300,000
billions flow in. A n d l i f e goes on, f o r some.

192
T H E WALL STtiEET JOURNAL

Monday. M . y 6, 1974
Oil-Rich Nations
Slate $2.76 Billion
For IMF Aid Fund
. " i
By a W A L L STREET JOURNAL Staff Reporter
WASHINGTON - Oil-producing nations
have offered to lend $2.76 billion to a special,
International Monetary Fund pool of curren-
cies to be lent to nations that need help in
paying their increased oil-import bills, the
I M F disclosed.
Ever since the skyrocketing of world oil
prices began to threaten international finan-
cial trouble for many oil-importing nations,
I M F Managing Director H. J. Witteveen has
been trying to drum up support for & special
oil fund that would lend money to nations in
need. He has sought funds from five oil-rich
Middle East and African nations and this
week will travel to Venezuela on a similar
mission.
Reporting results of the effort so far, the
I M F said the oil-exporting nations have of-
fered to lend to the I M F the equivalent of
$2.76 billion for the oil fund. I t said Saudi
Arabia offered the equivalent of $1.2 billion,
Iran' $720 million and other unidentified na-
tions a total of $840 million. "Additional
amounts may be forthcoming from other
oil-exporting countries," the 126-nation or-
ganization said.
The I M F chief called the results of the
fund-raising effort "satisfactory and encour-
aging." Member nations would be entitled
to borrow from the special fund an amount
about equal to the increase in the oil-import
bill resulting from the quadrupling of world
oil prices since last fall. The special oil ftind
is expected to begin lending after midyear.

193
THE WASHINGTON POST M a y 5, 1974
Courting The Arabs

Inter-American Development Bank
Seeks New Investors,
By Lewis H. Duiguid ras, With Venezuela lending 50' per- 1 However, the& sources allege, West
Washington Post St&fr Writer cent of the capital to Honduras and Germany backed off from its key com-
the four other countries of the. Central ; hutment on the $asis that the A&ehde
This hemisphere's principal develop-
ment lending insitution is seeking to American; common market. experience indicated excessive U.S..
attract Arab investors and thereby re- control oyer the, bank. With that, Euro-
Ecuador, another oil exporter, along pean membership was put off if not.
duce the influence of its main source With Argentina and Mexico would lend j precluded altogether.
of funds until now, the United States,
the other 50 per cent and aksure the Some isolated European and Japa-
Successful attraction of the Arab Hohdurans of markets for the paper. nese investments have been negoti-
funds would accelerate a drastic trans-
From Honduras's earnings, it would ated, and the proposed Common Mar-
formation of the institution, the Inter-
pay back Venezuela, which would thus ket memberships rehiain a goal of the
American Development Bank, which
receive a return far into the future on bank, but Ortiz Mena indicates that
began with a decision by Venezuela to
the Arabs' booming oil profits are now
underwrite major bank programs. its present sales of the non-renewable looked upon as a more effective route
Venezuela has teamed its fcommit- petroleum. Honduras, he "said, would to diversifying the bank's lending port-
ment of a reputed $1 biHion in oil ex- gain the biggest paper industry in folio. '
port earnings witih a call for reducing Latin America, capable of exporting In his talk, Ortiz Mena made no crit-
.US. influence in the bank. The United icism of the U.S. role in the bank or in
States is frequently accused of domi- elsewhere as welL
The Honduran government recently hemispheric development. Indeed, he
nating the institution, which has its
headquarters in Washington. decreed1 nationalization of foreign said, despite all of the talk of failure
(largely American) lumbering interests surrounding the Alliance for Progress,
Mexican Antonio Ortiz Mena, presi- in preparation for state takeover ef "the '60s saw substantial change in
dent of the 24-nation bank, announced forest industry. Latin America."
to the staff that Arab funds will be Venezuela's offer to help finance
welcomed on the pme terms as those bank programs was made last month
of Venezuela and will be used to fiat the bank's annual meeting in Santi-
nance giant industrial projects; ago, Chile. Details of the proposed
Ortiz Mena had just returned from trust fund are yet to be negotiated, but.
exploratory talks at the Beirut meet- Venezuela made clear, that some of the
ing of the Arab ,Economic and Social funds would be provided at conces-
Development Fund. He also visited sional interest rates.
Tehran to sound out Iran on possible The Venezuelans have also indicated
investment of oil profits in the bank. that they will not accept mortf than a
Praising the Venezuelan commit- token U.S. role in administration of
ment, Ortiz Mena said the conditions these funds." They have urged
that make investment in the bank de- "Latinization" of the bank and have
sirable far this hemisphere's main oil hinted that its headquarters might bet
producer are equally valid for the ter be located in Caracas than in
Arabs. He did not specify any Arab Washington.
commitments, but his words to the The main accusation of U.S. domi-
bank staff implied confidence that such nance turns on the pressures success-
investments would be orthcoming. fully mounted against loans by the
Ortiz Mena indicated that bank bank to the government of the late
would borrow from the oil producers Chilean President Salvador Allende.
at commercial rates, offering them a
return more than offsetting inflation. Critics say the failure to lend to
Chile, a member 'in good standing,
The 'bank's,role, he said, was to offer made the bank a tool of U.S. foreign
'âssurance to the investor of the qual- policy. Since Allende was ousted by a
ity of the projects." bi)/<tJ military coup last "September, the bank
'. The bank has lent $6 million over its has lent almost $100 million for two
14-year "history, but is often accused of Chilean projects.
approaching Latin America's develop-
ment t6o timidly: "We are now in a According to sources within the
bank critical of its response to U.S.
moment when the size of our projects
pressures, the failure to lend to Al-
-should riot frighten us," 'he said. lende cost }he bank another non-hemis-
, The onetime finance minister of pheric sourfce of fundsEurope.
Mexico said the bank must help Latin
Ahierica to be in the forefront of nu- The bank had proposed to bring Eu-
clear energy exploitation and to de- ropean Common Market members into
velop "the world's biggest food produc- the bank on the pattern of the recent
tion reserves,," But his main emphasis recruitment of Canada. They were to
was on industry, and he described a pledge $500 million in development
project for "the first Latin American^ funds for the bank, again with an uns-
trans-national corporation." . tated purpose of ^diluting U.S. influ-
As explained <by Ortiz, Mena, the ence.
bank would oversee creation of a huge
cellulose and paper industry in Hondu-

194
T H E MONEY MANAGER M a y 6, 1974
Swiss Central Bank President Sees Oil Deficits

As the Biggest Obstacle to Monetary Reform
The efforts toward international debts will represent another outflow, creases make an early restoration of
monetary reform will be complicated and thus burden, On these' nations' fixed exchange rates ' doubtful, /he.
by a problem far more serious than balance of payments. added. But private industry
the once-chronic United States bal- Mr. Stopper urged international co- least in the. intermediate-term, more
ance of payments deficits, according operation which would plso help oil- exchange rate stability than the float-
to Edwin Stopper, the president of producing countries. This cooperation ing rate system has brought, Mr.
the Swiss National Bank. could justify a reduction in petroleum, Stopper asserted.
prices, which has b e n requested by A restoration of the fixed rate sys-
^thisproblem is the massive balance tem could only be achieved by inter-
the United States. A price cut has
of payments deficits resulting from national cooperation to fight inflation,
also been favored by Saudi Arabia;
the massive escalation in the price of however, it is opposed by other mem- which he called Switzerland's'great-
crude oil by the oil-producing and ex- bers of the Organization of Petroleum est problem, and by r&luctions of
porting nations last year, he said. Exporting Countries. sudden and substantial exchange fates
Mr. Stopper, who retired at the end fluctuations, he said. Mr. Stopper
-*of April, told the recent anual meet- However, some oil analysts fear
added that the. hopes placed on the
ing of the Swiss central bank that it that a lowering of imported oil prices systems of floating currency rates
is assumed that oil-exporting "nations may not be desireable over the long- had not at all, or only partly been
will accumulate balance of payments term for national security reasons. A realized.
surpluses during the next five-to-ten lower impdrted oil price would in-
crease consumption of imported oil Mr. Stopper also urged careful
years at a rate starting at $60 billion examination into the possibility of
and -discourage investment to develop'
annually. commercial banks voluntarily aligning
domestic petroleum and non-petro-
Only a few countries would be able the credit policies and techniques to
leum sources of energy they contend.
to finance their balance of payments- the system of credit growth limits.
Lulled into a' false sense of security,
deficits arising from crude .oil pur- the United States, Western Europe The alternative to this cooperation
chases for some years through the and Japan would be even more vul- would be for the central banks to ob-
depletion of their foreign exchange nerable to an Arab oil .embargo such tain authority to institute restric-
reserves. One of these countries, Mr. as the one embarked oftQast October. tions on bank credit expansion, he
Stopper said, was probably Switzer- contended.
land. As for the world's financial sys- Mr. Stopper added that he hopes
tem, Mr. Stopper said that the United that gold wilT again one day resume
The other nations would be forced,
States' warning that the balance of its place as basis for a new interna-
as many are now, to borrow heavily to payments problems could become un-
finance payment of their balance of tional monetary system. He added
manageable should be taken very while raising the official price of gold
payments deficits. Among these na- seriously..
tions are now the United Kingdom, would not solve the problem of in-
France, Italy and others. In later Furthermore, the developments un- flation it would solve a let of other
years the interest payments on these by the crude ofl price in- problems.

195
EUROPEAN COMMUNITY APRIL 1974
Oil Price Rises Hit International Monetary System
The Arab oil weapon has turned the situation around. In the
The shock from rising oil prices has been felt in the economies
last three years, Saudi Arabia has seen its reserves rise from
of the entire world. The International Monetary Fund (IMF) has
$670 million to $3.7 billion. The World Bank estimates that, by
calculated that the "western" industrialized countries will have
1980, the Persian Gulf oil-producing states will have reserves of
to pay $50-60 billion more for their oil imports in 1974. For the
$280 billion, 70 per cent of world reserves.
nine EC countries, the figure is estimated at $23 billion.
What is to be done with all this money? The economies of
Such a large capital hemorrhage will further aggravate the
these countries, primitive and concentrated on one product, can
economic problems already facing the Community. Taking into
only absorb a small part of their revenues.
account the price rises in manufactured and agricultural goods
It is here that a ray of hope for monetary stability resides.
due to the petroleum product price rises, inflation will exceed 8
These monetary surpluses could be reemployed in the econ-
per cent annually. In addition, the dearth of supply will probably
omies of developed and developing oil-consuming countries.
accentuate the slowdown of economic activity and will raise un-
[For an example of such reemployment, see page 18.]
employment.
The IMF and the World Bank could perfect a system to channel
Finally, the accrued cost of oil will probably cause a deficit in
the money toward the developing countries and to the Western
the European balance of payments and seriously threaten the
markets. At the same time, a short-term stability could be as-
still embryonic system of the Community "snake." The French
sured by financing national purchases of oil through the sale of
decision to float the franc is a concrete consequence of the oil
gold reserves at market price.
crisis' influence on monetary affairs [see page 1 7 ] ,
These two plans were proposed at the meeting of the finance
DISASTER FOR THE THIRD W O R L D ministers of the IMF in Rome in January. There is no evidence,
Even if the developed countries' strong economies can weather however, that the Arab states would approve these proposals,
the crisis without long-term catastrophic consequences, the especially since they have had nothing to do with IMF affairs in
"Third World" countries present a different case. Many develop- the past.
ing countries are threatened with economic disaster by the oil A WORLD-SCALE CRISIS
price rises. The present increase in prices has already neutral-
In any event, the EC member countries should prepare for seri-
ized United Nations (UN) aid given to these countries. (UN aid
ous monetary problems.
equals one-fourth of the total aid they receive.)
Some EC countries will be able to balance the political capital
The developing countries import less than one-fifth of the total
exit caused by oil price increasesGreat Britain, for example,
oil imported by the industrialized countries. But the majority of
can attract considerable investments and thus find itself in a
the developing countries' imports are used in vital sectors,
paradoxical situation of a record commercial balance deficit on
which leaves a narrow margin of maneuver in efforts to econo-
one hand and a pound reinforced by monetary reserve increases
mize energy consumption. In addition, the general price rise on
on the other. Thus, Great Britain may be able to support itself
the international scale will make developing countries' other im-
until it has developed its own oil resources (North Sea) in about
ports more expensive. Most other imported products are as vital
10 years.
to these countries as oil.
Some developing countries could compensate for these dif- Other Community countries, like Belgium or France, which do
ficulties by increasing prices of their raw material exports. But I not have this capital market capacity, will be worse off. Their
balance of payments could feel a chronic deficit that they could
the slowdown of world industrial activity will reduce the demand not resolve alone. In fact, it appears that even the most favored
for raw materials, leading to a decline rather than an increase in nations cannot expect to find individual solutions. The monetary
prices. crisis is the last in a long list of common problems that demands
Other Third World countries which lack raw materials are on common policies and international solutions.
the edge of ruin. India, for example, strongly depends on ad-
vanced technological industries, especially the petro-chemical
industry. But, with its international credits already pushed to the
limit, India cannot pay for the crude oil for its refineries. The
world cannot ignore this crisis which affects hundreds of mil-
lions of people.
H O W TO USE THE NEW M O N E T A R Y SURPLUS

The Arab world's new position presents the international mone-
tary system with problems it is not equipped to face. In the last
20 years, monetary disequilibrium (payments deficits in certain
countries, excesses in others) was corrected by the system of
Special Drawing Rights (SDR's) or by bilateral loans between
central banks.

196
THE WASHINGTON POST May 10, 1974
Saudis t o K e e p O i l M o n e y
Yamani Rejects IMF Plan

By Bernard D. Nossiter
Washtofton Post Foreign Service
LONDON, May 9 Saudi
Arabian minister, Sheikh Zaki
Yamani, has rejectedat least
for nowa plan by the Inter- "We wont be amenable to
national- Monetary Fund to letting that money recycle to
protect the world's economy the Western economy for the
from currency disorders. sake of the Western economy
Since the fund scheme de- as such," he said. However, tej
pends heavily on the coopera- added, "That does not mean
tion of Saudi Arahi? and other we will never do it."
oil states with htige revenue Yamani's position is in sharp
surpluses, Yamani's cool res- contrast to the optimism voic-
ponse at a press conference ed just last Monday in Detroit
here today has placed the plan by Johannes Witteveen, IMF
in jeopardy. The IMF plan managing director. Witteveen
would recycle some of 1 this said that oil exporting states
Surplus to developing and in- "have taken a very positive
dustrialized countries hard hit attitude to s^v initiative" an<J
by the nearly fourfold increase that he was "hopeful" that the
in oil prices. fund scheme would be set up
The Arab minister told* re- before June 30.
porters that Western ext>erts Yamani did leave the door
were exaggerating the prob- open, however, to a modified
lem, that oil states would have version of the Witteveen plan.
"much less" than the esti- If the IMF would tie loans
mated $50 billion-in extra reve- from oil states to the consum-
nues this year. Later, he said er price index in the United
he thought oil state surpluses . States, Saudi Arabia-might be
would qot reach $25 billion. interested, he said.
In addition, he said, he did The Saudi oil minister dis-
not like the idea of the oil missed out of hand the moreJ
states losing control over their ambitious proposal for mone-
surplus revenues by lending tary and oil price stability!
them to an international agen- , now being discussed in Wash-
cy controlled by the West ington by Harold Lever, the
Iran, however, has come out British Cabinet minister and
strongly in support of the IMF financial advisor to Prime
plan. Minister Harold Wilson.
Above all, Yamani express-1 ' Lever prpposes that the
ed concern over the erosion United States and five other
that Arab loans to the IMF industrial nations collectively
might suffer because of the buy and distribute oil- and
rapid rate, of inflation in the then serve as a lending agency
West. financed by the surplus of
"For the time being," he producer states.
said, "you do not need" the
IMF plan. "We will absorb a
large part of the surplus we
realize," he said.

197
"I have had a chance to look fears that the ' purchasing
at the inside stprf" Yamani power of such credits would
said, "and I don't think the be eroded by price inflation in
consumers -will adopt ]this the West.
plan." -, ' That is j why he said he
He declined to explain fur- might be more "amenable" to
ther. But he apparently meant an IMF scheme linking oil
that American opposition hias . ' state credits to the American
already killed the Lever plan price index. In other words,
even before it got off the the Saudis might lend the
ground. IMF facility $5 billion if every
The one cheerful piece of 10 per cent rise in U.S. prices
news that the Harvard-trained increased the Saudi invest-
oil minister offered - tyas Ms ment by $500 million. '
view that crude prices ire ttifo' - The oil minister, whose trim
high. The Saudis, the world's goatpe' and mustache are now
largest oil producers outside internationally known trade-
the United States, had already marks, Said he expected to ne-
gotiate a new deal this sum-
brought the price of oil down
mer with the four American
from $17 a barrel to about $10, companies exploiting Saudi
he claimed. SHEIKH ZAKl YAMANI
Arabia's oil. They are Exxon,
*n% should he a Wit lovtfej\": <*, - - problem exaggerated jMobil, Stfirtdard of California
h,e said. "I think,it will go fur- ' * r ' ' - and Texagp. Their joint Saudi
ther downr^Bat he declined to todeai-wfth the-currency dis- concern is Aramco in which
spell out how. this would be locations threatened by the the Saudis already have 25 per
achieved. surpluses the Arabs and other cent interest.
Here Yamani runs into op- -oil states are now earning be-
position from the shah of Ir$n, cause of the; lfap in; oil prices. Yamani ,said that the exist-
who has sought to push oil Western pffieials Have esti- ing deal is : "out of date" and
prices. The Saudis, however, mated that the 'oil states, this that the Saudis need
Could force prices down' by yearwill earn $5Q bUl)oii more "completely different arranfee-
f
opening their taps and in- than thiey cfn |nyest in their menls." Oil industry execu-
tives think he will seek any-
creasing sharply their current ownûpttfes or ,use to buy
wfrwse from 75 to 100 per cent
output of about 8,5 million arms, goodând services from ofAramco in the next few
barrels daily. the West, ,%
i ea4.
Yamani said his country Witteveen' ha^ proposed cre-
would not increase production ating k "special facility?' or
to the 10 million barfel-a-day temporary loan, agency in the Venezuela Pledges
level planned before the Octo- IMF. I t would make seven-
ber war until the Arab-Israel year loani ,tp .Italy, Britain Money to IMF Plan
conflict is settled. But he did, and othjer countries now run- Reutet
hint at an increase above cur- ning big payments deficits be CARACAS, May 9-Vene-
rent production as one means cause of sharply increased oil ruela has pledged $540 million
of further reducing the price. -< -costs. " to the IMF to help countries
Yamani was talking about Funds for this "facility' whose balance of payments
the "realized" or actual sell- would, under Witteveen's plan, have been seriously affected
ing price of oil in the Persian come in part from the oil by the higher price of oil, cen-
Gulf as opposed to the "posted states with big surpluses. tral bank governor Alfredo
price" used for fixing royal- Thus the IMF would recycle Laffee said today.
ties and taxes. It is now money that Arabs and othei$ Laffee said at a news con-
around $11.65 for Persian Gulf can't absorb to countries"%ith ference' that Venezuela's con-
low-sulphur crude. emergency needs. . ,r, tribution to the IMF's oil-loan
yamani has been in Ldndon -The Saudis, .YamanT sa^d, fund was made on the condi-
primarily to see financial and wojild outlets for their tion that it be used preferen-
industrial leaders whom he urpjuj lending to the tially to help developing coun-
hopes to enlist for the rapid Wotld Bari|c, a new Arab-Afri- tries, especially in Latin
industrialization of Saudi Ara- efn/bank ,and financing tuf America.
bia. At a closed meeting of tffep têwer Saudi develop- The offer was made during
abdut 50 persons yesterday, he ment loan program. a meeting here with IMF man-
also voiced his coolttass to- .\AWrt frdtn losing political aging director Johannes Witte-
ward the IMF plan. 1 * " coritrol over oil money loaned veen who was present at the
, The meeting was proposed t& fcn IMF facility, Yamani press conference.

198
Hobart Rdwen THE WASHINGTON POST March 31,1974
Ttffi END of , the Arab oil embargo still leaves merce Secretary Peter Petersoft, now head of Lehman
the industrial world with a terrible dilemma and the Brothers, says that this "may wipfe out thp advantage
poor countries facing a disaster of unmanageable the United States increasingly enjoyed during 1973
proportions. from an under value dollar and restore roughly the
Although it has become fashionable in banking circles same condtions that existed prior to Aug. 15, 1971,
to suggest that financial gimmicks of one sort or an- when American goods encountered serious problems
other can "solVe" the problem, it is important for the of price competition ip world markets."
public to keep in mind that loans and investments Emminger, it should be said, thinks that the major
while great for the banking businesssolve neither nations will not engage in a cutthroat competition for
the difficulty of growing trade deficits nor the loss export markets typifie*) by exchan|e-rat# wars or
of purchasing power due to the higher price of oiL "beggar-thy-neighbor" pilicies.
There are two facts that should be But Japanwhich xqftift import virtually 100 per
remembered when anyone tells you that cent of its oilalready Jhas indicated that it will, junk
the energy i crisis is over because the the plans oace made to improve the standard of
Arab oil embargo has been lifted: living at home and return to the old emphasis of an,
First, despite some easing in the auc- export economy to improve its foreign exchange earn-;
tion price for oil in the Persian Gulf, the ings. That can'only mean a return to the bitter fights'
"mainstream" of supplies, as oil con- among Japanese, American and European manufac-
sultant Walter Levy points out, still turers to obtain and secure outlets for their goods.
ranges upward of $7 a barrel, compared Where does all of this leave ug? First of alj, we must
to $3 as recently as October 1973, $1.25 ignore the advice of such as Roy Ash, h$ad of,the Office
in 1971 and 90 cents before that. Thus, of Management and Budget, that a& allocation controls
the world oil bill for 1974 is something like $65 to $75 should be dropped once imports reach last August's
billion higher than last year's. levels. That would be stupid and short-sighted. We
Moreover, the secretary general of the Organization must accept as reality that the Arb oil.weapon has not
of Petroleum Exporting Countries, Dr. Abderramman been discarded, only temporarily suspended.
Khene, forecast on Wednesday that the cartel will boost Second, we have to make Project Independence be-
prices after the current freeze expires in July. Oil
prices are "artificially low," Dr. Khene alleges. The
OPEC governments, Watching the rate of inflation Economic Impact
around the world climb, are talking of a "take" in
taxes and royalties that will yield them about $12 lievable, rather than somethingas Peterson says
a barrel instead of the present average of $7.50. "which currently suffers from a credibility gap."
Second, as George W. Ball cautions, the end of the The United States government, if it truly believes
embargo "must still be regarded as provisionalfor that price is the real problem, can bring pressure on
the embargo cannon will continue to be loaded and the Arab monopolists only by setting specific produc-
ready for firing until the Arab-Israeli dispute is finally tion schedules and goals for oil shale, tar sands, off-
settled whicheven if we are luckyis not likely to shore oil, solar energy, and so on, that will diminish
occur for another two to three years." our dependence on Arab oil.
SO, EVEN with the oil embargo lifted, the oil problem If we yield to the temptation suggested by Ash
remains. For the less-developed countries which last to believe that the energy crisis is over, all necessary
year had a combined trade deficit of $11 billion, the effors to achieve major conservation in the use of oil
will go down the drain. '
staggering oil price increase means that th^y will wind
up with a deficit of $20 to $25 billion in 1974.
IN A NEW analysis called "Implications of World
For the industrial nations, as West German central Oil Austerity" which is gaining wide attention in Wash-
banker Otmar Emminger pointed out here the other ington circles, Levy comes to the conclusion that there
day, the situation varies. But even the supposedly must be a substantial cut in world oil consumption
wealthy United States faces an Arab oil "tax" which until the latter part of he 1970s, witty the burden of
wilj cut consumer purchasing power by perhaps $15 reduced production falling on Saudi Arabia, Kuwait
billion this year. And if prices go up, the situation and Abu Dhabi.
Will be worse.
Those are the countries in the cartel which are
Sorope and Japan are feeling pressure to boost
exports to earn more foreign exchange. Former Com-

199
Hobart Rowen
Will Worldwide Oil Austerity Continue?

ports to a lower level than a free market woulcj
under the least pressure to generate increased revenue bring about and to try to avoid an increase in the im-
and also the ones least ablebecause of their small port share of our energy supply."
populationsto absorb added goods and services from This is necessary not only because we no longer
the Western World in exchange for the^r oil. , can afford all of the oil we, would like to use, tyit
Whether these qguntries would agtee to reduce* because the cartel has demonstrated it is an unreliable
output while Iran, Iraq and others are expanding is source.
an unanswered question. But high oil prices unques- This will require some new disciplines. It means
tionably will force some kind of austerity in oil con- smaller and more economical carsby legislative order
sumption on the'West, if necessary-and a conservation program to cut
Economic Coiincil Chairman Herbert Stein, in a , energy wastage of the same order of urgency that
thoughtful speech on Project Independence, said this once was the accepted ethic in wartime.
past week tat "we will find it prudent to hold oil im-

200
PETROLEUM PRICES
Imports* Consumer pricest
(Dollars per barrel) (Cents per gallon)
Crude Gasoline Distillat
1973-Jan 2.75 3.92 2.46

Feb 2.73 6.16 2.76
March 2.82 5.53 2.98
April 2.84 6.25 2.84
May 2.90 7.05 2.77
June 3.05 7.64 2.90
July 3.15 7.32 3.39
Aug 3.25 6.87 3.39
Sept. 3.38 7.58 3.52
Oct. . . : ... 3.54 8.39 4.21
Nov 3.81 8.52 6.80
Dec 5.28 11.84 7.76
1974-Jan 6.71 13.23 1 1.95
Feb 9.09 17.02 9.35
March 11.08 17.99 13.76
The
Morgan
Guaranty
Survev
published monthly by
Morgan Guaranty
Trust Company
of New York
1974 Morgan Guaranty Trust Company of New York
MAY 1974

201
Those oil deficits

pick a number
M . S. MOIKICISOIUI
Latest official and semi-official calculations on just how the oil deficit will
be shared out are, if anything, even more frightening than the total numbers involved.
Here is a framework for readers to make their own calculations.
T rying to forecast this year's oil deficits has become

all the rage, and the Bank of England streaked in
with its contribution on 15 March, when it published its
about S23 billion for the oil-importing developing
countries.
However, these and subsequent official estimates are
latest Quarterly Bulletin. not forecasts in the ordinary way. They are simply
An attraction of this game is that the guesses can be suggestions of what might happen in given circumstances,
amended from month to month to keep speculation on and these assumptions include a good deal of polite
the boil. But although there is nothing certain about diplomatic fiction. One such assumption is that it may
the numbers (except that they are going to be very large), prove possible to maintain January's oil price levels
there have been very important changes recently in the throughout the year while at the same time maintaining
underlying assumptions that are being made. One of the growth of real output in the industrial world at
them is the official recognition that developing Countries between 3 and 4%. It is improbable that both these
will be unable to secure the financing they would need conditions can be satisfied at the same time, and if one
to maintain investment, output and employment; and of them is not, then the size of OPEC's suggested current
another is that the industrial countries will therefore surplus would shrink.
face deficits even bigger than those previously predicted.
The details of the way that official estimates have
changed and some of the ways in which they differ from Impact on the LDCs
each other are summarized in the tables at the end of Another polite fiction was that oil-importing develop-
this article. It will be seen that the financt ministers ing countries might somehow be able to find around
of the I M F accepted as a basis for discussion, in Rome in $23 billion to finance their projected current deficit
January, an OECD guesstimate that OPEC might run a this year, but that fiction, at least, was dropped by the
current surplus of about $55 billion this year offset time that OECD's Working Party I I I met in Paris in
by current deficits of about $32 billion for OECD and mid-February. Dr Otmar Emminger, the chairman of
the OECD group, disclosed merely that the industrial
countries' anticipated deficit was expected to be about
$40 billion rather than about S32 billion, but he de-
clined to go into the embarrassing details of what this
implied.
What it implied, first, was the official acceptance that
the oil-importing LDCs would probably be unable to
secure more than about S15 billion for thefinancingof
their current deficits this year, and that they therefore
face a considerable risk of recession and political insta-
bility.
The second implication was not merely that the indus-
trial countries faced an even bigger deficit than origi-
nally guessed, but that most of them face larger deficits
even than is being officially conceded now. This is
because the February estimates retained, among other
diplomatic fictions, the one that the US might be run-
ning a current deficit of around $4 billion this year.
But if the US current account ends in approximate
balance, as seems more likely, then the other industrial
countries would face between them a combined current
deficit of close to $45 billion, or about 50% more than
the combined current deficit being predicted for them

202
only a month earlier in Rome. No wonder that the

Jeluils were not emphasized, and no wonder either that
t-rance, Italy and the UK have been so quick to rush
- into the front of the queue for large Eurocurrency bor-
rowings (not to mention lesser fry like Greece, which
secured 5250 million in March, equivalent, on foreign
exchange earnings, to a single S2-5 billion borrowing
hy a country like the UK).
The forecasts of oil deficits will no doubt be changed
again, or several times, over the course of this year,
and it will be interesting to compare the results when
they are known with the guesses that were made. But
some assumptions seem reasonably safe:
1. That there may either be some fall in oil prices or
else a greater fall in oil imports than now being
estimated, and that OPEC's current surplus may
therefore prove somewhat less than the $60 billion
being suggested by the Bank of England or even the
$55 billion suggested by OECD, although that surplus
will still be very big;
2. That oil importing developing countries may go
short of oil,'or finance, or both; and
3. That the brunt of whatever the world's oil deficit
turns out to be will probably fall on the industrial
countries other than the US and Canada even more
heavily than most public statements have so far
suggested.
The tables below allowreadersto join the game with
their own guesstimates:
C a r a t payaaeate, 1974
$ billion
at Sept. at Jan. at Jan.
1973 1974 1974
prices prices* prices
US -It balance
Omada - i balance balance
Japan 1* -6 -8
France * -31 -3J
Germany 2*
Italy balance -31 -6
UK. -3* -7* -8/9
OECD 10 -32 -40f
non-oil LDCs -15 -23 -15
OPEC 5 55 55f
Official Rome estimates, January,
i Official Paris estimates, February.
Possible impact of higher o0 prim, 1974

(rise in cost of oil imports at 1973 volumes)
$ billion
OECD Bank of England
US 8i 9-4
UK 4* 4-3
Japan 7J 8-3
Germany 4| 5-4
France 4J 4-6
Italy 3| 4-7
OPEC surplus 55 60

203
NEW YORK TIMES
April 3, 197^
O I L BILLIONS FOR THE FEW - SAND FOR THE STARVING
By: Chester L. Cooper
WASHINGTON - - By t h e g r a c e o f A l l a h , a f e w M i d d l e
E a s t e r n n a t i o n s h a v e become r i c h beyond, e v e n t h e w i l d e s t
dreams o f t h e f a b l e d p o t e n t a t e s o f a n c i e n t A r a b y . Through
l i t t l e e f f o r t o f t h e i r own, 55 m i l l i o n p e o p l e - - o r , more
a c c u r a t e l y , t h e i r leaders - - of Saudi A r a b i a , Kuwait, I r a n ,
I r a q , Abu D h a b i , Q a t a r a n d L i b y a " e a r n e d " $16 b i l l i o n i n
1973 a n d a r e e x p e c t e d t o " e a r n a l m o s t $65 b i l l i o n t h i s
year. The s p i c e t r a d e was b u t s a l t a n d p e p p e r compared,
w i t h commerce i n b l a c k g o l d .
The r o l l o f t h e d i c e a n d t h e l e a d e r s 1 greed, h a v e
combined t o r a i s e h a v o c w i t h t h e e n e r g y - i n t e n s i v e , inter-
dependent economies o f W e s t e r n E u r o p e , Japan and t h e U n i t e d
S t a t e s and t o j e o p a r d i z e t h e d e v e l o p m e n t p r o s p e c t s o f s c o r e s
o f c o u n t r i e s i n A f r i c a , L a t i n A m e r i c a and A s i a . Because o f
q u a n t u m jumps i n o i l p r i c e s , w o r l d w i d e i n f l a t i o n i s s h a r p l y
accelerating. I n t e r n a t i o n a l monetary arrangements, c h r o n i c a l l y
f r a g i l e i n t h e most s t a b l e o f t i m e s , a r e u n d e r s e v e r e s t r e s s .
The s p e c t e r o f a w o r l d w i d e d e p r e s s i o n I s b e c o m i n g a l l t o o r e a l .
M e a n w h i l e , l i f e goes o n , a t l e a s t f o r some - - t h e l u c k y
ones whose o n l y u r g e n t n e e d i s o i l . But m i l l i o n s o f A f r i c a n s
a r e f a c i n g a n o t h e r , more t e r r i f y i n g c r i s i s . They a r e d y i n g
o f t h i r s t and h u n g e r . Unknown t h o u s a n d s have p e r i s h e d o v e r
t h e l a s t y e a r and s c o r e s o f t h o u s a n d s h a v e f l e d f r o m b a k e d
f i e l d s a n d d e s t r o y e d h e r d s t o r o t s l o w l y away i n u n f a m i l i a r ,
frightening cities.
On h i s r e t u r n r e c e n t l y f r o m t h e s u b - S a h a r a r e g i o n o f
A f r i c a , S e c r e t a r y - G e n e r a l W a l d h e i m o f t h e U n i t e d . N a t i o n s was
a g h a s t a t w h a t he h a d w i t n e s s e d . " P e o p l e s and c o u n t r i e s c o u l d
d i s a p p e a r f r o m t h e f a c e o f t h e m a p , " he s a i d . " T h i s r e g i o n has
n o t seen such a d i s a s t e r i n two c e n t u r i e s . "
The i n t e r n a t i o n a l c o m m u n i t y , o r r a t h e r a p a r t o f I t , has
n o t remained unconcerned.. A p p r o x i m a t e l y $350 m i l l i o n i n a i d - -
f o o d , money a n d s e r v i c e s ( n o t i n c l u d i n g a i r l i f t s ) - - h a v e b e e n
contributed, t o the s t r i c k e n c o u n t r i e s of Senegal, M a l i , Mauri-
t a n i a , Chad, N i g e r and. U p p e r V o l t a . Of t h i s , t h e U n i t e d S t a t e s ,

204
- 2 -
d e s p i t e d o m e s t i c p r o b l e m s , has c o n t r i b u t e d more t h a n
a third. The E u r o p e a n Economic C o m m u n i t y , r a c k e d b y
b a l a n c e - o f - p a y m e n t p r o b l e m s a n d i n f l a t i o n , has c o n -
t r i b u t e d s l i g h t l y less than a t h i r d .
The U n i t e d N a t i o n s a n d i t s s u b s i d i a r i e s , n o t
i n c l u d i n g t h e Food a n d A g r i c u l t u r e O r g a n i z a t i o n , has
g i v e n approximately 7 per c e n t . The F . A . O . has p r o v i d e d ,
s e p a r a t e a s s i s t a n c e , l a r g e l y f r o m A m e r i c a n and European
contributions. F r a n c e , West Germany, Canada, C h i n a ,
N i g e r i a a n d t h e S o v i e t U n i o n have made up t h e r e m a i n d e r .
On r e r e a d i n g t h e r o s t e r o f c o n t r i b u t o r s i one has t h e
f e e l i n g t h a t i t m u s t be i n c o m p l e t e . A r e t h e r e n o t some
countries missing? Some o f t h e v e r y r i c h , p e r h a p s ? Some
Moslem c o u n t r i e s , s i n c e m o s t o f t h e s t r i c k e n p e o p l e s o u t h
o f t h e S a h a r a a r e a l s o Moslems? Some f e l l o w A f r i c a n c o u n -
t r i e s , possibly? We had. b e t t e r r e v i e w t h e o f f i c i a l d a t a .
S t r i c t l y s p e a k i n g , t h r e e c o u n t r i e s were o v e r l o o k e d :
Libya c o n t r i b u t e d $760,000 - - from the $2.2 b i l l i o n i t c o l -
l e c t e d i n o i l revenues l a s t y e a r . Kuwait c o n t r i b u t e d
$300,000 - - from the $2,130 b i l l i o n of i t s o i l earnings i n
1973. But w h a t o f S a u d i A r a b i a , w h i c h e a r n e d t w i c e as much
as L i b y a ? Not a d o l l a r i n 1973? and. o n l y $2 m i l l i o n so f a r
this year.
A n d I r a q , w h i c h e a r n e d as much as K u w a i t ? Not a p e n n y .
Abu D h a b i , w h i c h e a r n e d o v e r $7 b i l l i o n , o r a b o u t $23., 000
f o r e v e r y one o f i t s i n h a b i t a n t s ? Nothing. And. Q a t a r , w h i c h
earned, a l m o s t $400 m i l l i o n , o r a b o u t $ 2 , 6 0 0 p e r c a p i t a ? Zero.
Bahrain? Zero. Algeria? Another zero. And w h a t o f I r a n , w i t h
a l m o s t $4 b i l l i o n i n o i l r e v e n u e s i n 1973 and. $15 b i l l i o n p r o -
jected. f o r t h i s year? A f u r t h e r zero.
A l t o g e t h e r , then, the Middle Eastern o i l - e x p o r t i n g nations

have c o n t r i b u t e d , l e s s t h a n 1 per cent o f t h e t o t a l a i d t o t h e
s t a r v i n g people south of the Sahara.
T h i s i s n o t t o s a y t h a t t h e y remained, e n t i r e l y a l o o f .
Not a t a l l . They r a i s e d , t h e p r i c e o f o i l , n o t o n l y f o r t h e
r i c h i n d u s t r i a l c o u n t r i e s b u t f o r t h e d e s p e r a t e l y p o o r ones
as w e l l . As a c o n s e q u e n c e , v i r t u a l l y a l l o f t h e A m e r i c a n

205
- 3 -
f i n a n c i a l assistance t o the s t r i c k e n countries of sub-

Sahara A f r i c a w i l l be absorbed, by t h e increased, c o s t o f
t h e i r o i l i m p o r t s - - a " c o n t r i b u t i o n " by t h e o i l e x p o r t e r s
t o t h e n e e d y t h a t should, n o t go u n n o t i c e d .
To be s u r e , , t h e A r a b League,, w i t h a l l d e l i b e r a t e s p e e d y
has been d i s c u s s i n g e a s i n g t h e b o r r o w i n g t e r m s and d o u b l i n g
t o a b o u t $400 m i l l i o n , , t h e c a p i t a l o f t h e A r a b Bank f o r
Economic Development i n A f r i c a . And. t h e r e h a s b e e n t a l k o f
p r e f e r e n t i a l o i l p r i c e s f o r some o f t h e d e v e l o p i n g c o u n t r i e s
and. some d e s u l t o r y d i s c u s s i o n o f e v e n t u a l l y d o i n g s o m e t h i n g
about the famine. But,, meanwhile., b y t h e g r a c e o f A l l a h , ,
t h e o i l f l o w s o u t and. t h e b i l l i o n s f l o w i n . And l i f e goes
orij f o r some.
THE WASHINGTON POST
April 3, 1974
VENEZUELA PLEDGES DEVELOPMENT A I D
V e n e z u e l a ^ whose c o f f e r s have been s w e l l i n g b e c a u s e

of higher o i l prices., yesterday told, the Inter-American
D e v e l o p m e n t Bank m e e t i n g i n S a n t i a g o t h a t i t w o u l d g i v e a t
l e a s t $ 1 . 2 b i l l i o n t o b e used, t o s e t up a t r u s t f u n d , t o
f i n a n c e development p r o j e c t s I n L a t i n America.
A t t h e same t i m e . , V e n e z u e l a a n d P e r u c r i t i c i z e d t h e
U n i t e d S t a t e s ' dominant r o l e i n the bank's a f f a i r s Agence
France Presse r e p o r t e d .
Venezuelan Finance M i n i s t e r Hector Hurtado t o l d the

b a n k m e e t i n g t h a t when L a t i n A m e r i c a n c o u n t r i e s contribute
more o f t h e b a n k ' s c a p i t a l . , "no c o u n t r y i s g o i n g t o be a b l e
t o c l a i m f o r I t s e l f the r o l e of leader or o v e r s e e r . " The
U n i t e d . S t a t e s c o n t r o l s more t h a n 40 p e r c e n t o f t h e b a n k ' s
3 7 - 2 1 1 O - 74 - 14

206
-2-
board of governors, w i t h the remaining votes s h a r e d by

22 L a t i n A m e r i c a n c o u n t r i e s and Canada.
U . S . T r e a s u r y S e c r e t a r y George P. S h u l t z t o l d , t h e
m e e t i n g t h a t t h e U n i t e d S t a t e s welcomed " t h e i n i t i a l
p o s i t i v e response o f t h e o i l p r o d u c e r s o f t h i s h e m i s p h e r e --
and i n p a r t i c u l a r V e n e z u e l a - - who have announced t h e i r
i n t e n t i o n s t o provide major help t o s i s t e r nations.11
S h u l t z s a i d t h a t because o f h i g h e r e n e r g y p r i c e s , t h e
I n t e r - A m e r i c a n Development Bank, w h i c h makes development
l o a n s t o L a t i n A m e r i c a , must "husband t h e s c a r c e c o n -
c e s s i o n a r y funds . . . f o r t h e p o o r e s t . " The IDB a l s o
s h o u l d p u t g r e a t e r emphasis i n i t s l e n d i n g on e n e r g y p r o j e c t s
and. member c o u n t r i e s a l s o s h o u l d a l l o c a t e more o f t h e i r own
i n t e r n a l i n v e s t m e n t funds t o w a r d e n e r g y , he s a i d .
S h u l t z a l s o v o i c e d c o n c e r n t h a t t h e w o r l d ' s raw m a t e r i a l s
producers might form c a r t e l s t o a r t i f i c i a l l y r a i s e the p r i c e s
of t h e i r exports. He a l s o c i t e d , " e x p o r t t a x e s and. o t h e r
r e s t r i c t i o n s aimed a t i n s u l a t i n g d o m e s t i c m a r k e t s f r o m t h e
g e n e r a l upward t r e n d o f p r i m a r y - p r o d u c t p r i c e s . "
He n o t e d t h a t r i s i n g f o o d p r i c e s i n t h e U n i t e d S t a t e s
have t r i g g e r e d s t r o n g s e n t i m e n t s t o w a r d i s o l a t i n g t h e U . S .
economy f r o m t h e r e s t o f t h e world..
THE WASHINGTON POST
March 1 4 , 197^
By: James L . Rowe, Jr.
MORE DEVELOPMENT A I D ASKED OF O I L COUNTRIES
The heads o f t h e f i v e m a j o r i n t e r n a t i o n a l f i n a n c i a l
o r g a n i z a t i o n s y e s t e r d a y s a i d t h e i r o r g a n i z a t i o n s need some
of the "increased f i n a n c i a l assets of the o i l - e x p o r t i n g
c o u n t r i e s " t o h e l p d e v e l o p i n g c o u n t r i e s pay t h e i r h i g h e r
energy b i l l s .
The heads o f t h e o r g a n i z a t i o n s , .including the Inter-

207
-2-
n a t i o n a l M o n e t a r y Fund. and. t h e World. Bank, n o t e d t h a t t h e

h i g h e r energy b i l l s not o n l y t h r e a t e n t h e balance of pay-
ments s i t u a t i o n s o f t h e d e v e l o p i n g c o u n t r i e s , b u t a l s o
j e o p a r d i z e " t h e o r d e r l y e x e c u t i o n of development programs
and t h e g r o w t h p r o s p e c t s o f t h e i r e c o n o m i e s . "
L a s t month, I r a n announced, t h a t i t would, make a v a i l a b l e

$ 1 b i l l i o n o f i t s s u r p l u s o i l revenues t o a s p e c i a l IMF-World.
Bank f u n d w h i c h would, h e l p c o u n t r i e s pay t h e i r h i g h e r o i l
bills. However, r e p o r t s f r o m T e h r a n s a i d t h e I r a n i a n i n v e s t -
ment would be made a t a c o m m e r c i a l r e t u r n of 7 t o 8 p e r c e n t .
The agency c h i e f s s a i d y e s t e r d a y t h a t a c o n s i d e r a b l e
p o r t i o n o f b o t h t h e l o n g - t e r m and s h o r t - t e r m a i d t h e d e v e l o p -
i n g c o u n t r i e s w i l l need, "should, be made a v a i l a b l e on con-
cessional terms."
They emphasized t h a t "advanced, c o u n t r i e s have a c o n t i n u i n g

r e s p o n s i b i l i t y for providing aid resources." They p o i n t e d out
t h a t " t h e o i l - e x p o r t i n g c o u n t r i e s now have a g r e a t e r c a p a b i l i t y
t o share t h e burden of the a d d i t i o n a l i n t e r n a t i o n a l a i d e f f o r t ,
b o t h t h r o u g h t h e i r own c h a n n e l s and t h r o u g h c o o p e r a t i o n w i t h
existing institutions."
B e s i d e s IMF d i r e c t o r Johannes W i t t e v e e n and W o r l d Bank

P r e s i d e n t R o b e r t S. McNamara, A n t o n i o O r t i z Mena o f t h e I n t e r -
A m e r i c a n Development Bank, Abdelwahab L a b i d i o f t h e A f r i c a n
Development Bank and S h i r o I n o u e o f t h e A s i a n Development Bank
met March 12 " t o assess t h e i m p a c t o f t h e c u r r e n t i n t e r n a t i o n a l
e n e r g y s i t u a t i o n on t h e d e v e l o p i n g member c o u n t r i e s o f t h o s e
institutions."
The I n t e r - A m e r i c a n Development Bank issued, a statement

on t h a t m e e t i n g y e s t e r d a y .
The f i v e e x e c u t i v e s a g r e e d t h a t " i n t h e l i g h t o f t h e
e x p e r t i s e and e x p e r i e n c e o f t h e i r r e s p e c t i v e i n s t i t u t i o n s i n
e f f e c t i v e l y channeling resources t o the developing w o r l d , t h e y
have t h e c a p a c i t y t o p l a y an i m p o r t a n t and t i m e l y r o l e i n t h e
international aid effort.
"To p e r f o r m t h i s f u n c t i o n , a d d i t i o n a l funds a r e r e q u i r e d
by t h e s e I n s t i t u t i o n s and a s p e c i a l e f f o r t s h o u l d be made t o
m o b i l i z e such r e s o u r c e s f r o m t h e i n c r e a s e d f i n a n c i a l a s s e t s
of the o i l - e x p o r t i n g c o u n t r i e s , " i t s a i d .

208
Financing the oil deficits
V*
II. Johanna Wiilcvwn

Managing director, International Monetary Fund, Washington D.C.
The enormous deficits of the western industrial world could lead to savagely nationalistic
reactions. It is to help try and avoid these that the managing director of the Fund has
devised the new special drawing facility to help countries through this period. Here he
describes the plan and its aims, and he sounds a warning.
U ncertainty and change, it is a truism to say, are no

strangers to the international monetary system. In
recent years, however, and more particularly in recent
How much deflation?
It is, of course, much easier to inveigh against inflation
than to suggest effective and workable policies to control
months, the pace of changc has accelerated. There have it. At the present time policy choice is particularly
been large movements in the relative value of major difficult because of the deflationary effect on real demand
currencies and a general departure from the system of of the new oil prices. These prices will bring about a
fixed exchange rates that has prevailed since the war. substantial transfer of purchasing power from oil-
Gold has ceased to be bought and sold at its official importing countries to oil exporters. Since the spending
price, and gold priccs in the free market have reached capacity of the latter is much less than that of the former,
levels that would have seemed unthinkable even two at least in the short term, the result will be marked con-
years ago. Now the dramatic developments in the energy traction in real demand. In its economic effect, therefore,
situation have introduced new elements of uncertainty the oil-price increase is similar to a tax increase or a
and the prospect of substantial changes in economic sudden growth in savings. How large this deflationary
relationships. effect will be depends on a number of factors: the extent
The enormous increase in oil prices presents countries to which the labour force seeks and obtains compensating
with many difficult decisions, both in their domestic increases in wages; the size of the consequential change in
and in their external policies. Besides imparting an ad- business profits; the scope for reduction in consumers'
ditional push in the direction of cost inflation, increased savings; the speed with which oil-producing countries
energy costs will have a deflationary effect on real expand their imports; the extent to which increased
demand. saving in the oil-producing countries can be channelled
into higher investment in the consuming countries and
Externally they will give rise to a substantial dis-
so on.
equilibrium in the global balance of payments. This
combination of circumstances will place strains on the Within limits, a measure of deflation may be welcome
monetary system far in excess of any that have been in reducing excess demand; but where the deflationary
experienced since the war. To withstand these strains impact of high oil prices is more than is needed to remove
with a minimum adverse impact on economic trade and existing pressures on resources governments may need to
growth requires close co-opcration between governments take some offsetting action. The task of domestic manage-
and a willingness to subordinate short-term national ment will be, as always, to strike the right balance
interests to the longer-term general good. To help between stimulation and restraint. Policy choice is even
achieve this the International Monetary Fund must more difficult at the present time because of the con-
provide its member countries with guidance and support siderable uncertainty concerning the magnitude of the
to help ensure that appropriate policies are adopted 'oil factor' on demand. Furthermore, since rates of
and, where necessary, to assist in financing structural inflation are already high, and confidence is brittle, the
adjustment. penalties for miscalculation are probably greater than
Undoubtedly, inflation will' continue to be a major usual.
problem in the year ahead. Even before the increase in Apart from posing difficult domestic policy choices, the
oil prices, inflation was running at an unacceptably high oil-price increases also create a need for balance-of-
level in the developed countries. Now the prospect is for payments adjustment, an area which is a particular
rates of price increase in doublefiguresfor many, perhaps concern of the Fund. If oil prices remain at the levels
most, of them, in the developing world the situation is established last December, the combined current sur-
similar and for some countries worse. Even in those pluses of the oil-exporting countries could, in 1974,
countries which have pursued reasonably sound domestic be as high as S65 billion. These surpluses will have to be
policies imported inflation has pushed the price level up at matched by deficits of equivalent amounts for the oil-
historically high rates. There has thus been a dangerous importing countries taken as a group. The developing
acceleration of inflation throughout the world, which at countries alone face an additional import bill approach-
the present time shows no signs of abating. ing $10 billion, afigureroughly equivalent to their total
W Enromoney April 1974

209
receipts of official development assistance. conditions to be applied to drawings. The relevant part
Faced with these deficits, there is a danger that the of this reads as follows:
external policies of the oil-importing countries may come 'In these difficult circumstances the Committee agreed
into conflict with each other. It would be inappropriate that in managing their international payments countries
for the oil-importing countries to use deflationary de- must not adopt policies which would merely aggravate
mand policies to try to eliminate the additional current the problems of other countries. Accordingly, they
deficit caused by the rise in oil prices. Such policies stressed the importance of avoiding competitive de-
would only shift the balance-of-payments problem from preciation and the escalation of restrictions on trade and
one oil-importing country to another and might have payments. They further resolved to pursue policies that
cumulative depressing effects on the world economy. would sustain appropriate levels of economic activity and
Equally unfortunate would be an attempt to solve employment, while minimizing inflation. They recognized
balance-of-payments problems by import restrictions. that serious difficulties would be created for many de-
This would not only, again, shift the problem from one veloping countries and that their needs forfinancialre-
oil-importing country to another, but would also give sources will be greatly increased; and they urged all
rise to serious trade conflicts and reduce the flow of in- countries with available resources to make every effort
ternational trade in a most harmful manner. Of course, to supply these needs on appropriate terms'.
the presentflexibilityof exchange rates should be used to To an important extent the fund will be able to finance
facilitate adjustment. But if a number of large countries drawings under a new facility from its existing resources.
were to try by this means to reduce their current account Hoover* if there is a heavy demand to draw, the Fund
deficits to an extent that was inconsistent with the un- will need to supplement these by borrowing. Although
avoidable total deficit of oil-importing countries, the one would naturally think in this connection of borrow-
outcome might be a return to beggar-my-neighbour ing frbm the oil-exporting countries, funds could also be
policies. It is gratifying that the Committee of Twenty obtained from those oil-importing countries which
at its Rome meeting showed itself to be fully aware of receive a large capital flow and which are relatively less
these dangers. affected by oil price increases.
In the present situationfloatinghas several advantages
and is probably unavoidable. But given the volatility of A breathing space
exchange markets, and the need for many countries to The purpose of the new facility is not to obviate the
accept large deficits on current account, there is a clear need for adjustment, but to provide a breathing space
need for constructive management of thefloatingregime. which will enable countries to avoid inappropriate ad-
Whatever happens, there are bound to be strains on the justment policies. This breathing space should be used for
mcchanisms whereby offsetting capitalflowsare induced consultations on the nature of the needed long-run ad-
tofinancethe enormous current account in balances to be justment and to cover the transitional period during
expected this year. The Eurocurrency market will have an which the necessary policies are put into effect. To the
extremely important role to play in attracting surplus extent that the current account deficit should be financed,
funds from oil-producing countries and lending them to the Fund should encourage its members to adopt policies
countries in deficit. However, in view of the preference that will help attract the necessary capital inflows. To the
of oil-producing countries for short-term deposits, and extent that some improvement in the current account is
the need of deficit countries for at least medium-term necessary, the Fund should endeavour to see that this
loans, there will be a very heavy burden on this market, is not achieved through excessive currency depreciation
about which there is already some concern. It seems im- or unjustified exchange restrictions.
probable, therefore, that all deficit countries will find it There will, of course, be difficult policy decisions in-
possible to borrow from the market to the required extent volved in the adjustment processnot only concerning
and on reasonable terms. It is to meet these unfilled the nature of the policies that are applied, but also con-
needs that I have proposed a special new facility, limited cerning the extent. Both under-adjustment and over-
in time, and related to the higher costs of imported oil. adjustment carry their different dangers. The task of the
Fund must be to try and help its member countries to
Avoiding economic nationalism chart this difficult middle course. The dangers of a failure
The facility would be designed to deal with an emergency to chart such a course are recession on the one hand and
situation and would not be a permanent feature of the a worsening of inflation on the other. The dancers are
Fund. It is proposed that the facility should be related to the perpetual Scylla and Charybdis of economic policy;
higher oil costs incurred in 1974 and 1975, taking into but on this occasion the whirlpool and the rock seem to
account the relative ability of countries tofinancetheir be uncomfortably close together.
current account deficits by net capital imports, or by
reducing the level of their net international reserves. The
maximum amounts drawable in the first year would
constitute, within limits related to quotas, an important
proportion of the impact effect of oil-price increases, but
this proportion would decline in 1975.
The conditions for use of the facility would be specific
to the drawings under it. Countries would be expected to
undertake the following policies, for example, in regard to
the exchange rate and incentives for capital inflows that
would facilitate the appropriate adjustment. It should be
possible to use the text of the Committee of Twenty
communique as a basis for reaching agreement on

210
T H E WASHINGTON POST April 12, 1974

Joseph Alsop
From Energy Crisis to Dpllar Crisis

NEW YORKMaybe it is a bad mis- from the enohnous increase- in the .'(fyclng eountrlea, there ii a rather gen*
take to come up here to $sk the insid- price of crude oil in recent months. era! tendency to argue>that "tne sys-
ers on the money market about the fu- This has created an entirely new situa- tem can take it."
ture effects of the miscalled "energy tion for all of the world's leading fi- In this respect, David Rockefeller,
crisis." It makes you feel that the nancial-industrial powers, including head of the Chase Manhattan Bank,
Watergate-besotted political commu- the U.S., since these are also the big stands almost alone. This is because he
nity in Washington resembles nothing oil-importing powers. has been saying forthrightly, albeit pri-
so much as a party of drunkards in a By the beat estimates of the leading vately, tha} he cannot see how the ex-
graveyard, boozing away among the expert in the field, Walter J. Levy, the isting financial system can possibly
corpses. oil-importing countries will end this stand the double strain ahead.
year owing the oil-producing countries ' The first pert of the double strain
The reason for this dire, perhaps ex- will be inability to pay their bills, and
treme sensation is really pretty simple. no less than $50 billion. This will be
net debt, please remember, after sub- therefore the continuously increasing
The wisest and most conservative ipen
in the economic andfinancialcommu- tracting the costs of everything kthe oil indebtedness of the U.S., Japan and
importing countries can persuadaythe the other leading financial-industrial
nities have begun to talk helplessly
about the threat of an onrushing, oil producera to buy from them, ajl'the ' nations in Western Europe. The second
way from perfumes to bomber plane*. part of the double strain will be the
Worldwide financial calamity in many
respects as serious as the Great De- immensity of the sums owed to the oil
pression of the '30s. As stated in t M previous report In producing countriestens of billions
this apace, all the tigns further suggest upon tens of billions, In fact, all sluic-
If these apprehensions have any thianet debt will be In the nature of a ing about in search of Investments.
Inundation, the! leaders of both politi-
cil parties and all other memben of The pptimists suggest that a way out
the political community ought to begin " will be found by selling the oil produc-
worrying, too, along with the Insiders added to it in 1075and so on Indefi- ing countries large chunks of the econ-
on the money market. The worst of it nitely, unlets tomathlng gives* way omies of the big oil importing coun-
is that by any logical test, the appre- somewhere with a rending crash. tries. This raises an interesting policy
hensions of threatened calamity ap- question, to begin with. Fat do we re-
pear to be well founded. On this matter of aometbint giving ally want great numbera of the prlp**
way somewhere, there la a, dmsioq. of pal financial and industrial
, Here one mptt, begin by noting that opinion. Among the greii American In the U.S. to be owned by 4
the "energy #isis!' is miscalled, be- banks, whoae deposits may be vastly Iranians?
cause It is a apohey crisis rather than and profitably awollen by the ever-
an energy crislfc^t results exclusively mounting funds owed to the oil pro- But aside from the policy question,
the eptimists' way out also raises a

practical question. On their system,
the oil producing countries will makf
overseas investments in jusjt yaari,
1974 and 1975, ^n amounts abotft $10*
billion higher than >va|M
of all the overseaf
mulated by the US. sine* I t ^ f t i e pH'
p roducert'JotfeJgn K ^ n g a $y tifc and
But no one makfa investment* over-

seas or* "without jgxpfebtiog*
reasonable return. a return Is
now thought to be aPc^ng: 10 par cent
per annum. At the of 1&76,
therefore, the c4 importing fcOtmtriftB
will have to face another yearot going
into debt fif fehergyty tfyt (funount of
$50 billion. And tfay will jUaofwe the
oil producers'" k^Mx* Mk* $10
billion In intrnmt-ltywmiHmtial -
The year following, oCinter-
est and/or dividends wH then rise to
btiltai. And So It will irtarrily con-
at leajt in thecfl^rButin prac-
tice4t cannot possibly c o o k i e ihtbis
âmfar. Unless oil prices edme down
draattoaUy, eomethinc really wi^l give
way aotnewhere.

211
FROM FINANCE MAGAZINE, JUNE 1974
Arab Lands Amm) in Cast?

Quadrupling of price of oil begins to flood Middle East with Incredible Riches.
The recipients' initial reaction has been to seek refuge in traditional short-
term money markets, juicy real estate deals in New York and Paris. But the
sheiks will wind up holding so many chips, the world financial system could
be ruined unless they unbend and lend at longer term, meeting maturity needs
of deficit oil-consuming lands. In due course, the Arabs might even develop
an appetite for common stocks, but that could still be a long time off.
By H. LEE SILBERMAN
4 6 / ^ N E THING you can be sure about rialize in only three years. Saudi the oil began to run up sizable
V - J the Saudi Arabians. They have Arabia alone is likely to accumulate balance-of-payment deficits because
no intention of being a patsy for at least $50 billion over the three of the higher oil prices and funding
anybody, aimlessly sloshing money years. most of these bills through the inter-
around the world." With oil-payment checks reflecting national banking system, that mech-
Speaking is a Wall Street financial the higher prices recently starting to anism itself is in jeopardy of a
executive, recently returned from a pour into Arab coffers in some vol- breakdown. The problem, David
trip to Jeddah, the financial center of ume, the Middle Eastern countries Rockefeller, chairman of Chase
the huge Moslem land. He might just are now having to make increasingly Manhattan Corp., and its subsidiary
as well have been speaking for all of difficult decisions concerning the dis- Chase Manhattan Bank recently
the soon-to-be incredibly wealthy position of their embarrassment of explained, is that "banks have
Middle Eastern oil producing coun- riches. " A r a b oil money historically been taking this short maturity
tries. has been invested at short term in money and relending it to oil-con-
Since the Arab oil producing coun- Treasury bills in the U.S., in sterling suming nations for periods of five to
tries quadrupled the price of oil last or i n the E u r o d o l l a r and E u r o - seven years." Such a process "ob-
fall, the annual cash flow to that part currency in markets abroad," says viously makes a very unbalanced
of the world has swelled by over the Wall Street financial man. "That and precarious maturity structure,"
$100 billion. Of that, the countries was no sweat because the amounts M r . Rockefeller warned in a recent
are expected to wind up with an were modeston the order of $10 address to the Spring meeting of the
estimated $60 billion after paying all billion or so. But now with their cash
of their bills this year, up from a $4 flow starting to pile up," he contin-
billion surplus by the same lands in ued, "concentrations in the short end
1973. could be self-limiting, forcing down
By 1975, howeverjust one year rates. That means we can expect
latertotal monetary reserves of oil some lengthening of maturities,
producing nations, including such though they will still probably stay
other oil-rich Arab lands as Iran, relatively short, at least for starters."
Kuwait, Iraq, United Arab Emir- The maturity preferences of Arab
ates and Libya, are likely to exceed investors are actually a matter of
$145 billionand $210 billion by considerable concern to international
the end of 1976. These are mind- bankers and monetary officials. The
boggling amounts, expected to mate- reason is that as countries that buy
44

212
prestigious U.S. Business Council. ganization is setting up a merchant interests in Beirut banks are New
The Chase chief executive empha- bank to manage securities underwrit- York's Chemical Bank and Fidelity
sized ihe need to develop mechan- ings in Saudi Arabia and a commer- Bank of Philadelphia. The Lebanese
isms whereby the "huge surpluses of cial bank in Iran both jointly capital is also the center for the cre-
the oil producers can be recycled owned with local participants; Chase ation of merchant banks, in which
back to deficit oil consumers." He has also established branches in Western banks are playing a role as
expressed the hope that "countries in Egypt, the United Arab Emirates partners or advisors. One such
the Middle East, as they become and elsewhere. It has a long way to bank is Arab Finance Corp., which
more familiar with the recycling go, however, to catch up with its while 56% Arab owned, also has
process, will at least agree to place New York archrival, First National New York's Manufacturers Hanover
funds at longer maturity." City Bank, which has long operated Trust Co. and banks in Tokyo and
Other solutions for resolving the branches both in Jeddah and Riyadh, Paris as partners.
problems outside the banking sys- capital of Saudi Arabia as well as in It is only a matter of time in the
tem have been proposed. Johannes Abu Dhabi. Bahrain and Qatar view of U.S. investment experts, be-
Witteveen, managing director of the among other places in the Middle fore many of the Arab countries
International Monetary Fund, for East. direct a significant portion of their
example, has called on the oil- The more recent inundation of the newly gained oil billions into me-
producing countries to advance some area with a rising tide of oil money dium and longer term investments.
$2.7 billion to a special new "oil has triggered a rush to those Arab Recent experience in Saudi Arabia
window" at the IMF which in turn lands by major banks from the U.S., shows that such direct investments
would lend the funds to the deficit France, Japan and elsewhere. In re- are initially made at home for
ridden oil-importing lands. cent months, First National Bank of schools, government buildings,
Chase Manhattan itself has be- Chicago announced opening a branch roads, hotels, office buildings, apart-
come increasingly involved in the in Dubai while its hometown comment houses and the like. But be-
Middle East. The global banking or- petitor, Continental Bank of Illinois, cause countries like Saudi, Kuwait
was buying into a Bahrain Bank. But and Iran are underdeveloped indus-
the most concerted activity is taking trially, there is a limit as to the long-
place in Beirut, the Arab world's tra- term financing they can absorb. The
ditional financial center. Prominent ultimate aim of each country's plan-
U.S. banks that now hold important ners, according to a well posted New

213
Y o r k banker, is to accumulate U.S. relates, admiringly, a personal valuable finished products instead
enough profitable investments out- encounter in a surburban area on the just the oil itself.
side its borders that will yield suffi- outskirts of Jeddah. " I had long Next to its own infra-structure, the
cient income to replace its oil rev- known the section to be sparsely set- Saudis are increasingly involved in
enues as they run out. tled and consisting of older scattered strengthening the basic economic un-
While still on a modest scale, long- residences, but I had not been out derpinnings of its Arab neighbors.
term foreign investments by Middle that way for six months or so. Imag- Toward this end the government is
Eastern countries are beginning to ine my surprise to discover the area setting up its own Islamic Bank with
build up, in real estate, selected se- completely transformed into a mod- no less than $1 billion capital for aid
curities and some direct investments ern planned neighborhood, with wide to the Arab world. It is also spon-
in industry. Newspaper financial paved streets, shops and homes. I soring a Cairo-headquartered Arab
pages in recent months have head- frankly didn't recognize the place, in African Bank, which will channel
lined such developments as the pur- a city where I have lived all my life!" Arab funds to African countries. In
chase of a large office building on Experiences like these buoy the these efforts Saudi Arabia and Egypt
Fifth Avenue, New York, by Shah sense of pride and mission of the have drawn closer together in a com-
Mohammed Riza Pahlevi of Iran; a Saudis and add to their zeal to put bination harnessing Saudi's financial
$27 million investment by a group their newly earned billions to good resources and pioneering zest and
of Kuwaitis in a planned luxury off- use. "When I see something like Egypt's more mature economic and
ice and bank building on the Champs this," the Saudi continues, " I am social structure; Egypt itself pro-
Elysees in Paris, to be called the overcome by the conviction that we duces no oil. The relationship is
House of Kuwait; and the acquisi- will play a catalytic role not only made even more secure because of
tion of about $1 million in raw land in the Arab world but in the world Saudi's reliance on the fertile Egyp-
for development in California by of finance as well. There are many tian Sudan as the country's bread-
Adnan M . Kashoggi, a Beirut-based things we will want to do as our plan- basket, a tie it recently knotted with
Saudi Arabian, who also purchased ning evolves; a few years from now, the guarantee of a $2.5 billion loan
two California banks. to Cairo.
Other major deals involving pool-
ing investments and businesses
As the Arab world begins to flex
its new-found oil wealth, major in-
... we will see Arab money
are in the works. It is reported, for ternational banks have come con-
example, that the Saudi Arabian
move into quality stocks,
spicuously to the fore to join with
Government has talked to Chase when conditions in the U.S. Arab banking interests, to help
Manhattan about the possibility of economy and markets smooth their path in the world. In-
Chase managing a pool of $200 mil- become more promising. vestment banking houses based in
lion in Saudi Government funds for the U.S. and elsewhere are not quite
investment in Saudi business and in as much in evidence in this process,
joint ventures with foreign partners I look for considerable emphasis in at least at the time being, probably
whom Chase would find. Earlier this joint ventures abroad many of because of the Arab countries' pre-
year the Kuwait Investment Co., one them, I expect, in the United States. deliction at this stage in their finan-
of several owned jointly by the Ku- We will approach these opportu- cial evolution to invest their surplus
wait Government and individual Ku- nities, I am sure, with the concept of oil funds mainly through the bank-
wait investors, bought Kiawak Is- having a benevolent and stabilizing ing system. There seems to be little
land off Charleston, S.C., for a re- effect on world finance. doubt, however, that the securities
puted $17 million in cash; the com- For the time being, the major fo- industry, both in New York and
pany plans to spend more than $100 cus of Saudi investment planners is London, will bulk larger in the pic-
million developing it as a residential on the country's infra-structure as ture as the Arab investors grow more
resort over the next 15 years. well as that of the Middle East in comfortable with longer-term debt
The Arabs' emphasis on real general. The emphasis thus is on and equity investments.
estate is understandable because it is such fundamentals as roads, power " I am quite confident that we will
visible and tangible, attributes cau- generation and transmission, schools see Arab money move into quality
tious investors can readily appre- and the like. The government at the stocks, when conditions in the U.S.
ciate. Arab investors, moreover, same time has begun to lay the economy and markets become more
have been realizing a fabulous re- groundwork for the development of promising," says the Wall Street fi-
turn on real estate investments at industry that, it is believed, will bene- nancial executive. "Right now, the
home: real estate in the center of fit the country most. This is the build- tendency is for Arab investors to
Jeddah is said to have trebled in ing of a full-fledged petrochemical carefully assess equity opportunities
value over the past 12 months alone. industry to refine the crude after it is and the market process, while their
As a result of this kind of appre- brought to the surface, thereby en- general approach toward the stock
ciation, a lot of oil money is being abling the country to expand its ex- market is one of considerable cau-
sunk right into the land at home. A port earnings even more significantly tion."
Saudi student, temporarily in the through the shipment of the more Then again, whose isn't?

214
T H E WASHINGTON POST M a r c h 31, 1974
Hobart Rowen
T h e Oil Crisis Will Continue'

The Arab oil weapon has temporar- , that "Israel alone" will bear the re- curity than any combination of K i r * I
ily been laid on the shelf, within easy sponsibility for "more severe oil meas- pean nations.,
reach by the managers of the export* ures, in addition to the other varipus
ers' cartel. It has not been abandoned, resources which the Arab world can Because it has not succumbed to
and it would be a mistake, ior the master in order to join the battle of blackmail, the United States has so far
American public to delude Itself into destiny." not chosen this course. Hopefully, the
thinking that the Vienna announce- ' Nixon administration will not b* vkA
Plainly, this is a threat to use not icked by the new harsh language i.
ment of the lifted embargo has more only oil itself, but oil money, as it piles
than marginal meaning. the cartel's Vienna announcement, o*
up, as a bludgeon over the West By by a political need for some new dlplo*
So long as prices for oil remain sky- moving large blocks of capital in and matic "success" to .offset Watergate
high-^triple what they were prior to out of money markets, for example, a troubles. f
the embargo-and so long as produc- concerted drive by the oil cartel coun-
tion levels are carefully controlled by tries could shake Western currency We can anticipate a flood of faifljr
the oil-producing states, the oil crisis markets. Demand for payment in gold, optimistic assessments from the majofr
will continue. from those who have limited supplies banks and the big oil companies wha
of gold, could also weaken the finan- are heavily engaged with the produc
Of course, it will be difficult to sus- ing countries in oil and money .mat-
tain public concern about the oil crisis cial underpinnings of the West. And
large-scale industrial and commercial ters. It isn't reasonable to Iodic' 16
if gasoline becomes somewhat more bankers or oil presidents for a re-state*
readily availablealbeit at prices investments in industrialized countries
could provide the Arab nations with a ment of the need for independence
nudging 70 cents a gallon in the East frofll Arab oil. i.
degree of leverage over economic
But the most difficult problem cre- prospects and Job opportunities.
ated by higb oil pricesthe potential But if that crucial drive gets lost lnf
for economic recession in the industri- It is not at all far-fetched to visual- a misplaced euphoria over a slight jig.
ize a scenario in which the embargo gle in the use of the Arab oil weapon,'
alized worldremains unsolved. it will be a shame. They have the abft*
might be threatened again unless the
As much as $50 billion to $60 billion industrialized countries step up their ity to turn the oil supply valves on attt
must be transferred from the oil-con- aid programs for the hard-pressed Af- off at will. They make no pretense o{
suming nations to the oil cartel this rican countries who have given the their willingness to use their oil an$
year to pay for the increased costs of Arabs political support. new found wealth as political black*
i oila sum which threatens vast disclo- Faced with the Arab nations' clear- maiL A policy that doesn't recognize
cations here and abroad. cut success in the initial round of the this as a fact is suicidal. /
v
No one has yet figured out how the oil war, it is disconcerting to see the We hardly needed to be told that t h *
consuming nations will pay the bill potential for joint actioii by the con- embargo will be "reviewed" June 1;
or how the exporting nations will use suming nations fade away in a welter Only a year ago, Saudi Arabian Minis-
or invest the vast sums they receive- of acrimonious debate between Presi- ter Zaki Yamani was saying that oil,
once they're paid over. dent Nixoh and Europe. would never be used as a political
But the terms of the lifted embargo, Europedominated by France weapon Now, we know (or should"
as made public in Vienna, carefully es- seems determined to pursue bilateral know) that no assurance from the
chew any guarantee of increased pro- deals with the Arab nations. If the Mideast exporting countries means any-
duction which would tend to assure a United States were to sacrifice princi- thing. , ..
softening in price. Iran and Algeria, to ple to be assured of a steady flow of The oil cartel has created a vast un-
the contrary, have been arguing loudly Arab oil, it could elbow the French certainty over a vital supply, with thW
for yet another increase in price. and British or anyone else out of the combination of oil and money forgfetf
The remaining potency of the oil way, especially with Iran and Saudi into a devastating weapon. So far, th
weapon, moreover, should be seen Arabia, offering them as much money Western World has evolved no efffo*
from the Arab statement which wqrns and technology and certainly more se- tive response.

215
Oil-Cash Recycling Plans Vary

I T CLYDE H. FARNSWORTH The mechanism'was de- as Those created in Brazil
iptotel to The New York Tbnc* scribed in British circles as In the late nineteen-sixties.
, PARISThe quadrupling of an alternative to the Witt- Credits on liberal terms
-oil prices at the end of last eveen plan. The British think would be provided for under-
year has caused economic it might prove more accept- writers and market makers
< and financial upheaval in the able because of certain tech- in each country, as well as
world. The petroleum-export- nical features having to do for entire regions.
ing nations are accumulating with the role of the mone- Monetary Correction System
money at a rate that has been tary asset known as Special Debt securities providing a
put at $6-billion a month. Drawing Rights. "real" interest rate after
A number of plans have However, Sheik Ahmed cost-of-living increases are
been offered to "recycle" Zaki al-Yamani, Oil Minister taken into account would be
surplus funds of the oii-ex- of Spudl Arabia, has warned offered. This monetary cor-
porting nations into produc- that any efforts to purchase rection system, which was in-
tive uses to avoid reductions oil collectively could result cluded in Professor Klein-
in consumption and even a in .further increases in prices. man's program for Brazil in
' world recession. The oil states have been cool 1967, is the key to attracting
to both the Witteveen and surplus oil funds.
The two plans most widely Lever ideas because they in-,
discussed have been formu- Oil money that is now be-
volve a loss of Control over ing invested may get what is
lated by H. J. Witteveen, the countries' money.
managing director of the known as a negative interest
While some of the oil na- rate if market rates are less
International Monetary Fund, tions' new wealth is used to
and Harold Lever, a Cabinet than inflation rates. So with
buy goods in the West and a higher rate of return, there
Minister and financial adviser for investment in Europe and
to Prime Minister Wilson of would be an incentive for oil
the United States, most goes states to shift their funds to
Britain. Another has been ad- into the money markets,
vanced by David T. Kleinman, the developing countries' fi-
which means that it is placed nancial centers.
professor of finance at Ford- in short-term securities at
ham University. relatively high interest rates. The securities that are is- J
It is highly volatile money. suedboth debt and equity
Discussions Planned would finance newly or- I
Some of the plans for re- Until now commercial ganized public and private
cycling money will be dis- banks have been the chief re- enterprises in participating |
cussed in Washington next cyclers, borrowing the short- countries and would be trad-
Tuesday at a meeting of the term funds and lending them ed on local and regional
Group of Ten, a forum of out at longer term for pro- stock exchanges.
the 10 leading industrial ductive use by business. The
powers that has been resur- volatility of the money, how-
rected to deal with , the oil- ever, creates unusual risks.
' financing crisis. The Group David Rockefeller, for one,
of Ten was disbanded in chairman of the Chase Man-
- March, 1973, when the world hattan Bank, warns that
monetary system went into commercial banks were not
a pattern of floating rates. equipped to handle the re-
The proposal by . Mr. cycling job.
-Witteveen, a former Dutch Plan by Kleinman
Finance Minister, seeks to The latest plan was offered
persuade Middle East states by Professor Kleinman, who
to lend some of their oil earn- presented his ideas in Paris
ings directly to his institu- last month at a meeting of
tion, the International Mone- the Young Presidents Organ-
tary . Fund, which would ization.
xelend to countries in need. Professor Kleinman, who
On a recent tour of the as a consultant, to the United
oil states he was able to get States Agency for Interna-
subscriptions for only $2.8- tional Development worked
inillion, a, minor amount in out a plan for restructuring
.relation to the magnitude of Brazil's capital market in
the oil countries' income. 1967, believes the problems
* American officials are con- can be solved by giving free
vinced that given the right rein* to market forces. He
interest rates and the right proposes to create capital
exchange rate guarantees, markets in developing coun-
the Witteveen plan could be- tries to attract surplus funds
come an important recycling of oil-producing states, stimu-
vehicle in, the. future. late more rapid economic
Mr. Lever proposed a mech- growth of the poor countries
anism for collective pur- and increase exports of in-
chases of Middle East oil by dustrial nations.
the industrialized nations of Mr. Kleinman claims the
the West. His pjan envisages plan would promote the rapid
an agency that would buy economic development of the
the oil at a negotiated price Third World, establish a new
and sell just about at cost to monetary equilibrium and
the main consuming nations. generate enormous demand
Revenues from a surcharge for capital and other goods
on these resales would b from the industrialized world.
. lent or given to developing He envisages development
countris. of financial institutions such

216
FROM THE NEW YORK TIMES, MARCH 2 0 , 1974
Arab Oil Strategy

Economics, Business and Politics
Mixed in Aiming at Embargo Goals
By LEONARD SILK
Some day the Arab oil em- to do this, you should have to
bargo, which now has been give us some powerful incen-
largely suspended against the tives."
United States, will make a great Although the embargo case is
case at the Harvard Business far from complete, here is a pre-
School. It could break new liminary version of how it looks.
ground in that Situation: You are a leading
largely unexplored Arab oil-producing state and a
Economic no - man's - land member of the international
AnalysU where economics, cartel, the Organization of Pe-
business and poli- troleum Exporting Countries.
tics meet. The es- With your fellow Arabs, you
sence of the case was stated by have been embargoing oil ship-
an Arab oil sheik to Peter G. ments to ,the United States, the
Peterson, the former Secretary Netherlands and other countries
of Commerce who is now chair- that, you assert, have aided Is-
man of Lehman Brothers, the rael against the Arabs.
big New York investment bank- theWith your fellow members of
Organization of Petroleum
ing house. "You taught us in Exporting Countries you have
your business schools," said the quadrupled oil prices. To make
Arab sheik, "that we should the embargo and price increase
maximize our profits. Do you stick, you had cut oil produc-
want us now to repeal the laws tion back by about 15 per cent.
of supply demand? If we are Now, in response to American
efforts to work out peace terms
with Israel, you have lifted the
embargo against the United
States. You must now think
through your broad future
strategy.
Lasting Development
Objectives: Your major ob-
jectives are: to maximize prof-
its, maximize capital accumula-
tion, recapture territory from
the Israelis, and to maintain
your security against internal
and external Arab radicals,
against Western imperialists,
against Soviet Communists. Fi-
nally, you want to achieve
lasting economic development
of your country.
Customers: Your principal
customers are the United States
Western Europe, Japan and a
crowd of energy-poor, less de-
veloped countries.
The United States has enor-
mous military power Europe
not much, the less developed
countries still less. But the
Soviet Union also has military
power air force, missiles,
tank not to mention their
ships and submarines in the
Indian Ocean.
The United States has a good
relations with Israel, the So-
viets bad. The United States
has Henry Kissinger. The Unit-
ed States is freer to wheel
and deal between Arabs and
Israelis than the Russians are.
Problem: How much oil
should you produce and how
much should you charge for
it? These are interdependent
questions. If you go back to
producing as much oil as you
did before the October war,
you could break the present oil
price, and maybe break up the
cartel.
As it is, the price of crude

217
oil has been softening. The

posted price is $11.65. At the
peak of the oil scare, prices Problem: What if foreigners
in the Middle East got up toj nationalize your investments? velopment in the poor countries
$22 a barrel. Until recently,; Proposal: As one wise old
light Arabian crude had been of Africa or Asia through an
sheik said, "The most illiquid oil exporters' International
going for $9 to $11. Now some investment is a demand deposit
independent oil importers say Bank for Development. You
at the Bank of America." don't need to use the Western
they are abfe to buy at $8. Your dollar holdings can
How can you keep prices from world's International Monetary
not only be blocked but the Fund or World Bank.
falling too much? purchasing value of the dollar Problem: But recycling or
Proposal: Restrict production will surely decline over time. running an aid program sounds
below the October level. Do Therefore, consider a range terribly complicated and risky.
this by maintaining your em- of alternatives: Diffusing your The West never did it very
bargo against tihe Netherlands, money through Arab-controlledl well. Why should we now carry
Denmark, Portugal, South Af- banks in the Vest, recycling the burdens and risks of soft
rica and Rhodesia, charging petrodollars, tnrough an aid? Isn't there a safer way to
that they are all unfriendly to "International Petrorevenue' stay rich and further our own
the Arab cause against Israel.: Fund," financing economic de- development?
This will justify the hold-downs Proposal: Improve relations
on total production and help with the United States and
maintain the price of crude.! other industrialized countries.
It may also yield political bene- Relax the embargo. Set up joint
fits, since the industrialized Government and business de-
countri) s seem to put economic velopment programs in such
needs above all else. kreas as food, education, hous-
Problem, What if W t i r ' M j ing, desalinization, as Peter
low cartel members fncre^fee1 Peterson and George Ball, the
production in order to ' maxi- former United States Under
mize profits, letting you carryl Secretary of State, have pro-
the burden ot cutbacks? posed.
proposal: Threaten to in- Negotiate tax treaties, mu-
crease your own production, tual investment guarantees.
which would break the price. Build programs for long-term
Alternatively, threaten to make development of energy, shale,
a political deal with the United soiar power, etc., for the time
States at the expense of your when your petroleum runs out.
colleagues. Work out pricing and pro-
Problem: The industrialized duction policies that will serve
countries claim they can't pay the interests of both oil-export-
the huge oil bills. They assert ing and oil-importing countries.
that high oil prices are worsen- World inflation and world re-
ing their inflation, which recession or depression, combined
duces your real gain. with breakdown of trade and
Proposal: Warn them that hostility among nations, won't
you will raise the price of oil do the West or you any good.
still higher unless they get in- Problem: You sound too ra-
flation under control. Tell them tional. But if we had been ra-
that they can't cheat you out of tional, we would never have got
your just price. where we are today. How can
Problem: But they may be we trust the West, those neo-
unable to control inflation, and colonialists who never did any-
if inflation gets out of hand, thing for anybody but them-
the money they owe yo will be selves?
worthless. Proposal: Hang on to the oil
Proposal: Buy gold. weapon. Threaten to reimpose
Will Gold Really Help? the embargo if necessary, and
Problem: But what if you get use it ad lib for either eco-
all the gold? Actually, you can nomic or politcial purposes, or
afford it. The artel's oil reve- ' both. Keep the oil price high
nues will go up by $65-billion enough to keep profits flowing
to $75-billion just this year, in, but not so high as to ac-
and keep on climbing. celerate shifting to other energy
sources.
But does it make any sense
Hold the cartel together at
just to bid up the price of
all cost. If the industrialized
gold higher and higher? Will
countries show serious signs of
that really help your economic
conserving on oil and substitu-
development?
ting other high-cost tech-
Your gross national product
nologies too soon, step up your
is growing fast. The combined
oil production and cut the
G.N.P. of all the Arab coun-
price.
tries is going up from $36-biI-
Make them come across po-
lion in 1973 to $74-billion in
litically. Insist on military pro-
1974. In Qatar, per-capital
tection.
G.N.P. will soar from $5,800
Keep cool. Remember what
Jast year to $17,400 this year.
you have achieved so far. And
In Abu Dhabi, it will hit $45,-
remember what the great Ger-
000 per person this year
man strategist, Karl von Klause-
compared to a mere $6,127 in
witz, virtually said:
the United States. But what
"War and business are not
happens to your G.N.P. when
merely political acts, but also
the oil runs out?
political instruments, a continu-
Proposal: Invest your petro- ation of political relations, a
dollars in income-earning assets striving for the same ends by
You can absorb only so much other means."
breed galloping inflation and
corrupt or ruin the working!
class. Invest more money
abroad. '

218
T H E NEW YORK TIMES A p r i l 8, 1974
M M FAIL
1
TO AGREE OH AID
importers ^Decide to Set Up
' FundforPoorer Countries
; bat Differ on Donations
My JUAN * ONIS
/kMt^tDTtMNWTottTlaM* fund for the developing coun-
OCNEV^ April 7~Tbe oil of Algeria, who has been the tries.
' jortingbountries decided to* principal sponsor of the special The dispute between Saudi
set Upaepoc^l fund *> don, had been interested in Arabia and Iran shows up in
ngthening the third world policy debates over oil pricing.
"ponir devetop&g by spreading some of the The Saudi Arabian position Is
ut they failed to tfl wealth of the oil export that prices now are too high
r jpouch money t# ; among the poorer members. and that the best contribution
He program. Large developing countries the producers could make to the
flrWletfeda* such as rwngltdwht welfare of developing and in-
1H-natfcn T Zaire and Brazil, ancT many dustrial countries would be to
other smaller countries that do reduce prices.
not have oil, have been hurt Iran has been among the ma-
Vweziielaand Aige- by the shop jority of oil exporters that op-
firmly spoosofad the fund, crease in oil prices that Is the poses any lowering of prices.
Saudi -Arabia,.Kuwait and source of new wealth for the These countries note that Saudi
Arab members resi*t6d'a it ~ Arabia has not taken any iodi-
firm decision., The Arab producers of the gdusOstejM to lower the prices
Persian Gulf region are the maj-
Jamahid Amdutgar, Iran's or recipients of increased in- Among the non-Arab mem-
Ifinistet of Finance said that come, particularly Saudi Arabia, bers of the Organization of Oil
fctt couhtry Was ready to give world's laignt oil exporter. Exporting Countries, little en-
tfre fund SlSO-milHqn as an But Saudi Arabian sources thusiasm for the fund was
Initial contribution, but He said said that Sheik Ahmed Zaki shown by Indonesia, a countiy
Out the organization'* ntfjois- al-Yamani, Saudi Arabia's Min- of 120 million people, as many
ister of Petroleum, had made as the total of all the Arab
' terial meeting here today had no commitment on any con- members. Indonesia exports
; kft all contributions voluntary. tribution to the new fund dur- 1.4 million barrels a day com-
NO $*dflc Aid Offer ingtoday'sfour-hour meeting. pared with Saudi Arabia's 8.5
An official statement said There is a strong ritalry be- million barrels, and members
that the fund wtyHd not go tween Saudi Arabia and Iran, of the Indonesian delegation
i$to operation until seven mem- Shall Mohammed said that all the earnings from
initially proposed Indonesian oil exports could be
ber countries had ratified the pent of i special utilized yithin ,|he cfcmtyT 7
articles governing its estab-
lishment and operation.
Cotfqfende sources said that
only Iran, Venezuela, Algeria
and Libya had clearly indicated
that they were' ready to ratify
the agreement. As a result, the
oil exporting countries will be
going to . the special .session of
$be United Nations General
Assembly that opens Tuesday
in New York to discuss raw
material and industrial infla-
tion without a concrete offer
of aid for the developing
nations.
President Houari Boumedfene

219
BUSINESSWEEK: March 16.1974
Middle East owns an interest in the national bank

of Oman, and recently bought 80% of
Now, American Express and two
other banksone American and one
The banking scramble Lebanon's Bank Chartouni.
These and other banks in the area
Japanese-are joining with Olayan in
trying to set up a merchant bank in
for Arab dollars are bracing for the huge surge of pay-
ments for oil that is about to hit the
Saudi Arabia to concentrate primarily
on financing business ventures and "in-
The flood of oil dollars into the Middle Middle East, reflecting last December's frastructure" projects, such as petro-
East is bringing with it a matching in- sharp increase in oil prices. At the out- chemical plants.
flux of Western bankers, financial ad- set, most of the money will bypass Still another vehicle for mobilizing
visers, and just plain promoters-all ea- Middle East banks, both locally owned Arab investment money-this one en-
ger to help the Arabs invest and and foreign, which operate mainly in tirely Arab-owned-is First Arabian
manage their Croesus-like wealth. local currencies. Instead, Arab govern- Corp., incorporated in Luxembourg
U. S. bankers are combing the area ments are expected to "recycle" the with a $10-million initial capital by a
so intensively for business that they bulk of their dollar earnings directly group of Arab banks. New York's Kid-
are practically bumping into each into deposits and short-term invest- der, Peabody Co. has played an advi-
other. A few weeks ago, when a senior ments in London, Zurich, New York, sory role at the outset.
vice-president of New York's Chemical and markets (page 42). Finding projects. The Beirut-based Arab
Bank took a swing through Middle Fueling a boom. Gradually, though, local Finance Corp. will be headed by Dr.
East capitals, he reportedly found pros- economies will feel the effects of Chafic Akhras, a Syrian who worked
pects waiting for Chase Manhattan's stepped-iip spending by Arab govern- with the United Nations and set up his
Chairman David Rockefeller, who was ments. That, in turn, will fuel the big- own consulting firm staffed with econo-
just a few days behind him on the same gest business boom the Middle East mists, engineers, and technicians. Part
circuit. has ever seen, and local commercial of that staff will move over to the new
U . S. banks a r e o p e n i n g new banks will reap a bonanza of deposits merchant bank to help in identifying
branches in the area and buying into and loan business with Arab individ- investment projects. The bank's first
local commercial banks, and they are uals, importers, contractors, govern- venture, according to Michael C. Boute-
setting up joint-venture merchant ment agencies, and other customers. neff, Manufacturers Hanover vice-
banks with Arab partners as well. Although Lebanon has no oil, Beirut president, will be a syndicated me-
Bank bids. Beirut, the Arab world's tra- will get its share. Says Bankers Trust
ditional financial center, is attracting representative Muhammed Saleem: dium-term financing for a project in an
much of the attention. Philadelphia's "Beirut bankers have a saying: The Arab country. But the bank also ex-
Fidelity Bank recently bought 80% of flow of money to Beirut will be like pects to channel Arab money into ven-
Banque de la Mediterange, Beirut's opening a can of beer. We will get only tures outside the area. "There are not
largest, and is selling off all but 20% to the foam, but the foam will be enough too many opportunities in the Arab
Arab investors. Chemical Bank last to keep us working full time." world," explains Bouteneff. "There are
year bought 80% of Beirut's Rubiya plenty in other developing countries,
The Lebanese capital is a center for
Bank, and Irving Trust is negotiating but at present the Arabs are not ready
the latest development on the Middle
to take over a bank there. to take the risks. So initially most of
East financial scene-the creation of
the money will go to the industrial
The banking boom is also spilling merchant banks designed to tap Arab
world. But the return there is rela-
over to Persian Gulf sheikdoms that funds for medium- and long-term lend-
tively low, so gradually they will move
were little more than sleepy sandpiles ing and equity investments, with
into developing areas as they gain
a few years ago. First National City Western banks playing a role as part-
more experience, in order to gain a
Bank of New York has branches in ners or advisors. Several such banks
much higher return."
Bahrain, Dubai, Abu Dhabi, and Qatar, are sprouting in Beirut:
and two in Saudi Arabia-the only U. S. Arab Finance Corp., 56% Arab- Despite the Middle East's big poten-
bank branches allowed in that country owned. I t will have as partners Kuwait tial as a source of investment capital,
so far. Continental Bank of Illinois is Investment Co.; Credit Libonaise, a the new financial institutions will have
about to buy into a Bahrain bank, and Lebanese bank; the Beirut-Riyadh to move cautiously in testing the ca-
First National Bank of Chicago will Bank, with mixed Lebanese-Saudi pacity of fledgling markets. A warning
soon open a branch in Dubaias will o w n e r s h i p ; the B a n k of Tokyo; occurred last year when Renault
France's Paribas, and a flock of Japa- France's Banque de l'Union Europe- floated a bond issue, denominated in
nese banks. Kuwait bars foreign-con- ene; and Manufacturers Hanover Trust Lebanese pounds, in Beirut and soaked
trolled banking operations, but is get- Co., with an 18% share. up all the available funds. Recalls
ting a merchant bank with minority Mehli Mistri, manager of the Beirut
Investment & Finance Bank, owned
American and European shareholdings branch of First National City Bank of
by Britain's Hambros Bank, France's
(page 61). Even Egypt, which nation- New York: "The interbank rate shot up
Renault, and Japan's Mitsui Bank and
alized its banking system years ago, is to 33% almost overnight, and only now
Nomura Securities.
allowing Chase Manhattan to set up a is it settling down to 11% or 12%."
American Express Middle East De-
representative office and eventually, velopment Co., set up by American Ex-
branches. press Co. six months ago. I t has already
Bank of America, which has had a helped a British insurance broker,
branch in Beirut for years, is expand- Bland, Welch & Co., buy a stake in a
ing in the Middle East mainly through Middle East insurance company owned
its 30% share in the Bank of Credit & by Saudi Arabian construction tycoon
Commerce International, which it set Suliman Olayan, and aided in the fi-
up in Luxembourg two years ago with nancing of construction equipment for
Arab partners. The venture has 10 Saudi Arabian operations of San Fran-
branches in the Persian Gulf emirates, cisco constructor Bechtel Corp.

220
lion at a time, to be invested in things bankers believe, in the words of one, that
TIME M a r c h 4, 1974 like Treasury bills," says a California "the only thing worse than the Arabs in-
banker. Adnan Kahsoggi, a Saudi, has vesting in America is the Arabs decid-
moved beyond U.S. bank deposits to ing not to." His point: a vast mass of
buy U.S. banks. Over the past two years, Arab capital pitching aimlessly from
he has purchased controlling interests country to country and industry to in-
in two headquartered in Walnut Creek, dustry could disrupt economies and
Calif.: Security National, which has as- financial markets throughout the West.
sets of $115 million, and the Bank of In order to avoid that, stable, long-term
Contra Costa, with assets of $22.8 investments must be found for the Ar-
million. abs, and the best are in the U.S.
INVESTMENT In the real estate field, the mixed
public-private Kuwait Investment Co.
The Arabs Are Coming last year committed itself to put up $10
million, half the equity of a $100 mil-
An embargo may still be keeping lion urban complex in downtown At-
Arab oil out of the U .S.but not the gi- lanta, two blocks from Peachtree Street.
gantic amounts of investment capital The project will include a Hilton hotel,
that the Arab countries are accumulat- offices and a shopping mall. Kuwait In-
ing by selling that oil elsewhere. Over vestment reportedly has also bought a
the years, the Arabs have piled up South Carolina island intending to build
American holdings estimated to be $10 a luxury resort.
billion to $15 billion. Now such thinly
Best Addresses. Kuwaitis and
populated countries as Kuwait, Saudi
Saudis are also buying feed lots, agri-
Arabia and the Persian Gulf sheikdoms
cultural land and New York City office
are pulling in more money through oil-
buildings, almost all at the best address-
price boosts than they can possibly ab-
es in town, such as Wall Street and Fifth
sorb at home, and are channeling still
Avenue. Raymond Jallow, chief econ-
more cash into the U S.
omist of the United California Bank and
The money is being placed discreet- himself an Iraqi, says he knows of sev-
ly, without publicity, in outlets that draw eral shopping centers and office build-
little attentionchiefly bank deposits ings that Arabs have bought in Califor-
and blue-chip real estate. There are two nia, ranging in price from $1 million to
reasons. One is simply that Arabs tend $10 million. Dr. Jallow expects such in-
to be ultra-conservative investors who vestment to increase "twentyfold in the
are fearful of being cheated if they ven- next two years."
ture into anything the letst bit specu-
lative. Also, the Arabs are well aware Most experts are convinced that the
of the political climate in the U.S., and Arabs will eventually move beyond such
so the Arabs are determined to main- cautious investments to ones that have
tain a low investment profile. more political clout. One reason: they
genuinel>, though wrongly, believe that
Still, the pickup in Arab investment
U.S. support for Israel stems partly from
has been noticeable. "Every day we
a Zionist hammerlock on U.S. business,
get offered vast sums, like $200 mil-
and are eager to break it. One indus-
trial area that the Arabs are certain to
aim at is so-called "downstream" oil ac-
tivityrefining and marketing in con-
suming nations. Kuwait is already con-
sidering buying a large chunk of Gulf
Oil stock (from whom is not clear).
The pacesetter for Arab investment
is likely to be the "First Arabian Corp.,"
an Arab version of First Boston Corp.
that was organized by Roger Tamraz,
Middle East representative of the U.S.
investment firm of Kidder, Peabody.
First Arabian will soon open offices on
Park Avenue expressly to channel Arab
funds into the U.S. Tamraz says that he
plans to take over an American bank
(one just below the big ten) on behalf of
his clients, then bid for an industrial firm
that he will not identify beyond saying
that its brand name is a household word.
He sees these moves as test cases that
he will stage-manage carefully, probably
clearing every step with Secretary of
State Henry Kissinger and Treasury
Secretary George Shultz.
The Arabs will get further help in lo-
cating U.S. investments from American
banks that are setting up throughout the
Middle East. I n the past six months,
Americans have bought controlling in-
terest in three banks, and bought into
three others in Beirut alone. The U.S.

221
T H E W A S H I N G T O N POST A p r i l 10, 1974
Joseph Alsop
A 'RiVer of Money'
NEW YORKIn March-April, the in- probably optimistic to suppose that
siders on the money market tell you they can find ways of spending half
"The oil producers9 ' this amount on goods and services pro-
that $10 billion of oil-producing gov-
ernments' profits will be looking for total profits for the first vided by the big oil importers like the
ihvestment opportunities around the, United States, the Western Europeans
world. 12 months of the new and Japan. But suppose the hopeful
forecast is correct. The current value
The people who are searching for higher prices are estimated of the Mellon-controlled Gulf Oil Co.,
places to put this vast amount of for' instance, is no more than $5 to $6
,money are the major oil companies, at about $100 billion
billion. That means, for instance, that
.like Exxon in this country and Royal every que of the major U.S. oil pompa-
Dutch Shell abroad. Initially} most nieacan be legitimately purchased by
"probably, they will select short-term needed American money to finance just one year of the oil producers' new-
'obligations. Eventually, something a their courageous effort to .withstand style profits. Or look at it another way,
f bit more solid and more permanent Adolf Hitler alone. In short, insiders on the simple assumption that the oil
.mil be wanted. . on the money market, pale-faced and producers will want their profits to
' Rudyard Kipling once wrote an en- confused, are mumbling about a earn a currently normal return.
jtire poem about the unseen, worldwide wholly new situation.
<fl9ws of money as an underground On this assumption, the big oil com-
The figures already cited, moreover, sumers like the United States will'
river more powerful than the Amazon,
are only a beginning. By the best esti- have to find $4.5 billionadditional to
the Mississippi or the Nile. What we
mates available, the oil-producing what they will need to pay for new oil
are now seeing, in Kipling's terms, is in Order to give the oil producers the
the first great flood of high water on countries will need to find places to i> money that their first year's invest-
tlje underground river, resulting from" vest about $50 billion before 12 months ments ought to earn. And next year's
the miscalled "energy crisis." have passed. net profits for the oil producers are
again forecast to be around $50 billion,
To give an idea of the extent of the In other words, the high water on since there is no foreseeable end to
high water, you have to bear in mind the underground river is going to con- the high water on the underground
that the value of all the overseas in- tinue. The $50 billion is net, too. It is river.
vestments of the United States is cur- the,amount, in fact, that the Persian
rently estimated at about $90 billion. No wonder, therefore, that the older
Gulf countries and other oil producers insiders on the money market have be-
In just two months, therefore, a small
number of oil-producing governments will have left over after they've spent gun to whisper the najne
will invest one-ninth of the amount every cent they can think of spending, "Kreditanstalt." The Kreditanstalt was
that thousands of immensely rich on everything from private luxury to the great Austrian bank whose failure
American individuals and corporations national defense. lead to the collapse of the old world
have invested abroad over a period of monetary system and thus to the sec-
about three-quarters of a century. The oil producers' total profits for ond and worst phase of' the Great De-
The comparison is almost ludicrous the first 12 months of the new higher pression nearly 50 years ago. Besides
3iith the British overseas investments oil pric.es are estimated at about $100 Watergate, in short, we have some
,at the beginning of World War II, billion. Given their small average pop- other things to worry about!
.when the British so desperately ulations and their real needs, it is
37-211 O - 74 - 15

222
Channels for Oil Money Flows to Developing Countries February 1974
Introduction
The huge s i z e o f o i l r e v e n u e s h a s l e d t o i n c r e a s e d
i n t e r e s t i n the i n s t i t u t i o n a l arrangements a v a i l a b l e t o channel
o i l revenues i n t o development. The p r e s e n t p a p e r r e v i e w s
a v a i l a b l e i n f o r m a t i o n a b o u t a i d e f f o r t s o f some o i l p r o d u c e r s
a n d d e s c r i b e s t h e i n s t i t u t i o n s w h i c h e x i s t o r have b e e n p r o p o s e d
t o c h a n n e l f l o w s o f o i l money i n t o t h e d e v e l o p i n g w o r l d .
I n c o n s i d e r i n g t h i s q u e s t i o n , i t may be w o r t h w h i l e
r e c a l l i n g t h a t the o i l producing c o u n t r i e s represent r a t h e r
s m a l l economies i n s p i t e o f t h e l a r g e o i l r e v e n u e s . Even i f
t h e y a l l were t o p r o v i d e f i n a n c i a l f l o w s t o d e v e l o p i n g c o u n t r i e s
o f 1 p e r c e n t o f t h e i r G-NP i n 1 9 7 4 , t h i s w o u l d amount t o t h e
r e l a t i v e l y m o d e s t amount o f $ 1 . 5 b i l l i o n .
A n o t h e r p o i n t t o be k e p t i n m i n d i s t h a t some o f t h e s e
c o u n t r i e s a r e r a p i d l y e x h a u s t i n g t h e i r o n l y known n a t u r a l
resources. I t i s t h e r e f o r e i m p e r a t i v e f o r them t o i n v e s t t h e
o i l r e v e n u e s i n s u c h a way t h a t t h e y w i l l p r o v i d e i n c o m e when
o i l i s no l o n g e r a v a i l a b l e . One may t h e r e f o r e e x p e c t f l o w s a t
commercial terms, i . e . OOF-like f l o w s or p r i v a t e investment to
p l a y a s u b s t a n t i a l r o l e i n t h e f i n a n c i a l f l o w s f r o m some o i l
producers to the developing c o u n t r i e s .
The p r e s e n t p a p e r d e a l s w i t h t h e s u b j e c t u n d e r the
f o l l o w i n g headings:
1. A c t u a l f i n a n c i a l flows
2 . Funds a n d o t h e r O D A - t y p e institutions
3 . OOF-type f i n a n c i a l institutions
4. P r i v a t e financial institutions.
1. Actual financial flows
The a i d programmes o f E g y p t , K u w a i t , L i b y a a n d S a u d i
A r a b i a have been d e s c r i b e d i n t h e " F l o w s o f Resources t o
Developing Countries, 1973". The p r e s e n t n o t e i s , t h e r e f o r e ,
l i m i t e d t o a d d i t i o n a l , most r e c e n t i n f o r m a t i o n .
(i) Kuwait
I n O c t o b e r 1973 K u w a i t d e c i d e d t o resume i t s f i n a n c i a l
a i d t o J o r d a n w h i c h had been i n t e r r u p t e d i n September 1970.
T h i s h a s a m o u n t e d i n t h e p a s t t o 16 m i l l i o n ( $ 4 0 m . ) a n n u a l l y
and i s e x p e c t e d t o c o n t i n u e a t t h i s l e v e l .

223
I t i s r e c a l l e d t h a t f o l l o w i n g the d e c i s i o n taken a t the

Arab Summit M e e t i n g i n Khartoum i n Autumn 1967 K u w a i t has u n d e r -
t a k e n t o p r o v i d e a n n u a l l y KD47.5 m i l l i o n ($160 m i l l i o n a t t h e
1973 exchange r a t e ) t o Arab c o u n t r i e s w h i c h had s u f f e r e d f r o m
t h e war w i t h I s r a e l . A l r e a d y b e f o r e t h a t d a t e K u w a i t had been
p r o v i d i n g s u b s t a n t i a l amounts t o o t h e r Arab c o u n t r i e s i n t h e
f o r m o f d i r e c t government l o a n s ( i n d e p e n d e n t o f t h e l o a n s t h r o u g h
the Kuwait Fund), These l o a n s amounted t o KD120 m i l l i o n ($405 m . )
"by t h e end o f 1968. B u t no such l o a n was e x t e n d e d i n 1969 and
1970 and t h e r e i s no e v i d e n c e t h a t any has been made i n r e c e n t
years. I n 1973 K u w a i t has p r o v i d e d some r e l i e f a s s i s t a n c e t o
Niger ($0.35 m . ) . A t t h e end o f 1973 t h e IBRD r a i s e d a n o t h e r
KD25 m i l l i o n ($85 m . ) i n K u w a i t i n t h e f o r m o f a p u b l i c bond i s s u e .
The bonds have a l i f e o f 15 y e a r s and an i n t e r e s t r a t e o f 7 i p e r
cent. I t was t h e 6 t h bond i s s u e by t h e IBRD i n K u w a i t w h i c h i n -
c r e a s e s t h e t o t a l amount r a i s e d i n t h a t c o u n t r y by t h e IBRD t o
$439 m i l l i o n . Kuwait thus remained the f i f t h l a r g e s t purchaser
o f W o r l d Bank b o n d s .
(ii) Lebanon
B e i r u t i s p l a y i n g an i n c r e a s i n g r o l e as an i n t e r n a t i o n a l
financial centre. The Lebanese a u t h o r i t i e s have encouraged bond
i s s u e s by f o r e i g n b o r r o w e r s i n Lebanese c u r r e n c y . I n 1973 f o r e i g n
bond i s s u e s r e a c h e d a t l e a s t LL 250 m i l l i o n ($100 m . ) o f w h i c h
LL 50 m i l l i o n ($20 m . ) were r a i s e d by t h e European I n v e s t m e n t
Bank, A l g e r i a b e i n g a n o t h e r b o r r o w e r . W o r l d Bank bonds i n
Lebanese pounds have r e a c h e d t h e v a l u e o f $30 m i l l i o n .
(iii) Libya
W i t h a c a p i t a l s u b s c r i p t i o n o f 15 m i l l i o n u n i t s o f a c c o u n t
($18 m . ) L i b y a i s t o g e t h e r w i t h E g y p t t h e l a r g e s t c o n t r i b u t o r
t o t h e A f r i c a n Development Bank. I n 1973 i t p r o v i d e d a $8 m i l l i o n
g r a n t f o r v a r i o u s p r o j e c t s i n Chad ( i m p r o v e m e n t o f a s l a u g h t e r h o u s e
i n S a h r , c o n s t r u c t i o n of a h o s p i t a l i n P o r t Lamy and a n o t h e r one
i n Mao, c o l l e g e s i n t h e c a p i t a l and i n L a r g e a u ) and c l o s e t o $2
m i l l i o n f o r f a m i n e - s t r i c k e n c o u n t r i e s i n A f r i c a (Upper V o l t a
$ 0 . 7 m . , Chad, M a l i and M a u r i t a n i a $0.35m. e a c h ) . L i b y a has
r e c e n t l y a g r e e d t o p a r t i c i p a t e i n t h e c o n s t r u c t i o n o f a number
o f f a c t o r i e s and an o i l r e f i n e r y i n Togo.
L i b y a has p a r t i c i p a t e d i n t h e c r e a t i o n o f t h e M a l t a De-
v e l o p m e n t C o r p o r a t i o n t h r o u g h i t s N a t i o n a l I n v e s t m e n t Company.
A l g e r i a was a u t h o r i s e d i n 1973 t o r a i s e $51 m i l l i o n i n t h e f o r m
o f L i b y a n D i n a r bonds.
(iv) Saudi Arabia
W i t h f o r e i g n exchange r e s e r v e s i n 1973 a m o u n t i n g t o some

$5 b i l l i o n and e x p e c t e d f o r e i g n c u r r e n c y e a r n i n g s i n 1974 i n
t h e n e i g h b o u r h o o d o f $20 b i l l i o n S a u d i A r a b i a i s becoming a m a j o r
f i n a n c i a l power. S i n c e 1967 S a u d i A r a b i a has p r o v i d e d a n n u a l l y
an amount o f r i y a l s 662 m i l l i o n ( a t p r e s e n t exchange r a t e s $186m.)
t o E g y p t , J o r d a n and S y r i a . The same amount i s i n c l u d e d i n t h e
1973/74 budget. However, a c c o r d i n g t o t h e p r e s s , Kin,-; F a i s a l i s

224
" b e l i e v e d t o have d e c i d e d t o p r o v i d e $ 1 " b i l l i o n as reconstruction

a i d t o E g y p t and S y r i a . ( l )
(v) Iran
F o l l o w i n g e a r l i e r p r o p o s a l s t h e Shah o f I r a n i n F e b r u a r y
1974 p l e d g e d a b o u t $ 1 b i l l i o n t o r e l i e v e b a l a n c e - o f - p a y m e n t s
problems o f d e v e l o p i n g o i l - i m p o r t e r s . His proposal contains
three elements:
- a $2-3 b i l l i o n fund w i t h p a r t i c i p a t i o n o f o i l
e x p o r t e r s and m a j o r i n d u s t r i a l i s e d c o u n t r i e s t o
be managed i n c l o s e c o - o p e r a t i o n w i t h IBRD and
IMF. T h i s p r o p o s a l w i l l be d i s c u s s e d a t t h e
OPEC m e e t i n g i n J u n e ;
- p u r c h a s e b y I r a n o f IBRD b o n d s ;
- a l o a n t o I M F ' s p r o p o s e d new l e n d i n g facility.
I n a d d i t i o n I r a n has a g r e e d t o s e l l o i l t o I n d i a on c r e d i t and
to invest i n j o i n t ventures i n India.
2. Funds and o t h e r QDA-type institutions
S e v e r a l o i l p r o d u c e r s have e s t a b l i s h e d o r a r e i n t h e
p r o c e s s o f e s t a b l i s h i n g f i n a n c i a l i n s t i t u t i o n s aimed a t p r o -
v i d i n g concessional aid to developing countries. They a r e
described i n the f o l l o w i n g paragraphs.
A. Bilateral aid institutions
(i) K u w a i t Fund f o r Arab Economic Development (KFAED)
The K u w a i t Fund, t h e f i r s t d e v e l o p m e n t f u n d i n t h e A r a b
W o r l d , was c r e a t e d i n December 1 9 6 1 as an autonomous agency o f
t h e K u w a i t Government. I t s p u r p o s e i s t o a s s i s t Arab s t a t e s t o
d e v e l o p t h e i r economies b y p r o v i d i n g f i n a n c i a l a n d , t o a l e s s e r
extent, technical assistance. The F u n d ' s p o l i c y i s t o p r o v i d e
loans a t concessional terms t o s p e c i f i c p r o j e c t s which are
l i k e l y t o have a f a v o u r a b l e i m p a c t on t h e b o r r o w e r ' s economic
d e v e l o p m e n t and p r o m i s e a s a t i s f a c t o r y r a t e o f f i n a n c i a l r e t u r n .
( 1 ) S a u d i A r a b i a and o t h e r o i l p r o d u c i n g c o u n t r i e s a l s o
s u p p o r t e d the E g y p t i a n war e f f o r t w i t h s u b s t a n t i a l
amounts. A l o n e i n t h e f i r s t h a l f o f O c t o b e r 1973
$920 m i l l i o n was made a v a i l a b l e o f w h i c h S a u d i A r a b i a
p r o v i d e d $300 m i l l i o n , K u w a i t 250 m . , L i b y a 170 m . ,
Q a t a r and Abu D h a b i 100 m i l l i o n each. I n F e b r u a r y 1974
S a u d i A r a b i a a l s o p r o v i d e d a $16 m i l l i o n g r a n t f o r m i l i t a r y
a s s i s t a n c e t o Uganda.

225
The s t a t u t o r y c a p i t a l o f t h e Fund i s K u w a i t D i n a r 200

m i l l i o n ($676 m. a t t h e 1973 exchange r a t e ) o f w h i c h 101 m i l l i o n
has been p a i d i n . By March 1973, i . e . a t t h e end o f i t s
e l e v e n t h f i n a n c i a l y e a r , t h e KFAED had c o m m i t t e d 39 l o a n s
a m o u n t i n g t o KD103 m i l l i o n ($348 m . ) t o 12 r e c i p i e n t c o u n t r i e s
and 10 g r a n t s t o t a l l i n g KD&76 m i l l i o n ( $ 2 . 6 m . ) . Cumulative
l o a n d i s b u r s e m e n t s had r e a c h e d KD74.7 m i l l i o n ($252 m . ) by
t h a t t i m e and r e p a y m e n t s KD18.9 m i l l i o n ($64 m . ) . The m a i n
r e c i p i e n t s o f l o a n s have been Sudan ( 1 5 $ ) , T u n i s i a ( 1 4 $ ) ,
E g y p t ( 1 3 $ ) , M o r o c c o , J o r d a n and A l g e r i a w i t h a b o u t 10$ each.
The d i s t r i b u t i o n by s e c t o r s shows a s t r o n g c o n c e n t r a t i o n on
t r a n s p o r t a t i o n and s t o r a g e ( 3 9 $ ) , f o l l o w e d by a g r i c u l t u r e
( 2 8 $ ) , power ( 2 0 $ ) and i n d u s t r y ( 1 3 $ ) . The g r a n t e l e m e n t o f
l o a n s ( c a l c u l a t e d w i t h a 10$ d i s c o u n t r a t e ) v a r i e s a c c o r d i n g
t o t h e r e c i p i e n t and t h e s e c t o r . I t i s highest i n agriculture
w i t h a w e i g h t e d a v e r a g e o f 48 p e r c e n t and l o w e s t i n i n d u s t r y
(29$ g r a n t e l e m e n t ) . Some p r o j e c t s have been j o i n t l y f i n a n c e d
w i t h t h e W o r l d Bank Group.
S i n c e 1963 t h e D i r e c t o r - G e n e r a l o f t h e K u w a i t Fund has

been M r . A b d e l a t i f Y. Al-Hamad. M r . Al-Hamad i s a l s o Managing
D i r e c t o r o f t h e K u w a i t I n v e s t m e n t Company (see b e l o w ) , Chairman
o f t h e Compagnie Arabe e t I n t e r n a t i o n a l e d ! I n v e s t i s s e m e n t
(see b e l o w ^ , and on t h e Board o f D i r e c t o r s o f t h e A r a b Fund
(see b e l o w ) . D u r i n g 1 9 7 1 / 7 2 , t h e K u w a i t Fund managed t h e
a d m i n i s t r a t i v e and f i n a n c i a l a f f a i r s o f t h e n e w l y c r e a t e d Arab
Fund.
(ii) K u w a i t Development Fund f o r n o n - a l i g n e d countries
A c c o r d i n g t o an o f f i c i a l announcement o f 1 s t O c t o b e r 1973
t h e K u w a i t Government has d e c i d e d t o s e t up a Development Fund
f o r the non-aligned c o u n t r i e s . No f u r t h e r d e t a i l s have been
made p u b l i c .
(iii) Abu D h a b i Fund
I n e a r l y 1973 Abu D h a b i s t a r t e d t o s e t up a Fund w i t h an

i n i t i a l amount o f D i n a r 8 m i l l i o n ($27 m . ) . Total authorised
c a p i t a l i s D i n a r 50 m i l l i o n ($169 m . ) . Yemen ( A . R . ) , S y r i a ,
T u n i s i a and Sudan w i l l be t h e f i r s t r e c i p i e n t s . I n the beginning
l o a n s s h a l l be e x t e n d e d f o r 7 t o 10 y e a r s a t an i n t e r e s t r a t e
o f 3.5 to 4.5 per c e n t . The Fund i s i n t e r e s t e d i n j o i n t o p e r a -
t i o n s w i t h t h e W o r l d Bank Group.
Managing D i r e c t o r i s M r . Hassan Abbas Z a k i , a f o r m e r

E g y p t i a n M i n i s t e r o f Economics, who has been p r i n c i p a l f i n a n c i a l
a d v i s o r t o S h a i k h Zayed, r u l e r o f Abu D h a b i , s i n c e 1970.

226
B. Multilateral institutions
(i) A r a b Fund f o r Economic and S o c i a l Development
The agreement e s t a b l i s h i n g t h i s Fund was r e a c h e d i n May

1968 b u t t h e f i r s t m e e t i n g o f t h e b o a r d t o o k p l a c e o n l y i n
November 1972. The Fund i s a j o i n t A r a b f i n a n c i a l i n s t i t u t i o n
w i t h headquarters i n Kuwait. Managing D i r e c t o r i s M r . Saeb
J a r o u d i , f o r m e r M i n i s t e r o f Economic Development i n t h e Lebanon
and b e f o r e t h a t c h i e f e c o n o m i s t o f t h e K u w a i t Fund. The Member-
s h i p o f t h e Fund i s composed o f A r a b League c o u n t r i e s ( * ) .
The A r a b Fund has a c a p i t a l o f KD100 m i l l i o n ($338 m . )

and a b o r r o w i n g a u t h o r i t y o f KD200 m i l l i o n ($678 m . ) . The m a i n
c o n t r i b u t o r s a r e K u w a i t ($101 m . ) and L i b y a ($41 m . ) . Saudi
A r a b i a has s t a t e d i t s i n t e n t i o n t o j o i n b u t has n o t y e t c o n -
tributed. The Fund i s i n t e n d e d t o o p e r a t e i n Member c o u n t r i e s
o f t h e A r a b League o n l y and i n p a r t i c u l a r t o ( a ) f i n a n c e p r o -
d u c t i v e i n v e s t m e n t on s o f t t e r m s ( w h i c h may v a r y a c c o r d i n g t o
t h e p r o j e c t and t h e r i s k i n v o l v e d ) ; ( b ) encourage p r i v a t e and
p u b l i c i n v e s t m e n t and ( c ) p r o v i d e t e c h n i c a l a s s i s t a n c e and
expertise. As o f J a n u a r y 1974, KD20 m i l l i o n ($68 m . ) had been
committed. I n p a r t i c u l a r , t h e Fund has r e c e n t l y a g r e e d t o l e n d
A l g e r i a $50 m i l l i o n ( a t 2 . 5 p e r c e n t i n t e r e s t o v e r 30 y e a r s )
t o b u i l d an o i l - l o a d i n g t e r m i n a l a t A r z e w . This p r o j e c t i s .
a l s o s u p p o r t e d b y Germany and t h e ' W o r l d Bank.
(ii) S p e c i a l A r a b Fund f o r Africa

I n J a n u a r y 1974 t h e A r a b c o u n t r i e s d e c i d e d t o c r e a t e a
$200 m i l l i o n S p e c i a l Fund f o r A f r i c a . The Fund i s t o be
e s t a b l i s h e d i n March 1974 t o s u p p o r t t h e p u r c h a s e o f o i l by
A f r i c a n c o u n t r i e s and t o d e v e l o p o i l r e s o u r c e s i n A f r i c a .
A n o t h e r s t a t e d p u r p o s e o f t h e Fund i s t o compensate A f r i c a n
c o u n t r i e s f o r t h e economic l o s s t h e y have s u f f e r e d f r o m b r e a k i n g
off relations with Israel. The m a i n c o n t r i b u t o r s t o t h e S p e c i a l
Fund w i l l be S a u d i A r a b i a ($25 m i l l i o n ) , K u w a i t ( * * ) and A l g e r i a
($20 m i l l i o n e a c h ) . The U n i t e d A r a b E m i r a t e s and Q a t a r w i l l pay
$10 m i l l i o n e a c h , Lebanon p l a n s t o c o n t r i b u t e $ 1 . 5 m . , and E g y p t ,
S y r i a and B a h r e i n $1 m. e a c h . The L i b y a n c o n t r i b u t i o n , i f a n y ,
i s n o t known. Loans o u t o f t h e S p e c i a l Fund a r e t o have t h e
following conditions: 1$ i n t e r e s t r a t e , 3 y e a r s g r a c e , 5 y e a r s
repayment. Loan r e c i p i e n t s w i l l be s e l e c t e d by t h e OUA i n c o n -
s u l t a t i o n w i t h t h e A r a b League. The Fund m i g h t be u l t i m a t e l y
l i n k e d t o t h e A r a b Bank f o r A f r i c a (see b e l o w ) .
(*) A l g e r i a , B a h r e i n , E g y p t , I r a q , J o r d a n , K u w a i t , Lebanon,
L i b y a , M a u r i t a n i a , M o r o c c o , Oman, Q a t a r , S a u d i A r a b i a ,
S o m a l i a , Sudan, S y r i a , T u n i s i a , U n i t e d A r a b E m i r a t e s
( i n c l . Abu D h a b i ) , Yemen A . R . , Yemen P . D . R .
(**) I n F e b r u a r y 1974 K u w a i t announced t h a t i t w o u l d i n c r e a s e

i t s c o n t r i b u t i o n t o t h e S p e c i a l Fund f r o m $20 m. t o $30 m.

227
(iii) A r a b T e c h n i c a l A s s i s t a n c e Fund f o r Africa
A t t h e same m e e t i n g i n J a n u a r y 1974, t h e A r a b c o u n t r i e s
d e c i d e d t o s e t up a $15 m i l l i o n T e c h n i c a l A s s i s t a n c e Fund.
I n a d d i t i o n t o t h e above f u n d s w h i c h a r e c l e a r l y i n t e n d e d
t o p r o v i d e ODA-type f l o w s , a number o f development banks a r e
a t v a r i o u s stages o f c r e a t i o n . I t i s n o t known t o what e x t e n t
t h e s e i n s t i t u t i o n s w i l l c o n c e n t r a t e on l e n d i n g a t m a r k e t r a t e s
(IBRD s t y l e ) as opposed t o c o n c e s s i o n a l l e n d i n g (IDA s t y l e ) .
Somewhat a r b i t r a r i l y t h e y have been i n c l u d e d i n t h i s s e c t i o n
r a t h e r t h a n u n d e r OOF-type i n s t i t u t i o n s b e l o w .
( i v ) A r a b Bank f o r I n d u s t r i a l and A g r i c u l t u r a l Develop-

ment i n A f r i c a
The c r e a t i o n o f t h i s Bank was d e c i d e d upon a t t h e 6 t h

Arab Summit M e e t i n g i n A l g i e r s i n 1973 on t h e i n i t i a t i v e o f
Kuwait. A c c o r d i n g t o an announcement c a p i t a l s u b s c r i p t i o n s
have a l r e a d y begun a l t h o u g h t h e s t a t u t e s o f t h e Bank have n o t
y e t been drawn u p . The c a p i t a l o f t h e Bank w h i c h had been v a r i o u s -
s t a t e d as $125 m . , $195 m. and $500 m. was f i n a l l y f i x e d a t $206 m.
a t t h e C a i r o M e e t i n g o f Arab F i n a n c e M i n i s t e r s i n M i d - F e b r u a r y 1SP4.
A c c o r d i n g t o t h e I r a q Mews Agency, I r a q had d e c i d e d t o make t h e
l a r g e s t c o n t r i b u t i o n w i t h $30 ra. f o l l o w e d by S a u d i A r a b i a w i t h
$25 m i l l i o n , K u w a i t ( * ) , A l g e r i a , and t h e U n i t e d Arab E m i r a t e s
each w i t h $20 m i l l i o n . Other Arab s t a t e s are p a r t i c i p a t i n g
w i t h sums r a n g i n g f r o m $2 m i l l i o n t o $10 m i l l i o n ,
( v ) A r a b Bank f o r Development i n Asia
A p r o p o s a l t o e s t a b l i s h a s i m i l a r bank f o r A s i a is
r e p o r t e d l y under c o n s i d e r a t i o n .
(vi) I s l a m i c Development Bank
I n December 1973, 25 I s l a m i c s t a t e s s i g n e d an agreement

t o e s t a b l i s h an I s l a m i c Development Bank w i t h a c a p i t a l o f
$1 b i l l i o n . The c r e a t i o n o f t h e Bank whose head o f f i c e w i l l
be Jedda was l a r g e l y due t o S a u d i A r a b i a n i n i t i a t i v e and a
s p e c i a l c o m m i t t e e has been f o r m e d f o r t h i s p u r p o s e u n d e r t h e
S e c r e t a r y - G e n e r a l o f t h e S a u d i A r a b i a n based I s l a m i c C o n g r e s s ,
M r . Tanku A b d u l Rahman. S u b s c r i p t i o n s have been announced so
f a r by Q a t a r ($20 m . ) , Lebanon ($5 m . ) and J o r d a n ( $ 1 . 2 m . ) .
(*) I n F e b r u a r y 1974 K u w a i t announced t h a t i t w o u l d i n c r e a s e

i t s c o n t r i b u t i o n t o t h e A r a b Bank f r o m $20 m. t o $50 m.

228
(vii) OPEC Development Bank
A p r o p o s a l t o e s t a b l i s h an OPEC Development Bank w i l l be

d i s c u s s e d a t Q u i t o , E c u a d o r , on June 10, 1974. The c a p i t a l o f
t h e p r o p o s e d bank has been r e p o r t e d as $1 o r 2 b i l l i o n . Members
w o u l d be t h e OPEC members: I r a n , K u w a i t , Saudi A r a b i a , L i b y a ,
Abu D h a b i , A l g e r i a , I n d o n e s i a , V e n e z u e l a , N i g e r i a , I r a q , Q a t a r ,
E c u a d o r , Gabon.
3. OOF-type f i n a n c i a l institutions
A number o f i n s t i t u t i o n s have been c r e a t e d t o i n v e s t

p u b l i c funds from the o i l - p r o d u c i n g c o u n t r i e s abroad a t commercial
t e r m s and l a r g e l y u s i n g t h e methods o f p r i v a t e i n v e s t m e n t f l o w s .
A l i s t o f such i n s t i t u t i o n s w h i c h have come t o t h e a t t e n t i o n o f
the D i r e c t o r a t e i s given below.
(a) A r a b A f r i c a n Bank
Head O f f i c e Cairo (Egypt)
Established 1964
Capital 1 0 , 0 0 0 , 0 0 0 ($25 m . )
Share-
holders Kuwait M i n i s t r y o f Finance and I n d u s t r y 34%
E g y p t i a n P u b l i c O r g a n i s a t i o n o f Banks 33f
P u b l i c and p r i v a t e i n t e r e s t s f r o m
o t h e r A r a b and A f r i c a n c o u n t r i e s 331
S p e c i a l E g y p t i a n l e g i s l a t i o n g i v e s t h i s bank t h e
status o f an i n t e r n a t i o n a l o r g a n i s a t i o n .
tb, L i b y a n A r a b F o r e i g n Bank
Head O f f i c e Tripoli
?
Established
Capital LD 20 m i l l i o n ($68 million)
Share-
holders L i b y a n Government
T h i s bank p a r t i c i p a t e s i n f i n a n c i a l i n s t i t u t i o n s in
Uganda, Chad, M a u r i t a n i a , Lebanon and E g y p t .
(c) K u w a i t I n v e s t m e n t Company Group

(i) K u w a i t I n v e s t m e n t Company '
Head O f f i c e Kuwait
Established ?
Capital KD 7 . 5 m i l l i o n ($25 million)
Share-
holders K u w a i t Government 50?o
Other Kuwait i n t e r e s t s
A p p a r e n t l y t h i s company has e n t e r e d i n t o a c o -
o p e r a t i o n agreement w i t h A m e r i c a n E x p r e s s .

229
(ii) Banque S e n e g a l o i C u w a i t i e n n e afInvestissement

Head Office Dakar
Established 1974
Capital 1 billion F CFA ( $ 4 million)
Share-
holders K u w a i t I n v e s t m e n t Company 50$
Government o f S e n e g a l 25$
P r i v a t e Senegal i n t e r e s t s 25$
(d) A r a b I n v e s t m e n t Company
( S o c i e t e Arabe d ' I n v e s t i s s e m e n t s )
Head Office
Established d e c i s i o n December 1973
Capital 100 m i l l i o n ($250 m.)
Share-
holders Egypt
Saudi A r a b i a
Kuwait
Abu D h a b i
Qatar
Sudan
I n v e s t m e n t s t o be c o n c e n t r a t e d on a g r i c u l t u r e a n d
Shipping; t h e company w i l l be open t o p r i v a t e A r a b
investors wishing to r e p a t r i a t e c a p i t a l .
(e) Arab I n t e r n a t i o n a l Bank Group
(i) I n t e r n a t i o n a l A r a b Bank p r e v i o u s l y t h e E g y p t i a n Inter-
n a t i o n a l Bank f o r F o r e i g n T r a d e a n d D e v e l o p m e n t
Head O f f i c e Cairo
Established 1973
Capital 30 m i l l i o n ($75 m . )
Share-
holders Egyptian interests
Libyan i n t e r e s t s
(ii) Joint Company b e t w e e n L o n r h o and A r a b I n t e r n a t i o n a l Bank
Head o f f i c e : ?
Established 1973
Capital
Share-
holders Lonrho
I n t e r n a t i o n a l A r a b Bank
(f) Banque L i b a n o B r s i l i e n n e SAL
Head office Beirut
Established
Capital
Share-
holders

230
Private financial institutions
The f o l l o w i n g ( i n c o m p l e t e ) l i s t d e s c r i b e s a number o f
p r i v a t e j o i n t f i n a n c i a l i n s t i t u t i o n s w h i c h have been e s t a b l i s h e d
l a r g e l y t o c h a n n e l o i l money i n t o p r o d u c t i v e i n v e s t m e n t s i n
both developed.and developing c o u n t r i e s .
1. UBAF Group
(a) U n i o n de Banques A r a b e s e t F r a n g a i s e s (UBAF)
Head O f f i c e Paris
Established 1970
Capital FF.100,000.000
Share-
holders C r e d i t Lyonnais 31.98$
Banque F r a n g a i s e du Commerce
Ext^rieur 8.00$
P r i v a t e French i n t e r e s t s 0.02$
S u b - t o t a l European interests 40.00$
A r a b Bank ( J o r d a n )
Banque E x t e r i e u r e d ' A l g ^ r i e
Commercial Bank o f S y r i a
L i b y a n A r a b F o r e i g n Bank
R a f i d a i n Bank ( I r a q )
C e n t r a l Bank o f E g y p t
A r a b A f r i c a n Bark ( A r a b m u l t i -
national ) 6.2$
Banque du Maroc 3.8?0
A l a h l i Bank o f K u w a i t 1.9$
R i y a d Bank ( S a u d i A r a b i a ) 1.9$
Bank o f J o r d a n 1.1$
Sudan Commercial Bank 0.8$
Banque N a t i o n a l e de T u n i s i e 0.6$
J o r d a n N a t i o n a l Bank 0.61o
S o c i t T u n i s i e n n e de Banque 0,6$
. .
Banque A u d i S . A . L . (Lebanon) 0 3$
Banque G. T r a d ( C r e d i t L y o n n a i s )
(Lebanon) 0.5$
A l a h l i Bank L i m i t e d ( D u b a i ) o,-;$
Bank o f B a h r e i n and K u w a i t 0.1 $
C e n t r a l Bank o f Yemen (Sanaa/Yemen
Arab R e p u b l i c 0.1$
N a t i o n a l Bank o f Yemen ( P e o p l e ' s
D e m o c r a t i c R e p u b l i c o f Yemen) 0.1$

231
Yemen Bank f o r R e c o n s t r u c t i o n
and D e v e l o p m e n t (Sanaa/Yemen
Arab R e p u b l i c ) 0.1
Banque A r a b e L i b y e n n e M a u r i t a n i e n n e
p o u r l e Commerce E x t r i e u r e t l e
D^veloppement ( M a u r i t a n i a ) 0.1$
P r i v a t e Arab I n t e r e s t s 0.001%
S u b - t o t a l Arab interests
U n i o n de banques a r a b e s e t F r a n g a i s e s -
UBAF L i m i t e d
Head office London
Established 1972
Capital 2,000,000 ( t o be r a i s e d to
5,000,000)
Share-
holders UBAF P a r i s 50%
Libyan A Arraab F o r e i g n Bank 25%
M i d l a n d" "Bank
"".la "
(o) U n i o n e d i Banche A r a b e ed E u r o p e e - UBAE
Head o f f i c e : Rome
Established 1972
Capital L.15 billions
Share-
holders U n i o n de Banques A r a b e s e t
Frangaises - U.B.A.F. 51%
Banco d i Roma 9.5
Banca N a z i o n a l e d e l L a v o r o 9.5
Societa Finanziaria Telefonica
p e r A z i o n i - STET 6%
I s t i t u t o Ligure Interessenze
I n d u s t r i a l i e C o m m e r c i a l i SpA
(Finsider)
Societa I t a l i a n a per Condotte
dfAcqua
I s t i t u t o d i C r e d i t o per l e Imprese
di Pubblica U t i l i t a - I . C . I . P . U .
(a) U n i o n de Banques A r a b e s e t E u r o p ^ e n n e s UBAE

Head office Luxembourg ( b r a n c h i n Franfurt)
Establsshed 1973
Capital DM.30,000,000
Share-
holders A r a b Bank L i m i t e d )
A r a b Bank O v e r s e a s L t d . ) 33 1/3%
Bayerische Vereinsbank
Commerzbank A . G .
Commerzbank I n t e r n a t i o n a l S . A . 33 1/3%
Westdeutsche Landesbank
Girozentrale
U n i o n de Banques A r a b e s e t
Frangaises - U.B.A.F. 33 1/3%

232
(e) U n i o n de Banques A r a b e s e t Nippones - UBAN

Head o f f i c e Tokyo and Hong Kong
Established 1973-1974
Capital $25,000,000
Share-
holders Bank o f Tokyo
Long Term C r e d i t Bank o f Japan
M i t s u i Bank
Nomura S e c u r i t i e s
Sanwa Bank
UBAF P a r i s
5 A r a b Banks
2. FRAB Group
(a) F r e n c h - A r a b Bank f o r I n t e r n a t i o n a l I n v e s t m e n t s
(Banque F r a n c o Arabe d ' I n v e s t i s s e m e n t s I n t e r -
n a t i o n a u x ) (FRAB Bank I n t e r n a t i o n a l )
Head o f f i c e Paris
Established 1970
Capital F F . 5 0 , 0 0 0 , 0 0 0 ( t o be r a i s e d to
FF.100,000,000)
Share-
holders Societe G^nerale (France) 36%
S o c i e t y G ^ n ^ r a l e de Banque
(Belgium) 7%
Swiss Bank C o r p o r a t i o n ( S o c i t
de Banque S u i s s e ) 6%
Banco U r q i n j o ( S p a i n ) 1%
S u b - t o t a l European S h a r e h o l d e r s 50$
FRAB-Trading and C o n t r a c t i n g Company 7.7$

K u w a i t I n v e s t m e n t Company 4%
Kuwait Foreign Trading Contracting
and I n v e s t m e n t Company 4$
N a t i o n a l Bank o f K u w a i t 1.595
A1 Sagar and B r o s . 1.14%
P r i v a t e I n t e r e s t s , A1 Sagar Group 3.30%
Other Kuwait F i n a n c i a l I n s t i t u t i o n s
( i n c l . K u w a i t I n s u r a n c e Company
Commercial Bank o f K u w a i t ) 2.60%
Other p r i v a t e Kuwait i n t e r e s t s 12.16%
S u b - t o t a l Kuwait I n t e r e s t s 36.40%

233
Bahrein 2.2%
Abu D h a b i 1.2 fo
Dubai 1.8%
Sharjah UOfo
S u b - T o t a l o t h e r Arab G u l f Interests 6.21o
L i b y a (Sahara Bank, L i b y a
I n s u r a n c e Company)
Bank o f T u n i s i a
Societe Nationale d 1 I n v e s t i s s e -
ments ( T u n i s i a )
0>) European Arab Holding

Head office Luxembourg
Established 1972
Capital L.Frs. 1 billion
Share-
holders A m s t e r d a m - R o t t e r d a m Bank N . V .
Amsterdam;
C r e d i t e n s t a l t Bankverein, Vienna;
D e u t s c h e Bank A . G . , F r a n k f u r t -
am-Main;
M i d l a n d Bank L i m i t e d , L o n d o n ;
S o c i e t e G e n e r a l e de Banque,
Brussels;
Societe Generale, P a r i s ;
S u b - t o t a l E u r o p e a n Bank
I n t e r n a t i o n a l Company 45%
E g y p t i a n N a t i o n a l Bank o f
F o r e i g n T r a d e and D e v e l o p m e n t
Abu D h a b i Fund f o r A r a b Economic
Development,
Banque N a t i o n a l e d ' A l g e r i e ,
N a t i o n a l Bank o f E g y p t ;
n a t i o n a l B a n k - o f 10 j .-. t ,
L i b a n a i s v ;:> /. I s Commerce,
I:-," ; H i s r , L e - ,. ;
( Llbanai; J", . . a n o n ;
Ilrt: a l Commercial Bank, L i b y a ;
M a r o c a i n e du Commerce
Byterieur,
N a L i o n e l C o m m o r c i a l Bank, S s . u l i
Aivbia^,
S u b - t o t a l Arab Shareholders 45%

FRAB-Bank International

234
European Ara"b Bank

Head o f f i c e Brussels
Established
Capital
Share-
holders European A r a b H o l d i n g
Others
E u r o p S i s c h e A r a b i s c h e Bank
Head o f f i c e Frankfurt
Established
Capital
Share-
holders European A r a b Holding
Others
C A I I Group
Compagnie Arabe e t I n t e r n a t i o m l e d'Investissements

Society Holding
Head o f f i c e : Luxembourg
Established
Capital US$30,000,000
Share-
holders D r e s d n e r Bank A . G . (W. Germany)
O s t e r r e i c h i s c h e LSnderbank ( A u s t r i a )
Banque de B r u x e l l e s ( B e l g i u m )
Banco do B r a s i l ( B r a z i l )
Canadian I m p e r i a l Bank o f Commerce
Banco C e n t r a l ( S p a i n )
Bank o f A m e r i c a (USA)
Banque N a t i o n a l e de P a r i s ( F r a n c e )
Banque N a t i o n a l e de P a r i s I n t e r -
c o n t i n e n t a l (France)
Algemene Bank N e d e r l a n d EV
Banca N a z i o n a l e d e l L a v o r o ( I t a l y )
Sumitomo Bank ( J a p a n )
S o c i 6 t F i n a n c i f e r e Europeenne
(Luxembourg)
B a r c l a y s Bank LTD.
U n i o n de Banques S u i s s e s
Government o f Abu D h a b i
N a t i o n a l Commercial Bank ( S a u d i
Arabia)
Bank o f K u w a i t and t h e M i d d l e E a s t
(Kuwait)
G u l f Bank ( K u w a i t )
K u w a i t I n v e s t m e n t Company

235
Banque du L i t a n e t d ' o u t r e m e r
N a t i o n a l I n v e s t m e n t Company ( L i b y a )
Banque C e n t r a l e P o p u l a i r e ( M a r o c )
Banque M a r o c a i n e p o u r l e Commerce
1'Industrie
Banque N a t i o n a l e p o u r l e L e v e l o p p e m e n t
economique (Maroc)
Q a t a r N a t i o n a l Bank
Banque N a t i o n a l e de T u n i s i e
U n i o n B a n c a i r e p o u r l e Commerce e t
1'Industrie (Tunisie)
(b) Banque A r a b e d ' I n v e s t i s s e m e n t s Internationaux BAII

Head o f f i c e : Paris
Established: 1973
Capital : FF.50,000,000
Share-
holders : CAII 99.9%
Banco C e n t r a l ( S p a i n )
Banque du L i b a n e t d ' o u t r e m e r ( L e b a n o n )
Banque N a t i o n a l e de P a r i s ( F r a n c e )
Banque N a t i o n a l e de P a r i s i n t e r -
continentale
Banque N a t i o n a l e de T u n i s i e
Banco de B r a s i l .
Bank o f K u w a i t and t h e M i d d l e E a s t KSG
C a n a d i a n I m p e r i a l Bank o f Commerce
S o c i e t e F i n a n c i & r e Europeenne
S t a t e o f Abu D h a b i
K u w a i t I n v e s t m e n t Company
S a u d i N a t i o n a l C o m m e r c i a l Bank
N a t i o n a l I n v e s t m e n t Company
O s t e r r e i c h i s c h e LSnderbank
U n i o n B a n c a i r e p o u r l e Commerce
et 1'Industrie
U n i o n de Banques S u i s s e s
Interts prives particuliers
I t i s i n t e n d e d t o o b t a i n more participations
by Arab f i n a n c i a l I n s t i t u t i o n s .
4. I n v e s t m e n t a n d F i n a n c e Bank ( I N F I )
(Banque d 1 I n v e s t i s s e m e n t e t de f i n a n c e m e n t SAL)
Head office Beirut

Established 1974
Capital Lib 1,500,000
Share-
holders Banque A u d i SAL 35%
C a i s s e C e n t r a l e de Banques P o p u l a i r e s 8%
Hambros Bank L i m i t e d 8%
M i t s u i Bank L i m i t e d 8%
Nomura S e c u r i t i e s Co. L i m i t e d 8%
G-roupe R e n a u l t 8%
P r i v a t e Arab i n t e r e s t s 25%

236
T H E NEW YORK T I M E S M a r c h 13, 1974
The Petrodollar Flow

Kuwait and Abu Dhabi, appear
If the Theory of Panglossian Economics professor at Georgetown Uni-j
to recognize this. j
Is Rightand It's NotAll Is Well versity in Washington, notes j Professor Oweiss- noted that
that the Arabs have already; Saudi Arabia has proposed to
reduce the current price ofj
sit up four major financial con-i Persian Gulf oil "once justi-1
By LEONARD SILK sortia in collaboration withj fiable political and economic j
There is a school of eco-i tries pay out to the oil-produc- American and European inter- demands of Arab countries are I
nomics whose fundamental :ing countries, because the i t - ests. met and once rich oil-consum-
tenet is that everything happens money will flow back to the One is the Union des Banques iing countries pursue a policy!1
for the best Among the his- oil-consuming countries as inet Frangaise (U.B.A.F.), estab-l of genuine cooperation with the
toric claims for this principle vestments or to pay for good&ti lished in Paris in 19709 with developing countries."
are the following: flit doesn't matter if the. out- jmOre than $700-million in as-
fllf the taxes of flow of money to pay for oil sets. This is 40- per cent owned He added that Tit is not m j
, the rich are cut, causes a temporary cut in con- by Credit Lyonnais the big the economic interest ot oil*
Economic ^ ,benefits will sumption in the oil-consuming French bank, but it is controlled exporting countries to push
Analysis ^ J m m ^ countries, because this will con- by 14 Arab banks. U.B.A.F. has the price of oil beyond the in-
stitute a form of saving, and terval in which demand is in-
larly, if the rich the "petrodollars" will then in- subsidiaries in London, Rome, elastic."
or the jniddle class build more crease the world's stock of Frankfurt, Luxembourg and ' The_ sharp increases in oil
new houses, this will benefit capital, furthering growth and Tokyo; partners of these sub- prices will mean a huge trans-
the poor, because the standing damping down inflation. sidiaries include several big fer of real income and wealth
4
stock of existing houses will Volume to Be Great European banks and the Bank] from the Westa real lowering
trickle down to the poor. (The However, the volume of pet-1 of Tokyo. of living standards. .
trickle-down theory is one of rodollars may be too great for The three other consortia! As economists of the First [
the major contributions of this the world monetary system to' [are: National City Bank put it, "The
school of Panglossian eco- handle. The whole system could flTfte Banque Franc-Arabe) discomfort of facing up to this
nomics.) break down. d'lnvestissement Internation- harsh truth has engendered il-
aux (E.R.A.B.), chartered in lusionsnotably that, for con-
1
<1A fall in output, income
and employment is good be- J. Carlin Englert of New York Paris in 1969 by the Kuwait suming countries, the adjust-
cause it will restore the econ- University has made fresh esti- Investment Company in partment can be eased by more
omy to a sound basis. mates of the money flows from nership with the French SoctetS rapid inflation' or by govern-
11 major industrialized nations
flFor every seller of stock, to defray the costs of higher- Gten6rale and the Society de ment intervention in the mar-
I there is a buyer. Strong hands priced petroleum and petroleum I Banque Suisse; . ketplace."
[will take over the assets once products this year. He found, flThe European Arab Bank, But the real transfers of in^
'held by the week. started in 1972, with headquar- come and the potential 'dis-l
that the United States, Canada,
' Êquilibrium is the law of Japan, West Germany, France, *. ters in Luxembourg, which is ruption of the world economv
[economic life. If people spend Britain and five other European made up of 16 Arab financial threaten to exacerbate bOtn|
more money for food, they will countries would see their oil institutions (including E.R.A.B.) global inflation and recession.
have less to spend for "other bills increase from $42.6-billion and seven European banks; Hopes for Price Cuts
things, so inflation will not rein 1973 to $108.7-billion in, flAnd la Compagnie Arabe It is the belated recognition
sult. If one nation loses mone- 1974. et Internationale d'lnvestisse- of the gravity of these dangers
reserves, another nation ment, incorporated in Luxem- not only to the industrialized
[will gain them, so the world What will the Arab oil states' bourg in January, 1973, which nations but to the oil-producing
monetaiy system will not suffer do with their money? Much, of - (is owned by 24 Arab and other states as wellthat has given
[from either inflation or defla- it will indeed flow west. ^ ibraks, including the Bank of rise to hopes that the Arab
tion. Ibrahim M. Oweiss, a America, West German, states rtieeting hi Tripoli today
To those principles of sym- of Egypt who is an. Italian, Japanese and French may be ready to lift the oil
metry, balance and divine auto- [institutions. [embargo and expand produc-!
maticity, the oontemporary fol- Arab Business Sought jtion. The Western nations and
lowers of Dr. Pangloss (Voltaire Japan are also hoping for some
In addition to these major price cuts.
named him "Professor of Meta- Arab combines, many Western The United States has pressed
physico - Theologio - Cosmo- banks and brokers are compet- hard for such concessions -to
lonigology") have added the ing for Arab business, led by the Western nations, while
following doctrines:
the First National City Bank France has been following a
flit doesn't matter how much; of New York, with branches go-it-alone line, seeking to
money the oil-consuming coun-| in Beirut, Saudi Arabia, Bahrain make her own deals with fhfe
and Dubai, and the Chase Man- Arabs.
hattan Bank, with bran-hes Jh Even if the Arabs end the
Beirut and Bahrain. Chase embargo, however, the threat
(Manhattan and the Morgan to the world economy will not
Guaranty Trust Company of evaporate over night. Inflation
New York are the largest hold- is raging, and the Western po-
ers of Saudi Arabian Govern- litital and economic alliance is
ment deposits. severely strained possibly
But the flow of capital from' ^ T h e deciples of Dr. Pangloss
the oil-consuming to the oii-j'should remember that their
producing countries is so huge'(shattered.
las to threaten hyperinflation master barely missed losing his
I in the Western economies. head in the Inquisition and
I The, more moderate Arab wound up living humbly on
[countries, such as Saudi Arabia, the farm of Candlde.

237
9l|t Journal of {Bommmr

APR 4 1374
that simplified multicurrency
oil revenues are only begin- units will be developed that
ning to flow. Heaven knows could be a great inducement
Euromarket Challenge: where interest rates would be.
bankers here say, if very con-
to Arab investors and could be
a sizable factor in reducing
siderable funds weren't com- uncertainty and, as a result,
Recycling Arab Funds ing into the market, primarily
to the three largest U. S.
inflation. They view the
Rothschild composite unit,
known as Eurca, as far too
By ALENA WELS banks. complicated. Two Eurco bond
Journal of Coinmercc Staff City Delighted issues were launched last year
(First of a Series) The City is deligjitetf with with very disappointing re-
the speed and secrecy with sults. The unit is composed of
LONDON Johannes Witteveen, the managing di- nine currencies weighted by
rector of the International Monetary Fund, is current- which the $2.5 billion clearing
bank loan to the British Gov- gross national product and ad-
ly touring the Middle East oil producing countries with ernment was carried off. It justable daily.
the hope of enlisting their support in helping the world epitomizes to hankers here the Questioned as to what would
deal with sharply higher energy costs. The Shah of strength and flexibility of the happen if the Arabs were to
Iran has already pledged some support. London money market, sup- withdraw their Xunds from
But officials and bankers here are well aware that ported as it is by a flexible London ai some future date,
the main job of recycling the $35 billion to $60 billion Treasury and a cooperative Mr. Montagu said that there
in excess oil revenues this year will fall on the bank- central bank. There was tre- are very few places where
ing community. mendous interest, they said, such sums can be invested
from Japanese as weti as and that they are bound to re-
The opportunities for profit to the "City," London's A m e r i c a n banks. What's turn to the "melting pot" in
financial district, are huge and banks here are care- more, they insisted, broken some form or fashion.
fully cultivating their already extensive ties with the arms weren't as nearly in evi-
Arab world. There are, however, serious pitfalls for dence in London as they were It is his impression that the
in Paris after the $1.5 billion fculk of the Arab funds wiU be
financial institutions of which even the most euphoric
loan to the French Govern- going into the Eurocurrency
and confident bankers are acutely aware. markets and that the oil pro-
A. T. Mitchell and P. C. Day. assistant general ment.
-duceis wiU be coming to 4he
managers of Barclays Bank, expressed their serious Be that as it may. the" Bar consortia for longer-term fi-
concern in an interview that the banking system just clays spokesmen believe that nancing.
wasn't geared to handle the influx of Arab money. A rhe nationalized French banks David Benson, the director
lot of banks with balance sheets under pressure will could be in a better position in in charge of corporate finance
face the exposure of borrowing short-term Arab funds the future than Hie private for Kleinwort, Benson Ltd.
British institutions when the points out that the banking
to lend on longer and longer terms. These funds, they
crunch comes. end of the Euromarket lias
cautioned, could be pulled out and, if the worst came
to the worst, the Arabs could bypass the banking sys- They say, however, that re- been operating well in the face
tem altogether. sistance to taking deposits en of a very large demand lor
sfcort-tetm wiH grow and will funds.
Britain. France, Italy, Denmark, Austria and vari- force a lot of money into lonrg- The Arabs are handling
ous other countries are already tapping the Eurodol- er term. It could be that the themselves "in a mature
lar market for bUlions of dollars at a time when Arab Arabs in time will have to de- way," he indicated, and are
posit their funds for-as much aware that they must Insure
as seven years in order to get themselves against being vic-
a quote at all. tims ot their own success.
David Montagu, chairman They are particularly con-
and chief executive officer ot cerned to form relationships
the consortium bank Orion, with banking institutions of
which participated in die Brit- "undoubted quality" and
ish government loan through aren't in any particular hurry
its ties with National West- to consolidate relationships.
minister, conceded that the This leaves room for every
banking system wiH have a iot kind of tie with the Arab
of adapting to do to meet the world, he said.
"unbelievable" demand for Orion, like e\ ervone else, is
long-term tunds. If exchange looking closely at the Arab
rates continue to float, raising countries. A personal" tie
substantial risks in individual doesn't seem necessary, Mr.
currencies, there wilt fee tre- Montagu explained, because
mendous room for multicur- most of Orion's shareholders
rency financing. have their own presence in the
Orher bankers predicted Arab countries.
3 7 - 2 1 1 O - 74 - 16

238
T H E WASHINGTON POST J a n u a r y 20, 1974
Hvbart Rawen
Oil, Gold, the Dollar

I N THE LAST 10 weeks, the major European cur- $21.6 billion to something just short of $100 billion.
rencies have plummeted about 13 per cent in value Of the latter figure, Europe, Japan and the United
against the dollar, which now is within hailing distance States would have to shell out $87 billion at current
of the foreign exchange levels set by the Smithsonian prices, assuming consumption at 1972 levels.
Agreement of December 1971. As Treasury Secretary George Shultz said in Rome
Excluding the British pound (which is in a seriously on Thursday, it is impossible for such a "staggering"
weakened condition), the dollar, is within about 5 per result to take place. vAt current prices, oil imports and
cent of the levels set at the Smithsonian for major consumption will fall. New sources ,of energy will be
currencies. (Including Britain, the dollar is withm 1.65 developed. But there will remain, nevertheless,- a huge
per cent of the Smithsonian averages.) bill to pay, and serfous secondary effects, Shultz
Or, to pUt i t another way: the dollar has totally re- warned, on the supply of products' ordinarily derived
covered from what Georges Pompidou called the "third from petroleum, such as fertilizer. Beyond that, there
devaluation"the panicky erosion of last spring and lies great uncertainty about what happens to trade,
summerand about half of the 10 per cent devaluation money flbws and balance of payments positions.
of February 1973. "We must be realistic," Shultz said, "and recognize
Meanwhile, the price of gold has skyrocketed to a that the present problem is literally unmanageable for
many countries."
record $136 an ounce, and it would surprise no one
if it goes even higher. Unless the problem is made manageableand that
I n both cases, we are witnessing a dramatic response means a rollback of-the cartel-ordained pricesthe
world could êncpunter a wave of devaluations in an
to the energy crisis, which threatens the oil-importing
effort to cope with the enormous oil costs.
world with a financial upheaval. The
As former Federal Reserve Board economist Daniel
United States, as the Chase Manhattan
Bank points out, looks like such a "safe
haven" compared with Europe and Ja-
pan that the dollar has gained in value Economic Impact
even faster than it dropped during the
crisis i n confidence in 1973.
Moreover, European bankers who H. Brill put it, "If major oil-importing countries try to
who were worrying about a massive cover their soaring fuel bills by competitive devalua-
"dollar overhang" around $90 billion tions to get a little larger share of a diminishing world
last year have just quit talking about it: they win neea trade market, we could be in for a repetition of the
Thirties."
every one of those dollarsand moreto pay the mas-
sive oil bill that the cartel of producing nations has
WHERE DOES GOLD come in? If major currencies
' laid on their doorsteps.
are devalued, the oil cartel countries might respond
The dollar problem, i n effect, has taken a 180-degree
, by insisting on exchange rate "guarantees, or payment
turn: there is no longer a deadly surplus, but a prospec-
/in gold. Already, Europe is full of talk of an official
tive shortage. Central bankers, meeting for the past $150 gold price as part of a "package" plan to expand
x
few days in Rome, are arguing not about propping up world liquidity. ' t
the dollarbut how most efficiently to keep it from
going too high. Since the present, theoeretical official price is only
These same forces explain the stunning advances in $42.22 an ounce, those countries "with substantial
gold reserves would triple the resources available to
the gold market. Once upon a time, when gold was'
pay their future bills for imported energy, i
going up, the dollar would be going down, and vice
The American dollar, ,of course, had been enjoying
versa.
steady gains before the energy crisis broke into full
But the dimensions of oil price escalation forced on
view as a result of great improvement in the U.S.
the consuming countries by the producer cartel could balance of trade and balance of payments accounts.
point to a new role for gold in providing additional In turn, that improvement was due to the better
resources necessary to foot the oil bill. competitive edge given to American exports by the
double devaluation of the dollar, plus a much better
IN THE SPACE of just two yearsfrom 1972 to
1974, the world is faced with an oil bill rising from See IMPACT,

239
Hobart Rawen
Oil, Gold, Dollar

IMPACT,-
core on Inflation at home than recorded in most
other industrialized countries.
The oil crisisalthough it causes discomfort and
higher prices heresimply Underscores the strength of
the U.S. economy relative to the rest of the world.
Since we are dependent on Imported oil for only a
fraction of our needs, higher oil costs will worsen our
balance of trade to a lesser degree than Japan's or
I that of any country in Europe.
Beyond that, while the real growth of the U.S.
economy may be sliced to a small figure (or even tp
zero), the degree of recession here is likely to be much
less severe than in Japan and Europe. The contrast
With the catastrophe in Britain is stark.
THEREFORE, the prospectivow ironic for Arab

policy-makers!is that surplus revenues built up by
the oil-producing nations will flow mostly back to the
United States, seeking safe investment, directly or
through the Eurodollar market.
There is not a little bitterness in Europe over the
way things seem to be working oyt. A few have won-
dered, -seeng the relatively insulated American posi-
tion, whether the U.S. government is hot secretly con-
tent with a situation which shows Europe helpless and
dtartraught, the Common Market a shambles, while
the U.S. dollar regains its former prestige.
It is certainly true that the United States stands
to come off best of any major country, regardless
of the future Arab squeeze and what it may portend.
But officials here know that the United States can
not prosper in the midst of a world depression.
They take seriously IMF Managing Director H.
Johannes Witteveen's warning, like Brill's, that failure
to fiiKj common approaches could bring the world to
the kind of disaster that befell it in the 1930s, with
the less developed countries suffering the most.
It would be illusory for anyone to think that be-
cause the dollar is strong in exchange markets, the
U.S. will be home free. It won't.
1974, -Ru Washington Post Co

240
T H E W A L L STREET JOURNAL February 11, 1974
Arab Oil and the Currency Crisis

B y W I L L I A M C . CATES since been lambasted by well meaning peo- termediary. The U.S. alone can fulfill this
When a Secretary of the United States ple. function. If our government declares itself
Treasury finds it necessary to characterize an ILLUSION: Floating exchange rates will willing to accumulate substantial amounts of
International monetary development as "liter- take care of the problem, providing they do European and Japanese currencies, thus sta-
ally unmanageable" for many countries, as not constitute competitive devaluation. (The bilizing their values at levels which, before
Secretary Shultz did in Rome on Jan. 17, distinction Is becoming hard to discern, but the oil crisis, we regarded as quite reason-
things must be pretty bad. They are. we know the first is good and the second is able, the Arabs would receive dollars, the Eu-
By most estimates the gap between ex- bad.) ropeans and Japanese would be spared loss of
ports and imports of Saudi Arabia, Kuwait R E A L I T Y : Floating rates, the New Testa- their reserves and ultimate bankruptcy, and
and the other Persian Gulf sheikdoms alone, ment of the free market economists, can cope world trade could continue to function
which had already swelled to some $10 billion smoothly.
last year, will shoot up to $50 billion in 1974, Though this sounds simple, if not simplis-
against a trade deficit of about the same tic, such a policy is fraught with technical
amount facing Western Europe and Japan. If
The Western world to-
and political difficulties; for example, does
left unchecked, or uncompensated by a coun- gether with Japan face a trade the U.S. support the pound or lire on the eve
terflow of loans or investments, this transfer of a British or Italian election which may re-
of over $4 billion a month could clean out all and monetary crisis of serious sult in a Socialist or Communist government?
of the monetary reserves of Europe and The difficulties being endless, an intervention
Japan within 23 months. Even if the gold proportions within a matter oi policy will not be popular with those who have
component of these reserves were re-prlqed to administer it (although our currency
at $120 an ounce, they would last for but 33 months. No assemblage oi na-
"swap" network with other central banks al-
months.
tions will find, let alone agree ready totals $18.98 billion). But, at present
The crisis that looms so directly ahead dif- levels, the yen and most European currencies
fers from those of the past three years in upon a solution. ^ are a businessman's risk, and even If we sus-
more than just direction and degree. So long tained book losses on a few, much as other
as the United States was running the deficit countries lost for a time on their holdings of
and others the surpluses, we could in a pinch, very nicely with modest marginal changes In ' our dollars, the effect on the American tax-
and we did, stop paying out reserves and sim- a nation's trading position, but not with a del- payer would not be noticeable, certainly not
ply let other countries accumulate dollars or uge. For one thing, the favorable trade effects in comparison with the consequences of the
revalue their currencies or both. Looking of devaluation can take as long as two years rapid shrinkage of world trade which faces us
back, despite hard feelings among finance to become evident. For another, as Arthur today.
ministers, remarkably little harm was done Laffer pointed out on these pages Jan. 10, any In return we can insist on a few important
to world trade. I n other words, because the benefits of devaluation are largely offset by quid pro quos, among them no arms deals
U.S. dollar was both a reserve currency and inflation in the devaluing country. with the Arabs and no imposition of quotas or
the standard denominator for world trade, we ILLUSION: The oil crisis demonstrates other serious trade restraints.
could cover our sins or misfortunes by supply- and enhances the need for meaningful trade
ing more dollars. negotiations. Careful Explanation Needed
This is not the case when the shoe is on the R E A L I T Y : The administration first pro- Obviously such a course of action can be
other foot. With European and Japanese cur- posed trade negotiations when the U.S. bal- undertaken only after the most careful ex-
rencies weakening, exporters to those coun- ance of trade was in terrible shape, allegedly planation to Congress, as the opportunity for
tries, including oil exporters, will demand and due to Japanese aggressiveness and Euro- demagogic attack in this complex area is un-
receive dollars, for which the suppliers of last pean protectionism. Now it Is the Europeans limited. One can almost hear the epithet
resort are the European and Japanese central and Japanese who face bankruptcy. Is now "Marshall Plan" reverberating in the Senate
banks. Since these dollars come from finite the time to tell the former to dismantle their chamber. At the same time steps must be
reserves, the present crisis is unique not only Common Agricultural Policy and regional taken, including removal of withholding taxes
for its magnitude but also for the fact that it preferences and the latter not to Invade our and provision of ironclad guarantees against
cannot be papered over. It is unique as well markets but pick on the Europeans instead? expropriation of foreign investors, to ensure
for its suddenness. Given time, economies, Apparently it is, and in addition, according to that the American capital market can play its
like people, can adjust to almost anything, our trade negotiators, it is time to start work- essential role in the overall financial interme-
and had the oil price increase come upon us ing on rules which would prevent nations, in- diation.
in 50 cents a barrel increments over the past cluding presumably the U.S. and Canada, Assumption by the United States of posi-
decade, national economies as well as the from limiting their exports of oil, wheat, soy- tive leadership and specifically a financial in-
world's trade and payments system could beans, or whatever else gets scarce. I n to- termediary role would not only avoid or miti-
have taken it in stride. As is, automatic mar- day's crisis atmosphere such an ambitious gate an immediate currency crisis, it would
ket forces will not have time to perform their round of trade negotiations would at best be a expedite the necessary adjustment to a new
function, and agonizing decisions will have to failure and at worst result in the hardening of pattern of trade and investment flows. Such a
be made rapidly. national positions to the ultimate detriment of pattern will entail vastly Increased invest-
free trade. ment in countries which can in turn purchase
Reality and Illusion To summarize: The Western world to- products made in the U.S., Europe and
For this reason it is worthwhile to try to gether with Japan face a trade and monetary Japan. This probably means Eastern Europe
sort illusion from reality in the proposals and crisis of serious proportions within a matter and Russia, plus any developing countries
prognostications that have already been put of months. No assemblage of nations will find, viable and stable enough to absorb and utilize
forth. let alone agree upon, a solution. Nor can we substantial outside investment. Thus, the re-
ILLUSION: An International body, be it expect the "market mechanism" to cope with duction in consumption by the wealthy indus-
the I M F , the OECD, the Common Market or a an adjustment of this velocity and magnitude. trialized nations, brought about through the
meeting of oil-consuming nations, later joined In such a climate the free trade platitudes of oil price increases, can become investable
by oil-producing nations in Washington can yesteryear will provoke at best derision, at funds which, properly handled, will be a boon
set up a nice system to handle the problem. worst reaction. to all concerned.
R E A L I T Y : While it is sometimes easy to But no crisis arises without providing the While the execution is far more complex
organize a grand coalition of nations to fight opportunity for leadership, and this opportu- than the recipe, failure by the United States
fascism, communism, capitalism, papism or nity is knocking, however quietly, at the door to grasp this nettle of economic, and with it
Zionism, when it comes to jobs and money, of the U.S. government. Logically the prob- strategic, leadership could indeed result in
international agreement is well nigh Impossi- lem would resolve itself if the Arab govern- "unmanageable" consequences for the trad-
ble. A modern day exception was the Smith- ments were willing to hold and then use Euro- ing world, including ourselves.
sonian Agreement on new currency parities pean and Japanese currencies in payment for
reached in December 1971, and there, not their oil. However, this is unlikely, given the Mr. Cates, an economic consultant, was
only were the nations represented managea- immediate prospects for these currencies on Deputy Assistant Secretary of the Treasury
ble in number and the sacrifices required the exchange markets, and it would be fool- during the first Nixon administration. An
marginal, but we had the benefit of Secretary hardy to ask any favors from the Arabs. editorial related to this subject appears
Conhally, whose "tough" tactics have ever What is needed, therefore, is a financial in- 'today.

241
FROM THE NEW YORK TIMES, MARCH 7 , 1974
IKuwait to Invest Riches in Arab Channels

By JUAN de ONIS used to ease balance of pay-
Spttltl to Th* nr York Times ments deficits arising from
higher oil prices. j
KUWAIT, M^rch 6Kuwait Neither the Special Develop-
intends to deploy h6r oil riches ment Fund nor the financing
primarily through channels by the I.M.F. of oil deficits
under Arab control and will from oil-producer loans waa
not contribute to special funds viewed with favor by Mr.
proposed by the Shah pf Iran AtSd, whose country Is a major
and the International Monetary financial power in the Arab
Fund to meet the. world's oil world.
payments crisis.
He said that Kuwait was|
"We will make our own con- participating in discuss!
tribution to the world, big or among member countries of
small, through our own insti- the Organization of Petroleum
tutions," $aid Abdel-Rahman Exporting Countries on the
Salem al-Atiki, Kuwait's Min- creation of a bank to make
ister of Finance and Oil, in development loans, and he said
an interview. Kuwait was prepared to join
Last month, the Shah of Irah In a four-point, $5-bllllon re-
proposed that the 12 major plenishment of the funds of the
oil exporting countries and 12 International Development As-
large industrial countries, in- sociation, an affiliate of the
cluding the United States, set World Bank.
up a special development fund, But the major part of
receiving $2-billkm to $3-biliion Kuwait's international finan-
a year, to make loans on "soft" . . . . amr. Pr cial . aid will be put at the
terms to poorer countries. Abdel-rahman Salem al-Atild .service of Arab countries, and
The proposal was hailed, by- to assist other Moslem coun-
Robert S. McNamara, president! The shah said Iran was pre- tries, particularly in Africa,
!of the World Bank, and H. pared to provide $l-billion, part Mr. Atiki said.
Johannes Witteveen, managing of which would go to the "Nobody looked at the
director. of the International proposed fund, while the Arabs before," Mr. Atiki said
Monetary Fund, as a proposal j rest would be used to buy "why does everybody expect
of "great vision." Both institu- World Bank development bonds us now to be the godfather?,
tions offered to manage the] and make a $700-million loan
to tft* fJJf.F., which could be Continued i

242
Kuwait to Invest Her Oil Wealth

lh Channels Under Arab Control
possed to be too highly priced?'
We will not accept instructions he asked.
from anybody on how we use "Oil is a commodity affected
our money." by th$ law of supply and de-
"This part of the world has mand, and its prices should be
been neglected for centuries equitably matched with the cost
and its wealth has been car- of equivalent commodities that
ried away by foreigners with- produce energy," he said.
out giving it a hand for de- Earlier than most other oil
velopment," he said. Mr. Atiki exporting countries, Kuwait
added: faced in the early nineteen-
' I f there seems to be a sixties the build-up of oil in-
capital surplus now, it Is' not come to levels above domestic
beonjpe we have more than development and welfare needs,
we need, but it is because we which are budgeted" at about
lack 'the ability to consume $1.5-billion.
these;, amounts so quickly In a With an outward looking
very short period." policy, Kuwait has been a
Kuwait's estimated oil reve- leader among the Arab coun-
nues this year, at current oil tries in establishing Investment
prices, ape $9-biHion to $10- institutions designed to put
Dillion for a country of 850,000 Kuwaiti funds to work abroad.
people, with oil as the only These institutions, both prof-
largB domestic resource. it making and for development
fro* massive revenue, relending, include the Kuwait
flecting an increase of more Fund for Arab Economic De-
than 300 per cent in oil prices, velopment, the Kuwait Invest-
may rise further when Kuwait ment Company, and the Kuwait
acquires,. as is planned, a 60 Foreign Trading, Contracting
per cent equity in the ]Kuwait and Investment Company. They
Oil 'Company, now owned joint- have made loans and invest-
ly by Gulf Oil and British Pe- ments of more than $500*mil-
troleum. lion abroad.
Mr. Atiki said that he con- Kuwait has been the movii
sidered the present level of force in the establishment
government take from taxes the Arab Fund for Economic
and t royalties of $6.96 a barrel and Social Development, a sort
for Kuwaiti crude oil as "still of regional development bank,
too low." which made Its first three loans
He said that Kuwait Is pre- last year, totaling $30-million.
r sd to market directly her New loans to Egypt and Al-
per cent share of oil pro- geria totaling $200-<nillion will
duction from the Kuwait Oil be announced this month.
Company, which was three mil- Kuwait has pushed the crea-
lion barrels a day until pro- tion of an Arab-African Bank
duction was cut back after the that was set up with a $200-
OctQfcr Middle East war, if the milHon* capital in Cairo in
foreign partners do not meet January, and is planning to
Kuwait'* terms for "buy back" oin in major investments in
pricgfL ! Sgypt and the Sudan for proj-
These demands were be- ects ranging from oil pipelines
lieves to be in the vicinity of to highways and major agri-
$10 barrel. The companies cultural and livestock develop-
havCpffered $8.50. ment.
"I-think oil prices on the "It is going to take a lot of
world market should go even money to get this part of the
higher," said Mr. Atiki. world to stand on its feet," said
"tpay $21 for a Swiss-made Mr. Atiki, whose combined role
shirt and $90 a sack for im- as Finance and Oil Ministef
ported rice. So why is my bar- puts him at the center of
rel of oil the only thing sup- Kuwait's financial management.

243
BUSINESS WEEK. February 16, 11
Money: Where the Arabs will panies making loans of this kind." The
Arabs also are expected to step up the
real-estate investments they have been
invest their new oil wealth making in the industrialized nations,
and some Arab money w i l l probably go
into corporate stocks.
" I t ' s going to be a helluva task but an the Eurodollar market via a consortium Economic effect. The reverse flows of
interesting one, if you are in inter- of banks headed by France's Societ6 money from the Arabs to the world's
national banking," says Richard Vo- G6n6rale. The French will draw on the capital markets w i l l go a long way
key, vice-chairman of London mer- money when needed to offset a proj- toward offsetting the deflationary im-
chant banker H i l l Samuel & Co., Ltd. ected $3.7-billion balance-of-trade defi- pact that the oil-payment deficits
Hill Samuel's "task" is the awesome cit that will be created largely by soar- would otherwise have on the economies
but potentially lucrative one of helping ing oil-import costs. of the consuming countries. Still, the
recycle an estimated $50-billion a year The Arabs w i l l supply some of the sloshing of huge amounts of Arab
of surplus A r a b oil revenues back money that the French need. Says an money through financial markets may
through the world's capital markets to official of the Paris-based Union des make the job of managing the world's
the nations that consume oil. Not sur- Banques Arabes et Francaises (UBAF), economies a rough one. Explains a top
prisingly, H i l l Samuel will have consid- jointly owned by Arab and French economist of the Organization for Eco-
erable competition. Commercial and banks: "We are bound to subscribe to nomic Cooperation & Development: " I f
merchant banks from the U. S., Brit- this loan, and thus we will serve as a Italy and France don't attract Arab
ain, the Continent, and Japan are rush- conduit for Arab funds finding their funds to compensate for their oil bills,
ing to get a piece of the action. way back into European hands." they are going to have to mount an ex-
There will be plenty of it. The oil-ex- Via Now York. I n addition to the Euro- pansionary monetary and fiscal policy.
porting countries will be able to spend dollar market, some Arab funds will And i f the U. S. attracts more than its
less than half of their fabulous earn- flow to national money markets on the share, it w i l l have to adopt a restrictive
ings, expected to total around $90-bil- Continent and in Britain through the policy." To ease such problems, French
lion this year, for imports of capital purchase of such securities as British Foreign Minister Michel Jobert report-
equipment and consumer goods. Libya, Treasury bonds. Eventually, a big edly proposed to Arab governments
Saudi Arabia, and the Persian Gulf share probably will surge into the New that part of the payments they receive
sheikdoms, which will pile up the big- York money market because the U. S. for oil be left on deposit in banks of
gest surpluses, have not even decided economy, less affected by the energy consuming countries.
what to do w i t h the remaining unspent crisis than most, looks like the safest Tragically, the developing countries,
funds, according to Beirut bankers. haven for investors. w i t h gloomy economic prospects and
But for lack of other profitable al- To keep the Arab dollars circulat- thin capital markets, have little hope of
ternatives, it is virtually certain that i n g - a n d give American bankers a attracting Arab funds. And they lack
they will have to deposit, lend, or in- larger role in handling them-Wash- the credit to borrow in the major capi-
vest a good part of the money in the ington last month lifted U. S. restric- tal markets or the ability to pay com-
major Western capital markets. Says tions on capital outflows. mercial interest rates. Managing Di-
banker Vokey: "They will put their The French already are tapping New rector Johannes Witteveen of the
money where they get the best deal." Y o r k . The F r e n c h n a t i o n a l tele- International Monetary Fund (IMF)
Oil consumers, in their turn, will communications agency plans to float a proposes to help them w i t h an ex-
have to borrow in these very capital $75-million bond issue in the U. S. I n panded credit facility that would be fi-
markets to help finance their purchases the next few months, says a French Fi- nanced mainly by Arab funds.
of Arab oil. Thus, France is swinging a nance Ministry official: " I think you Meantime, Saudi Arabia is setting
$1.5-billion medium-term credit line in will see a whole lot of French com- up its own Islamic Bank w i t h $l-billion

244
capital for aid to the Arab world, and a notes Higman, "they have learned a Rue Ancelle in the Paris suburb of
Cairo-headquartered A r a b A f r i c a n lot." Neuilly i n 1970, has assets of more than
Bank will channel Arab funds to A f r i - W i t h the assistance of countless ea- $l-billion. Arab participants, including
can countries. ger financiers, they w i l l learn a lot banks from Kuwait, Bahrain, Oman,
Actually, the recycling of Arab funds more. Vokey of Hill, Samuel notes that Libya, and Tunisia, own 60% of the
is not yet into top gear because there is the Arabs generally have bought Euro- shares, and France's Credit Lyonnaise
a two-month lag between the loading bonds in the relatively safe secondary and Banque Francaise de Commerce
of tankers in the Persian Gulf and the market. Now, he says, "a lot of bankers Exterieur hold the rest, UBAF operates
flow of tax and royalty revenues into are hoping they will get active in the branches in London, Frankfurt, and
Arab coffers. The big bulge of revenues primary market" as original lenders- Rome, is opening another in Hong
from the Dec. 23 oil-price hike will Kong w i t h Japanese banks, and is con-
start pouring into Arab treasuries next A lot of bankers are hoping sidering yet another in New York.
month. the Arabs will get Other such joint ventures include
Lota to learn. Investing huge chunks of active in the primary market Frabank International in Paris, Euro-
that money will be no easy task. "The pean Arab Bank in Brussels, and Cie.
Arabs are terribly worried about their an activity that involves considerably Arabe et I n t e r n a t i o n a l de Inves-
money and what they can do w i t h it," more sophistication. Indeed, the Ku- tissement in Luxembourg, in which
says Burhan Dhajani, who heads the wait Investment Co., owned by the Ku- Bank of America has a holding.
Beirut-based Union of Arab Chambers waiti government and private share- Says an UBAF official: " A t the sum-
of Commerce. holders, already is active as a co- mit meeting in Algiers last December,
Traditionally, the Arabs have been manager of new Eurobond issues. the Economic Council of the A r a b
very cautious with their funds-in- New partners. Europeans and Americans League called for Arabs to withdraw
vesting heavily i n short-term instru- are setting up merchant banks in Bei- funds gradually from Western banks.
ments. Their natural caution has been r u t to tap Arab money nearer its This won't happen overnight, but in a
buttressed by a number of sobering fi- source, while Western and Japanese year I think you will see a change in
nancial experiences, including heavy commercial banks are flocking into the the flow of funds to Arab affiliated
losses in the debacle of U. S. offshore gulf states. And bankers from all parts banks." And Suliman Olayan, a Saudi
mutual funds. Arab investors "have of the world also are jostling each other Arabian entrepreneur w i t h interests in
been had in the past," notes William in their rush to set up joint-venture fi- construction and oilfield contracting,
Higman, a director of a newly-formed nancial houses with the Arabs, head- explains why such joint ventures will
London bank, the Arab & Morgan quartered in such European money also attract private Arab business.
Grenfell Finance Co., which is jointly centers as Paris and Brussels. "When I go to see these people, they
owned by Jordan's Arab Bank and The Union des Banques Arabes et speak my language, they know who I
London's Morgan Grenfell & Co. But, Francaises, which opened its doors on am. I can get in to see the president."

245
THE WALL STREET M a r c h 5, 1974

[ But these kinds of developments now seem
I more typical:
Shah M o h a m m e d Riza Pahlevi of I r a n has
Arab Investors bought, through his Pahlevi Foundation, a
large office building, which he's remodeling, a t
As O i l Money Pours in, 642 F i f t h Avenue i n N e w Y o r k .

A group of Kuwaitis recently paid about
$27 million for property along the Champs
Mideast Lands .Search Elysees in P a r i s for a luxury office and bank
building to be called the House of K u w a i t .
A group of A r a b banks is setting up F i r s t
For Places to Put I t Arabian Bank and F i r s t Arabian Corp. as vehi-
cles for pumping fundsIncluding money to
buy ownership interests in U.S. banksinto the
While Much. Is Still Banked, U.S.
Sudanese i n California
States Now Seek to Invest Adnan M . Khashoggi, a Beirut-based
Saudi Arabian who acquired 50% of the stock
I n Real Estate, Businesses of Security Capital Corp. last September, and
who has purchased two California banks, also
has acquired about $1 million i n r a w land* for
E x i t Gnomes, Enter Sheikhs development in California. H e plans to bring
some 40 young business trainees f r o m the
Sudan to California to learn how to use vehture
B y PRISCILLA S . M E Y E R
capital and develop r e a l estate.
Staff Reporter of T H E W A L L STREET JOURNAL
The Saudi Arabian government has talked
The flow of oil money into A r a b lands is be-
to Chase M a n h a t t a n bank about the possibility
' coming a flood as the oil-producing nations col-
of Chase managing a pool of $200 million i n .
lect their windfall profits f r o m the most recent
Saudi government funds for investment in
doubling, on Jan. 1, of the price they charge for
Saudi business and in joint ventures w i t h for-
oil.
eign partners whom Chase would find.
Last year, Middle E a s t oil revenues r a n Libya has established an investment bank
about $22 billion. M u c h of the profit was in- in Buenos Aires. Abu D h a b i and a u d i A r a b i a
vested domestically. This year, w i t h revenues are discussing building a large oil refinery, i n
running anywhere between $80 billion and $110 partnership with a N e w York-based f i r m , i n
billion, a n estimated $<f0 billion to $90 billidn Puerto Rico. And the Saudi Arabians a r e inves-
should spill into the international-money m a r - tigating the possibility of a refinery and petro-
kets. Over the longer t e r m b y 1980, according chemical complex in the Philippines.
to an estimate by Chase M a n h a t t a n B a n k - A r a b Kuwait, a small" nation with inordinately
I foreign reserves should swell to more than $400 large oil revenues and relatively solid experi-
billion f r o m a meager $5 billion, as estimated ence in investment, also is buying U.S. r e a l es-
by the World Bank, in 1970. That compare* tate. The Kuwait Investment Co., one of sev-
with total foreign investments of U.S. corpora- eral owned jointly by the K u w a i t government
tions of $145 billion at the end of 1972. and individual Kuwait investors, this month
The big question is how the Arabs will in- bought K i a w a h Island off Charleston, S.C., for -
vest all this money. F o r the immediate future, $17.4 million in cash. The company plans to
it appears, most)of it w i l l continue to go into spend more than $100 million developing it as a
bank deposits and in government securities residential resort over the next 15 years. The
like U.S. Treasury bills. But the potential de- same company put up $10 million, or half the
m a n d for such funds is limited. And already equity funds, for a project in downtown Atlanta
there a r e solid indications that the Arabs a r e that includes the new Atlanta Hilton hotel.
starting to change their traditionally ul.tracon- Once Stung, Doubly Cautious
fiervative investment policy to take the plunge
A n executive with a m a j o r U.S. bank esti-
I into more profitable ventures. A r a b institutions
1 mates that in the past few months up to $400
are buying r e a l estate i n the U.S. and else-
million has been lent directly to U . 6 . borrowers
wherehotels, apartments and office build-
by A r a b investors. Enck, Hollingsworth &
,ings. A r a b institutions and p r i v a t e . investors
> Reveau, a Louisville real estate f i r m , says it
are buying and attempting to buy interests i n
has agreed in principle to borrow $150 million
U.S. banks. A n d negotiations are starting for
f r o m Persian Gulf investors for the purchase of
joint ventures, mainly i n oil, petrochemical
U.S. real estate. Wooten & Associates, a Dal-
and other energy-related projects, i n the U.S.
las builder and developer, says it has got about
An A r a b Landlord on F i f t h Avenue
$200 million in Middle p a s t financing for a n
P a r t l y for political reasons, and also be- apartment development in St. Louis.
cause they haven't yet developed a big force of
Najeeb Halaby, former chairman of P a n
investment professionals and business manag-
American World Airways, has assembled $100
e d , the A r a b nations are unlikely to m a k e a
million in real estate he hopes to sell to private
run on the U.S. stock m a r k e t or acquire big
Saudi Arabian investors.
publicly held companies anytime soon. I r a n , i t
is true, has indicated that it plans eventually to Arabs like real estate because it's "tangi-
invest hdavily i n "blue chip" U.S. securities, ble," M r . H a l a b y says. "They've seen prices of
-and it already has agreed to a joint venture their own r e a l estate rise faster than other in-
w i t h Ashland Oil i n the U.S. Individuals i n the vestments," he adds. D a v i d Toufic Mizrahi, ed-
Middle East, too, m a y buying U.S. securi- itor of a N e w York-based newsletter called the
ties. " D o n ' t be surprised if A r a b interests al- M i d E a s t Report, says some land in the H a r a
ready have a significant participation i n A m e r - , district of Beirut has doubled in six months.
ican companies," Joseph A . El-Khoury, direc- E v e n so, some bankers say, the Arabs ap-
tor general of the Banque de l a Mediterranee pear to have rejected most of the deals offered
of Lebanon, said during a recent visit to N e w them by "the flocks of investment men who
fork. have been giving them pitches in recent

246
Arab Investors: as Wealth Pours in,

Mideast Lands Seek Places to Put I t
Continued From Page One and Mr. Richardson have encouraged Saudi
months. This may partly reflect some unhappy Arabian officials to establish a large pool of
past experiences. Arab investors were hurt by Arab money for investment in energy respirch
the collapse of Bernard Cornf eld's I.O.S. Ltd., and developmentpartly because Arab oil
which sold many mutual-fund shares in the eventually will run out.
Middle East. Some Arab investors still haven't Many international banks and brokerage
received full repayment from the collapse of a houses are buying into Arab institutions and
major Mideast baqk, Intra-Bank, eight years forming new ones in the Middle East to influ-
ago. ence and exploit the Arab desire for new in-
That kind of experience explains the Arab vestment. Most of theoe efforts are thinly
desire to enter joint ventures with experienced, veiled attempts to Import surplus Arab dollars'
reputable partners, says Benjamin V. Lam- and shore up financial markets here and in Eu-
bert, president of Easdil Realty Inc., an affili- rope, though the financial men usually describe
ate of Blyth Eastman Dillon & Co. that is plan- their efforts as "harnessing Arab funds for
ning & nUxed pool of Arab and other investors' Arab investment." . i
funds. The Arabs, he says, have been "stung Though internal investment has top priority
and double-stung." in most Arab countries, even ambitious proj-
M r . Lambert thinks the AOddle East oil na- ects, given the relatively small populations and
tions will invest around $1 billion in U.S. real capital needs, aren't likely to drain off much of
estate in the next two years. Other observers the cash flowing into Arab treasuries. Not even
think it might amount to five or 10 times that. the $3 billion fund for loans to underdeveloped
Mr. Lambert Is conservative because, he countries proposed by the shah of I r a n
thinks, investment may be limited by the sup- amounts to more than a tiny fraction of Arab
ply ot "good" investment property and by po- funds that will become available for, invest-
litical considerations. The Saudi Arabians, for ment over the next six years or so.
example, apparently fear that a worsening in A Place In Financial Folklore
relations with the U.S. might persuade the U.S. Their vastly increased wealth has earned
to freeze Arab funds in U.S. banks. The Arabs Arab investors a certain notoriety in some fi-
are aware that Congress has been making fret- nancial marketsand the Arabs are dis-
ful noises over the prospect of massive Arab pleased. " 'Arab sheikhs' have now replaced in
Investment in the U.S., and they are aware oi financial folklore the notorious 'gnomes of Zu-
the controversy in Hawaii over Japanese in- rich' of the '60s," Abdlatif Y . Al-Hamad, direc-
vestment in the tourist Industry. ! tor general of the Kuwait Fund for Arab Eco-
Some bankers, however, see a masSive flow nomic Development, complained recently at a
of Arab money into foreign real estate and In- meeting in Luxembourg. Arabs,, he says, have
dustrial development as a near-inevitable de- "played virtually-no role" in recent foreign-ex-
velopment over the long term. Derick Richard- change and commodities-market gyrations, he
son, Chase Manhattan's group executive for says.
the Middle East and Africa, doubts that money Some international bankers say that al-
markets alone can absorb all the new Arab though Arab governments may not be very ac-
wealth.'"Looking at the capacity of markets to tive in those, markets, private Arab institutions
cope with the accumulating dollars," he says, and investors are. The oil-generated profits of
"unless there are structural changes in the na- Arab contractors, business consultants, private
ture of institutional markets there will be se- banks and others on the fringes of the oil busi-
vere difficulties two years but." Specifically, ness are financing foreign-exchange and com-
he says, the market for Eurodollars, or dollar modities speculation, they say.
deposits held outside the U.S., will become At the same time, some Western "ihoney
"saturated." brokers" are trying to exploit awareness of the
Alternative Energy Sources Arabs' new riches by collecting feeB from U.S.
Other big U.S. Wanks have discussed alter- firms for arranging loans from Arab investors,
natives, to money-piarket Investment at consid- and then disappearing. Offers to arrange such
erable length with Arab financial officials. loans have proliferated since last fall. M r . Hal-
Chase seems more willing to talk about these aby, proprietor of his -own investment com-
discussions than its competitors. Chase says pany, says he has checked out many of these
for example, that Chairman David Rockefeller brokers and found them to be "phonies."

247
ments: "He doesn't really have much of

Opening the Arab well a chance to get Arab countries to sub-
BUSINESSWEEK March 30 1974 scribe heavily to the IMF. They want to
I to money-dry nations invest unilaterally."
As for the U. S. viewpoint, a Treas-
The oil-producing countries have the ury official says: " W i t h the embargo
money and the oil-consuming countries off, the oil price must come down. Why
need i t - m o s t of all the developing institutionalize high money costs and
lands with only limited access to the give the oil countries guarantees? I f
world's capital markets. you go to them on bended knees and
So World Bank President Robert S. ask for money, the terms will not be
McNamara was in Algeria this week, very generous." For this year, at least,
Treasury Secretary George T. Shultz the U. S. feels the market can do the
was in Caracas, and Managing Direc- job for developed countries that can af-
tor Hendrikus Johannes Witteveen of ford to borrow at all. By next year,
the I n t e r n a t i o n a l Monetary Fund though, financial officialdom may find
leaves Tuesday on a six-week swing itself giving guarantees to commercial
through oil-producing nations from bank loan officers i f the oil financing
Iraq to Venezuela. Each man hopes to problem does not wane.
open a conduit through which the bil- Still, Witteveen in the 127-member
lions of dollars being paid for oil today IMF has a wider constituency than the
will flow to nations that face bank- industrialized nations. Furthermore,
ruptcy because of soaring fuel bills. aides say preliminary contacts with the
The financing of oil costs through oil countries about putting money into
borrowings in international markets the IMF are not so negative as to keep
has worked well enough for some- the managing director from making
Britain this week announced a $2.5-biI- the trip. And, they add, not only does
lion commercial bank standby f a c i l i t y - the IMF chief expect to bring back some
but countries w i t h doubtful credit rat- funds-the Kuwait Fund for Arab Eco- commitments, but he also feels there is
ings need more foreign exchange than nomic Development, the Abu Dhabi a "good chance" to get them at interest
the market will give them. Fund for Arab Economic Development, rates below going market yields.
So far, oil-producing countries talk in the Islamic Bank, the African Fund for
generalities about plans for officially A g r i c u l t u r a l & I n d u s t r i a l Develop-
recycling funds to the hardship cases ment, and the Arab-African Bank. The
the markets turn down. But they are latest talk is that the Islamic Bank, set
not plunking down much hard money. up to help Islamic nations w i t h the im-
Says McNamara, whose agency so far portant patronage of Saudi Arabia,
has had only $200-million from Iran will see its resources doubled to $2.8-
and $27-million in commitments from billion.
Venezuela: "No doubt other funds will Venezuela seems likely to dispense
come forward. The question is whether oil money in a similar regional pattern.
they will be soon enough, and in the I t is negotiating with the Inter-Ameri-
proper amounts." can Development Bank to set up a
Eurodollar*. The pinch would be worse if $250-million fiduciary fund. And a na-
the Eurodollar market were not so fer- tional investment fund, which will col-
tile in providing financing. Britain, lect an estimated $5-billion in oil reve-
France, and Italy have put their state- nues, will be used partly to finance
owned companies to work borrowing at Latin American development projects.
a great rate. Japan has directed its pri- One project is for an oil refines^.in
vate banks and corporations to seek out Costa Rica to supply Central America.
Eurodollar resources. Gaps to fill. With the increase in the
Even Britain and Italy would like to world's total oil bill estimated at $50-
supplement what the market is willing billion and up, this leaves a lot of fi-
to lend them with official credits, pro- nancing gaps for McNamara and Wit-
vided they could be had without the teveen to fill. Witteveen's contacts
strings the IMF attaches to all the or- with the oil countries will make or
dinary credits it gives. Among the break his proposal to set up a special
poorer countries, India was able to bor- "oil window" at the IMF where govern-
row $62-million from the IMF a few ments can borrow w i t h relative ease.
weeks ago, but the increase in its oil Says a fund official: "Without oil
bill this year over 1973 is estimated at money, the window would have to be so
$900-million-which it cannot pay. severely scaled down, there is doubt it
Meanwhile, the schemes for using the would be possible."
oil money are focusing on development I t does not help that the Arabs are
of the oil regions first. This leaves little apathetic and the U. S. hostile to the
for other less developed countries. Witteveen proposal. No oil money has
Already in the Arab world, there are been committed since Witteveen first
no fewer than five local development proposed it in January, except for $700-
million that Iran may place with the
fund. Says University of Colorado Pro-
fessor Ragaei El Mallakh, who does
consulting work for the oil govern-

248
T H E WASHINGTON POST M a r c h 1, 1974
Iran's Proposals for the World Economy

RAN HAS MADE a far-reaching proposal to cope with ers have sound moral and political reason to come to
I some of the acute dislocations caused in the world
economy by the oil cartel's quadrupling of prices two
the aid of, their price-stricken third-world brothers. To
be candid, however, $150 million a year per donor is not
months ago. To help poor countries hit by the increases much; for Iran, it's only one per cent of the increment
to maintain the momentum of development, Iran would of its oil. revenues. Then, there are differences between
have 12 oil exporters and 12 industrialized countries put Iran's aid proposal and the evident aid proclivities of
up $150 million each a year (a total of $3 billion) in a OPEC's Arab members. Iran and Saudi Arabia are
new soft-loan fund, to be run by donors and recipients political rivals; whether the Saudis will wish to support
on "non-political" lines and to be serviced by the World an Iranian proposal, one which they were not invited
Bank and the International Monetary Fund. To help oil to help shape, remains to be seen. Iran wants aid to be
importers absorb the severe balance-of-payments impact nonpolitical but the Arabs avowedly want to use oil as
of the new prices, Iran will lend perhaps $700 million (at a political weapon. The Arabs may not be as ready as
commercial rates) to the IMF, to be recycled to import- Iran to use the services of the World Bank and IMF. So
ers. Iran also will buy (at commercial rates) some $200 far only Venezuela, another non-Arab OPEC member,
million in ordinary World Bank bonds. The Shah has has indicated support for the Iranian proposal. There is
committed his country to put, up $1 billion for these always the prospect, however, that if the Arabs do not
three uses this year. He hopes his initiative will be joined choose to join Iran on this fund, they will create their
and supported by other states. own separate and larger one. The need is there.
The Shah's proposal is, first, a major political move The $700 million which Iran plans to loan to the IMF
reflecting an Iranian bid for global political stature. It will help it serve better the swollen liquidity require-
goes well beyond the bilateral oil arrangements which ments of the oil-importing nations. There is no particular
the Shah is quietly and simultaneously making with political reason why the Arabs in OPEC should not fol-
countries of his region. It makes Iran the first member low suit, and there is good economic reason why they
(of OPEC, the oil cartel, to offer a comprehensive adjust- should: the IMF is a good safe place to invest some of
ment plan for the world economy. It puts Iran in the their surplus funds. Recycling oil revenues to consumers
prestigious position of using the great international fi- should quiet their nerves, at least in the short run. Just
nancial institutions, the World Bank and IMF, as instru- how consumers are to earn the money to pay back the
ments of Iranian policy to a considerable extent. Indeed, IMF, and their other creditors, is necessarily a longer-
these institutions, by accepting the Shah's initiative, have term problem running beyond the writ of the IMF.
in effect endorsed his grand strategy of reshaping the Needless to say, the Shah's initiative is not the last
world economy to pay the new high prices of the oil word, or perhaps even his last word. But he has put into
cartel; it is the American grand strategy, of course, to circulation serious proposals to deal with some of the
lower the prices. And no matter what comes of the pro- basic new conditions of the world economy. Moreover,
posed new soft-loan fund, the Shah will make a good he is treating the world economy as the integrated inter-
return on funds invested * n the IMF and the World dependent entity which it is. If there is a tight strand
Bank's hard-loan branch. of Iranian self-interest in what the Shah of Iran sug-
The soft-loan fund idea is especially interesting be- gests, then the rest of us should not be put off. We
cause of the poor countries' desperation. The oil export- should test his ideas to see which of them may work.

249
BUSINESS W E E K M a r c h 2, 1 ( 174
RNANCE
How to handle $50-billion in Arab oil money

t r\ ( ( nts
Investors look for n o r m a l I . S. c e i l i n g s o n d e p o s i t
guidance in the new, vast y i e l d s , so loni_r as t h e v w e r e u s i n g
international market onlv Eurodollar monev.
But the i m p l e m e n t a t i o n would
h a v e t o be d o n e h v t h e F e d . A n d
Surplus A r a b oil m o n e y , the s t r e n g t h - central bank officials are very
e n i n g o f t h e d o l l a r , a n d t h e e n d o f U . S. s k i t t i s h a b o u t t h e i r c a p a c i t y t o po-
a n d f o r e i g n capital controls are com- lice b a n k s here to p r e v e n t t h e m
b i n i n g to create a vast, i n t e g r a t e d in- from using their unregulated
ternational capital market. But just E u r o d o l l a r f u n d s l o r m a k i n g do-
how the g o v e r n m e n t will permit pri- mestic loans c o n t r a r y to m o n e t a r y
vate i n s t i t u t i o n s to o p e r a t e in the n e w policy. ^ ou d need e x c h a n g e con-
environment has r e g u l a t o r s ' phones trols to insulate t h a t Eurodollar
r i n g i n g all over W a s h i n g t o n . window o n . o t f i . i i l obs< , \ t s
T h e E u r o d o l l a r m a r k e t is as n o t o r - S E C problem. I lie > o c u n t i e s iV E x -
ious!}" u n r e g u l a t e d as d o m e s t i c E . S. f i - change ( omirussion laces a differ-
nancial m a r k e t s are t i g h t l y controlled. ent d i l e m m a . A year ago. the SEC-
Y e t both are expected to share in the t o h e l p t h e b a l a n c e ot p a y m e n t s b y
e x t r a $oO-billion that oil producing g e t t i n g I . S. b u s i n e s s t o f i n a n c e
countries will have for i n v e s t m e n t this overseas i n v e s t m e n t s w i t h over-
year. that securities
T h e I ' . S. w a n t s i t s m a r k e t s free : h a v e t o be r e g -
e n o u g h to recycle c a p i t a l i n f l o w s of oil mmission.
m o n e y in excess of w h a t it needs t o | Th< SH w is tw iit of th. d tn-
balance its o w n i n t e r n a t i o n a l Ixioks. " * impanv might nomi-
A n d it w a n t s a f r e e c a p i t a l m a r k e t t o c a p i t a l issues t o f o r -
encourage inflo B r i m m e r : 'If the p r o b l e m is f o r e i g n m d arrange tor the
Thi ; t h a t t h e c; p i t a l < banks, the Fed will not s t a n d by helpless. d i s t r i b u t i o n t o lie r e r o u t e d b a c k t o
t r o l s t h a t er i d e d o n .Jan. 29 nly retail customers inside the I . S . - a
one of the m a n y g o v e r n m . regi- t h e y are not subject to reserve r e q u i r e - v i o l a t i o n ot r e g i s t r a t i o n r e q u i r e m e n t s .
m e n s r u l i n g U . S. m a r k e t s , f egis- ments. Subjecting our London branch H o w t * e r s o l m i g is t h . mt< n ^ . q u i l -
t r a t i o n of securities to reserve r e q u i r e - to reserve r e q u i r e m e n t s for the same r i t i o n t i \ 11 I I \ i n If. < t t h . < \ t r I
m e n t s on b a n k s . O n e of tin- h o t t e s t l o a n , " he a r g u e s , w o u l d i n c r e a s e t h e n - cost i t i m p o s e d o n A m e r i c a n s p u r c h a s -
issues c o n c e r n e d t h e b i g - l o a n business costs a n d m a k e t h e i r l o a n r a t e s to pros- inis s e c u r i t i e s f r o m f o r e i g n e r s g a v e e f -
t h a t IJ. S. b a n k s h a d d o n e i n t h e L o n - pective borrowers uncompetitive. fective insurance that this danger
don E u r o d o l l a r m a r k e t d u r i n g the era So f a r , f o r e i g n b a n k s a r e n o t l e n d i n g w o u l d not m a t e r i a l i z e . N o w t h a t the
of the controls. t o E . S. c o m p a n i e s o n a n y scale. I n t h e 1 F:T IS g o n e a n d A m e r i c a n c o r p o r a t i o n s
Reserve rule. I n 1969 t h e F e d e r a l Re- f u t u r e , " says B r i m m e r , " i f the p r o b l e m are no l o n g e r r e q u i r e d to e m p l o y for-
serve imposed special reserve r e q u i r e - is f o r e i g n b a n k s , t h e F e d w o u l d n o t eign m o n e v to finance overseas c a m t a l
m e n t s o n a n y l o a n s by t h e E u r o d o l l a r s t a n d b y a n d be h e l p l e s s . " A l t h o u g h s p e n d i n g , t h e sEc savs t h a t w e h a v e t o
b r a n c h o f a E . S. b a n k t o c o r p o r a t i o n s w o r k u p a set of g u i d e l i n e s t h a t w i l l
r e s i d e n t in this c o u n t r y . T h e idea was One Presidential plan would keep the stufi t r u m c o m i n g back.
t o close a l o o p h o l e i n t h e c r e d i t c r u n c h repatriate the Eurodollar S i m i l a r l y , tne T r e a s u r y D e p t . had
then p r e v a i l i n g by s t o p p i n g E.S. been, m effect. w a i v i n g I . with-
banks from siphoning Eurodollar mar-
operations of U. S. banks
h o l d i n g tax on A m e r i c a n - s o u r c e i n t e r -
ket funds. To oblige the capital controls t h e F e d has no w a y to put r e s e r v e re- est a n d d i v i d e n d i n c o m e p a i d t o f o r -
p r o g r a m , however, the Fed had q u i r e m e n t s on f o r e i g n banks abroad, e i g n e r s so l o n t r as t h e s e c u r i t i e s m
e x e m p t e d loans to A m e r i c a n s by t h e w i t h a c h a n g e i n l a w , it m i g h t d o w h a t question came under the IEI. Like the
f o r e i g n b r a n c h e s o f E . S. b a n k s i f t h e G e r m a n y d i d i n 1972. T o k e e p E u r o d o l - F e d a n d t h e SEC. it d i d so t o g e t I . S.
A m e r i c a n b o r r o w e r s p l e d g e d t o use lar m a r k e t b o r r o w i n g s f r o m ballooning corporations to finance abroad.
t h a t money to pay for the factories the d o m e s t i c money supply, G e r m a n I he I r e a s u r v n o w s a v s it w o u l d l i k e
t h e y b o u g h t or b u i l t overseas. a u t h o r i t i e s put reserve requirements t o tret r i d o l t h e w i t h h o l d i n g t a x a l t o -
Idle s u d d e n e n d of c a p i t a l controls in d i r e c t l y on G e r m a n c o r p o r a t i o n s w h e n g e t h e r . T h e a r g u m e n t for a b o l i s h i n g it,
J a n u a r y made bankers fear that the t h e y b o r r o w e d a b r o a d in d e f i a n c e of h o w e v e r , goes s t r a i g h t back t o t h e di-
e x e m p t i o n f r o m E u r o d o l l a r r e s e r v e re- anti-intlation restraints. l e m m a ol the new i n t e g r a t e d capital
q u i r e m e n t s w o u l d be c u t o f f . A n d it Nixon's proposal. T h e F e d a l s o is n o t r e - m a r k e t . The people overseas who are
w a s , at least on n e w loans, e v e n t h o u g h s p o n d i n g too w a r m l y to a N i x o n A d - p o t e n t i a l b u v e r s of A m e r i c a n secu-
Fed governor Andrew F. Brimmer d i t i o n p r o p o s a l t h a t it f e l t h a d rities. i n c l u d i n g the A r a b i a n oil sheiks,
1
heard t h e i r protests t h a t t h i s was un- implications. The international are n o t a p t to t o u c h a n y issue w i t h a
f a i r in the n e w i n t e g r a t e d m a r k e t . eport of the P r e s i d e n t u r g e d w i t h h o l d i n g tax. T h e r e are p l e n t y of
Says D a v i d D e v l i n , vice-president of t h a t E u r o d o l l a r m a r k e t o p e r a t i o n s ot i n v e s t m e n t s a r o u n d w i t h o u t it. A n d
First National City Bank: " T h e prob- E . S. b a n k s be b r o u g h t h o m e . I f d o n u s some investors fear thev risk exposure
l e m is t h a t f o r e i g n - o w n e d E u r o d o l l a r t i c b a n k s k e p t a s e p a r a t e set o f b o o k s , at h o m e f o r t a x e v a s i o n it U . S. t a x col-
b a n k s c a n l e n d t o E . S. f i r m s h e r e a n d t h e y c o u l d be e x e m p t e d f r o m d o m . sti< lectors get d a t a on t h e i r incomes.

250
THE NEW YORK TIMES, THURSDAY, APRlf, 25, 1974
Arabs Starting to Invest

New Oil Money in West
By LEONARD SILK
A large amount of Arab oil But the truly massive flows are
revenues has begun to flow yet to come.
West, including about $l-billion Among the projects that have
to the United Statesa small come to light so far are these:
but significant part of the vastly f A Louisville, Ky., real
Increased revenues the Persian estate and finance com-
Gulf states are obtaining for pany, Enck, Hoilingsworth &
their oil. Reveaux, will invest an initial
Only limited amounts have $50-million of Kuwaiti and
surfaced as direct investments Lebanese money in American
in the West, so far. Some of it real estate, backed by a $200-
is going into real estateraw million line of credit Ulti-
land, hotels, apartment houses, mately, the company claims,
office buildings, including one the investment will reach $250-
on Fifth Avenue and one on the million.
Champs Elysees in Paris. qWooten k Associates,
An unknown amount is flow- Dallas builders and developers,
ing indirectly to Moscow, in say they have $200-million ofi
payment for arms, and may be Middle Eastfinancingfor apart-
flowing back to the United ment house development in
States in payment for wheat. St Louis.
fThe Shah of Iran, through
his Pahlevi Foundation, has

251
ment, if relations with the Arab is all the Arab oil money going? construction and development
world deteriorate. For the fact is that most pf it projects in Saudi Arabia, in-
bought 642 fifth Avenue in flAdnan M. Khashoggi, a rich seems remarkably invisible. cluding petrochemical plants.
New York City. The Pahlevi Saudi Arabian based in Beirut, Rudyard Kipling wrote a poem Lehman Brothers, the big
about hte unseen flow of
Foundation purchased the for- has bought raw land in Cali- money as an underground river New York investment banking
fornia for development. He has house, .with former Commerce|
mer DePinna Building on the also acquired controlling inter- more powerful than the Ama- Secretary Peter G. Peterson
southwest corner of Fifth Ave- est in the Security Capital Cor- zon. But the Arabs and Iranians and former Under Secretary of
nue and 52d Street last August poration with assets of $115- are sending forth their money State George Ball leading the
for $8.6-million from Sam Min- million, and in the Bank of not in a mighty river but in way, is seeking to interest the
skoff & Sons, the building Contra Costa, Calif., with as- hundreds and thousands of Arabs in a broad range of de-
organization, Lehman Brothers sets of $22.8-million. rivulets. velopment projects and to get
Fall-Out Still Evident American bankers and finan- the United States Government
and the Cust6m Shop Shirt- cal advisers are in ardent pur- to support the joint develop-
makers. The foundation is Six months after the Arabs
suit of Arab money. David ment of the Middle East in
based in Iran and is named deployed their "oil weapon' Rockefeller, chairman of the such areas as food, education,
against the West; in the course
after the Shah, Mohammed Riza 0 f the October'war against Chase Manhattan Bank, has housing, and desalinization.
Pahlevi. 'Demolition of the Israel, the fall-out from the in- concluded a deal with the On their side, the Arabs have
buildingn was recently begun duced energy crisis is still strik- Saudis in which Chase will set up their own banks and
manage $200-million in Gov- joint ventures, especially with
to clear the site for the con- ing the world economy.
ernment funds for investment. the French, and are using them
struction of a 34-story multi- The quadrupling of oil prices
The Philadelphia Fidelity Bank as a vehicle to move part of
use tower that will include an by the Organization of Petro- has bought 80 per cent of their funds West.
Iranian cultural and commer- leum Exporting Countries has Lebanon's largest bank, the
cial center. The tower project hurt a broad range of industries Banque de la Mediterrane; Hundreds of foreign banking,
brokerage and investment in-
had been originally planned by from autos to air lines to pub- Irving Trust is taking over an- stitutions in financial centers
lic utilities. . .
the former owners who had other. all over the world are waiting
abandoned it when the office Worldwide inflation has been The First National City Bank for the truly massive flows of
intensified. An enormous trans-
space market in the city be- fer of wealth to the Middle East of Chicago is opening a branch petrodollars to come, but so far
came glutted. has begunthe equivalent of a in Dubai, and the Continental the flows of Arab money have
^Several Kuwaitis paid $27- massive tax increase on tihe Bank of Illinois reportedly is been less than expected.
million for a large property on rest of the world. Interest rates about to buy a Bahraini insti- A Lag In Payments
"the' Champs Elysees in Paris, have been forced to record tution.
where they will build a large levels, everywhere, squeezing The First National City Bank One reason for this is that
luxury office and bank building Stock brokers and investors, of New York which ranks the payments for oil from the
to be called the House of and threatening the solvency of with Chase Manhattan and big international oil companies
.Kuwait. many busineses dependent on Morgan Guaranty as the big- have not yet been reaching the
f i n early March, 1974, in ready credit. gest American holders of Arab Middle Eastern oil-produting
H one of the moves that has most, The combination of soaring Government funds already states in sizable amounts.
^caught public attention, the oil bills, inflation and huge has branches in Bahrain, Dubai, Major oil companies such as
^Kuwait Investment Company shifts of funds jeopardizes the Abu Dhabi and Quatar. and is EXxon, Mobil and Gulf nor-
bought Kiawah Island, 15 miles balance of payments and cur- the only foreign bank in Saudi mally pay their bills with lags
'South of Charleston, S.C., for rehcy of many countriesin- Arabia. Chase is setting up a of three to sue months. The
$17.4-million in cash and are cluding some of the poorest, branch in Egyptin Aswan, of Persian Gulf producers have
-planning to develop a $100- such as India and Pakistanof all placesdespite the coun- not been pressing for early pay-
! million residential resort there. many countries and endangers try's nationalized banking sys- ment. For the moment, there-
The same company put up $10- the stability of the entire world tem. Manufacturers Hanover fore, their funds are still piling
\!million, half the equity, for a monetary system. Trust of New York has an 18 up in the oil-companies' own ac-
j-downtown Atlanta center that The quest is on for monetary per cent interest in Beirut's counts. Bigger transfers will
will include a Hilton Hotel and securityin the oil-producing Arab Finance Company, which come within the next few
[a. shopping mall. states as well as among the oil is 56 per cent Arab owned. months.
" f Many other real estate con- consumers. The use of the oil The Bank of America is ex- A second reason for the
cerns are looking for Arab weapon by the Arabs, far from panding in the Middle East, limited visibility of the Arabs'
money. Benjamin V. Lambert, causing a counterattack by the with a 30 per cent share in new wealth so far is that a
president of Easdil Realty, an Western powers, has set off a the Bank of Credit and Com- great deal of Arab money has
affiliate of Wall Street's Blyth, race in business, financial and merce International, set up in been flowing to the Soviet
Eastman Dillon, says he thinks government circles for access Luxembourg in 1972 with Arab Union, in payment for arma-
Middle East oil states will put to the billions of "petrodollars" ment furnished to Egypt and
about $l-billion into American flowing to the Middle East. That partners. Syria for the war against Is-
properties in the next two flow has been estimated as The American Express
rael. The Arabs especially
years. But he disputes claims likely to exceed $80-billion in die East Development Company the Saudis bankrolled the
that the Arabs may invest five 1974 alone and to reach a cu- which helped a large British Egyptians and Syrians,-and are
to ten times as much, asserting mulative total by 1980 of half insurance brokerage company still paying off their arms bills.
that they are nervous about a trillion dollars in investible buy into a Saudi Arahian in- The Russians have been eager
exposing themselves too much funds. surance company, is joining
. and having their assets frozen with Japanese and other Amer- to get dollars to meet their own
by the United States Govern- Yet one of the critical mys- ican institutions to set up a' external obligationsespecially
teries of the moment is where merchant bank to invest in to the Americans for the huge

252
1973 wheat deal. Meanwhile, they are eagerly ernments in the Eurodollar a timely adjustment will take
Thus, Soviet supplies of trying to screen the vast num- market this year will reach place.
weapons to Egypt and Syria ber or projects, at home as well about $30-billion. Britain has economists as Prof. Richard
were essentially paid for by as abroad, open to them. announced that it intends to Cooper of Yale and Prof. Sid-
higher oil prices charged in the The greatest single share of borrow $2.5-billion to help ney Rolfe of Long Island Uni-
West by the Arabs. The Saudis, Arab money seems to be going cover its oil deficits. Italy will versity feel, the world needs
Kuwaitis, and Libyans have into the Eurodollar market be after $2.2-billionif lenders an international central bank
been shipping money to the dollar deposits in banks abroad are willing to give the shaky to serve as a lender of last
Soviet, who transhipped some and into foreign exchange, Italy Government that much. resort, should some major na-
of it back to the United States. especially West German marks, France is expected to borrow
European sources estimate that which helps to account for the $2.3-billion. The Philippines, tional financial institution
the Arab payments to the Rus- superstrength of the mark. Spain, and Denmark are ex- crack. The danger is that, if
sians have amounted to nearly For the time being, the Arabs pected to borrow nearly half a there is no prompt bail-out,
$5*billion. are staying' liquid. Such long- billion dollars each, and a siz- there could be an extinguish-
ment of money and credit that
Middle Eastern money is term investing as they have able group of other countries ptfrkf^bring depression in its
also being used in growing done in Europe has gone into will seek smaller amounts.
amounts to increase imports gilt-edged securities in London Including both prmrte I wake*
from Western Europe and and into West German bonds mblic borrewfegSjiJEaHtiSollar Others believe that such
i
Japan. In Europe, West Ger- and they have reportedly been oans thi^yeir-are forecast to fears are exaggerated, and that
many appears to be reaping buyers tjf gold. They have also total $40-bilHonabout double the highly developed interna-
the biggest gains in trade with panted millions in longer-term last year. tional money markets will au- '
the Araos. time deposits, rangingfromthyae ''" The resource-poor developing tomatically take care of the
Much oil money is likely to to 10 years. New Yorfcjttdfces countries, such as India, Bang- recycling of excess funds flow-
go for increasing imports of say they have stayed out of ladesh and Pakistan, have been ing to the Middle Eastern states
armament. United Stater "Treasiiry bills. thrown into desperate straits back into the normal channels
Iran has spent about $4- Howeveft Venezuelaa benefi- by the increased oil price, and
billion in the last half dozen ciaiy of the quadrupled oil price regard increased loans or aid of the world monetary system.
years, especially on American has been a heavy buyer of from abroad as a life-and-death If these moves are not
aircraft and British tanks. Brit- United States Treasuries. matter. enough to bring the extraordi-
ish tanks have also been going The Arabs, American observ- Economists of the World nary new situation down to
to Saudi Arabia, Iraq and the ers agree, are nervous about Bank have estimated that, on manageable proportions, there
Gulf States. The French have jutting too much of their hold- the basis of an $8.65 price per are also the possibilities that
been selling aircraft and sur- ngs into dollars. They have barrel of oil, the poor develop- the Arabs will make matters
face-to-air missiles to Libya >een asking Washington for ing countries will require an easier themselves by lower-
and Kuwait, and have re- guarantees against further de- additional $9.4-billion in capi- ing prices, or increasing their
portedly just agreed to sell valuations, but the Treasury h tal to cover their external pay- imports and their foreign aid
$150-million worth of missiles, refused to give such guarantees. ments gap. The Arabs and or the countries that con-
mortars, ammunition and other Some critics feel that the Unite Iranians have indicated that sume oil will move to buy less,
equipment to seven Arab coun- States should be prepared to they will cover some fraction especially from producing
tries. The Soviet Union has countries that will not use the
of this but are ambiguous on money productively.
been the big supplier of mili- sell bonds to the Arabs, de- how much.
tary goods to Egypt and Syria, nominated in riyals or othe Or the West might seek ac-
but the Egyptians are in Middle Eastern currencies, And, overwhelmingly, it is commodation with the Arab oil
process of switching to United which would assure repayment Arab money that these borrow- producers on thefr own politi-
States and other Western without loss of value. This has ers will be taking. As one New cal terms. Says Professor
sources. been done in the past, but only York banker puts it, "all the Oweiss: "The United States
with major currencies. longer-term money in the Euro- should take another look at its
Thus far, the Arabs are tak- Dollars Still Dominant dollar market is from the Mid- foreign policy and at the right
ing their time in making long- dle East."
range investment commitments. Even without guarantees, of Arabs in the area. It should
Prof. Ibrahim M. Oweiss of much of the Arab money going tively Immediately, given the rela- also take another look at its
Georgetown University says into the Eurodollar market is oil moderate flow of Arab true economic interests. If the
that they "are studying all likely to find its way to the themoney into capital markets, United States and the Arabs
heavy demands of govern- can build up cooperation and
prospects, and seeking to find United States anyway direct- ments, caught in a balance-of- mutual respect, then Arab
on their own what investment ly from the Middle East or in- payments
demands are open, to them." directly via Europe given the borrowers, bind, and of private money will flow into the United
hit by inflation and States for investment."
Somee outsiders criticize them still dominant international role urgent cash
for having no "system" for of the dollar and the size of rates are beingneeds, interest Some- observers feel this is
forced up to a more subtle and dangerous
evaluating investment projects; the American capital market. 10 per cent and higher, here form of blackmail than the oil
they are short of expert an- All countries that purchase and
alysts, economists and plan- oil are strapped for funds to ger flow of Arab moneya into
in Europe, although big- embargo, one that poses serious
ners. pay the bill this year. The oil the capital markets in coming danger for the survival of Is-
Professor Oweis a native of squeeze is intensifying the de- months is expected to ease in- rael Others think, however,
Egypt, feels that the Arabs are mand for Eurodollars on the terest rates next summer and that in the long run improved
in no hurry because of the lag part of nations threatened with prvent the situation from be- relations between the Arab
in collecting the oH funds due unpayable balance-of-payments coming critically tight. world and the United States
them; he suggests that the lajg deficits. are a precondition both of
will last another ix or seven Financial experts estimate However, not all money-mar- world political and economic
months, stretching into 1975. that total borrowings by gov- ket experts are confident that stability. '

253
EUROMONEY A p r i l 1974
Oil money and tlie markets
W as month the markets started to ice the l i m early cerned there are, m fact, very dear lessons. The breadth
of what the new oil surpluses might mean. of the London market gives the country a real advantage
We don't know whether it was a switch of oil funds out in attracting Arab funds to tide her over until she be-
of the dollar that triggered off the currency's weakness comes a major oil producer herself. London, New York
towards the end of the mortth; but we can be pretty and perhaps Paris ire the only markets where funds
M R tint it was a flow of oil funds into sterling that on the scale accruing to the oil producers can be placed
brought the rate from S2-I6 to $2-36 between mid- without sending the market through the roof. Secondly,
January and late March. Certainly it was not confidence the guarantees now given to official holders of sterling
in the economy that did this. make sterling, in effect, a secure currency. The fact that
There is some debate whether the flow of funds into this country may see a steady (and perhaps embarrassing)
sterling was mainly oil companies buying the currency rise in>the currency coinciding with a continued awful
in Older to pay their royalties (much Middle East oil is current account deficit has been pointed out already.
still invoiced in sterling), with these funds not being It may even be that Britain will be able to cover the nor.*
switched out of sterling by the new holders; or whether oilas well as the oildeficit from capital inflows
the flow was more a straightforward placement of royal- without needing the official $2-5 billion borrowings now
ties previously earned. It must be a bit of both; the negotiated and the others in the pipeline.
question is one of degree.
For the world as a whole the lessons are less bbvious.
But we do know that there has been steady buying of Certainly the influence on exchange rates will be massive
gilts since mid-January by Middle Eastern interests, if the impact on sterling is anything to go by. There is
sometimes on a very big scale. On two days towards the no evidence that the oil producers will use their currency
end of last month 80 million was bought, while total holdings as a potential weapon; nor even is there any
purchases of U K Government securities by oil producers evidence that they will pursue an active foreign exchange
this year may already have reached 500 million. The policy, switching between currencies to try to maximize
gilt purchases are the main example seen in London of their return. Not only do they not need to play this
the producers investing medium-termin this instance game; they probably could not, as there would be no
mainly in five- to seven-year maturities. Elsewhere one playing against them on the other side. Since'central
shorter maturities seem to have been favoured, with banks can sit out the dance by floating their currencies
some funds (apparently from private Middle Eastern the days of the one-way bet on the exchanges are now
investors) being placed in CDs. over.
Evidently, too, substantial funds have been placed in
US Treasury bills by the New York Fed, acting for But even the oil producers'straightforward investment
Middle Eastern government agencies like the Saudi policies are bound to distort currencies. It would be
Arabian Monetary Agency. extraordinary if their investments tallied precisely
Aside from some publicized properly purchases currency by currencywith their earnings. For this to
for example, by Kuwait on rhc Champs-lyseesthat is happen, countries which were more successful at export-
about all that is known. There has not been much long- ing to the oil producers would have to take a smaller
term placement of funds, there has been virtually no share of the producers' investment funds. This, seems most
investment in equities, hardly any direct investment. unlikely. If anything, the reverse will happen, with
The Arab funds coming into the Euromarket have been countries with close political ties with the producers,
largely from Arab banks (in the medium-term market) or which are particularly successful at exporting, getting
and private individuals (in the Eurobond market), not more than their share of investment funds. We have
from official sources. just seen how one currencysterlingcan move i r
quite the opposite direction to what might be expected
So it means the pressure is still on the producers
on economic and political grounds. Such movements
to do something other than pile up short-term paper,
are bound to be repeated by other currencies, with the
which offers them no real return at current inflation rates.
French franc as an obvious candidate.
What docs it mean? If this is correct, the idea of centrally planned distri-
This is pretty thin evidence to start drawing conclu- bution of the oil revenues, via the IMF. lakes on further
sions about the implications for the financial world of the attractions. The cynical view of the Fund's plan is that
oil revenues, hut it does seem worth making a few points, it puts the Fund back in business alter floating rates had
if only because of the scale of the funds in question and reduced the need for its services. This is true enough, if
the fact that these will be a major (if not the major) unkind. But the Fund's plan docs provide the much-
influence on exchange and interest rates for several needed mechanism through which the distortions
years. Besides, no better guideline of what will happen of the market's redistribution of oil revenues can be
exists. counterbalanced. This job hus to he done; and no one
First the parochial part. As far as Britain is con- has yet come up with a better way of doing it.
Euromoocy April 1974
3 7 - 2 1 1 O - 74 - 17

TK: American
KCOIKMUIC Rev1CW
PAPERS A N D PROCEEDINGS
OF TT1 F
F.i rh: >-(/x: i Annua! Meeting
OF THF
AMERICAN I ( ( ) \ ( >\1 K ASSOCIATION
MAY VFl

255
Politics, Economics, and World Oil

By M . A . A D E L M A N *
Zen Buddhist monks used to torment is a pitiful and futile attempt to replace
novices by asking: "What is the sound of the price-cost thermometer-thermostat,
one hand dapping?" That sound has be- but they are official truth. One projects
come deafening in recent years: the official "needs" and "amounts available" to And
predictions that because world oil con- a "surplus" or "deficit" regardless of elas-
sumption will increase, oil must grow more ticities ol demand or supply.1
scarce and the price must increase. But A Royal Dutch Shell executive sums up
scarcity is the pressure of demand upon the world oil market: "The underlying
supply. To omit either element is non- situation of supply and demand remains
sense. They are united in the true measure one of potential surplus. Yet the producing
of scarcity, long-run marginal cost. The countries manage to reap the rewards of a
only relevant question is whether, as con- sellers' market by creating a producer's
sumption grows, society must keep putting monopoly" (Geoffrey Chandler).
more or less into the ground to get out
another barrel. I. Monopoly
Long-run marginal cost is mostly the
return on the investment needed to de- The multinational oil companies are not
velop additional capacity. Failure to dis- junior partners but rather agents of that
cover new flush reservoirs means ever monopoly, the members of the Organiza-
more intensive development of old fields, tion of Petroleum Exporting Countries
hence rising development investment and (OPEC) (but not OPEC itself). Aside from
cost per unit, and rising prices. Antici- short-termflights,the price is now around
pated price-cost increases delay develop- $8 and (probably) close to the long-run
ment of some deposits, forcing more inten- profit-maximizing level set by the compe-
sive work on the remaining ones, hence tition of substitute energy sources, as the
higher costs. Thereby a development cost Shah of Iran has stated (New York Times
increase serves as a distant early warning [Arrr], Dec. 24, 1973). The official truth
signal of future scarcity, bringing it into stated by Secretary of State Henry
the present. Conversely, a stable (or de- Kissinger, that prices haverisenbecause
clining) marginal cost means no greater of a surge of demand against inelastic sup-
scarcity, and this is the actual case. For ply (NYT, Dec. 12, 1973), is in utter con-
the Persian Gulf, or even for the whole flict with the fact of enormous supply
world outside North America, real costs elasticity at cost of at most one-fortieth of
have been sharply declining, and even if the current price.
they were now to reverse course and climb, The popular slogan "avoid overbidding"
as is always possible, they would be a suggests that oil prices have been bid up by
negligible fraction of price. The current demand exceeding supply, which is un-
flood of projections from here to eternity true, and also betrays a misunderstanding
1
* Massachusetts Institute of Technology. I wish to Elementary economics is ignored in grain as in oil:
thank Harry J. Colish, Richard L. Gordon, Richard B. the Department of Agriculture's Economic Research
Mancke, and Joseph L. Yager for comments on an ear- Service was never consulted on the notorious 1972
lier draft; errors are my own. wheat sale to Soviet Russia (A7 I T , Oct. 7,1973).

256
INTERNATiONAL ENERGY SUPPLY
of what has been happening in 1972-73. pitulationand ceased upon his request;
Current supply-demand fluctuated, with see M. A. Adelman (1973). He later ex-
occasional excess capacity. But the de- plained that the threats had been made
mand for crude for later delivery was in- privately (James Akins). This evades the
satiable because buyers knew prices were issue; threats are made in private so that
going to be raised. Buyers had littk down- they may be denied, reinterpreted, or re-
side risk. If the producing countries de- pudiated. And to say that the threats
livered at the contract price, buyers would ceased is completely false in die light of the
make a speculative gain; if they delivered numerous public statements which culmi-
at the expected higher prices little would nated in a formal OPEC resolution, issued
be lost. Whereupon the OPEC countries just before the Tehran agreements, threat-
turned around and cited the rising con- ening "total embargo"and equally nu-
tract prices as a reason for raising their merous threats since.
taxes~-thereby putting a firm tax floor The first triumph of blackmail an-
under the higher prices and validating the nounced more to comeas some were then
expectations. "Reasons" are as plentiful as denounced for saying. Our government
blackberries; what matters is the power to "expected the previously turbulent world
raise the price of oil dose to the cost of oil situation to calm down following the
(expensive) substitutes. new agreement." In fact, the five-year
Monopoly means control of supply, Tehran agreement lasted four months, and
hence power to stop It, hence dependence after several "revisions" was pronounced
and insecurity. Food is more essential than "dead" vst fall when the Persian Gulf na-
fuel, yet nobody is "dependent" on any tions unilaterally raised prices. Perhaps
farmer or on all farmers together, because they were bored with what an oilman
farmers cannot act together to control and called "the charade of negotiations."
if need be withhold their production. Our (NYTt Oct. 19, 1973.) But the American
"dependence" on imports exists only be- policy maker may be right in claiming that
cause of the cartel and (in the short run) the Tehran agreements "worked well"
the Arab majority bloc. Its history is ex- (Akins)from his point of view. So also
tremely important: "those who ignore the with the proposal for preferential entry
past are condemned to repeat it," and we into the United States for Saudi Arabian
have already repeated it once. The key oilthe most insecure source conceivable.
words in that history are threats by the The State Department was "enthusiastic"
producers, and collaboration by the con- (Oil and Gas Journal [OGS], Oct. 9,1972),
suming nations, especially the United for reasons not explained. Nobody can
States. The threat of an embargo gave the doubt that its "exaggerated talk of an
cartel its first triumph: the Tehran energy crisis greatly strengthened the bar-
"agreements" of February 1971, whose gaining power of the Arab states" (Petro-
expected and actual effect was to raise leum Press Service [PPSJ Nov. 1973).
prices at a time of slack demand. The
documented record of the 1970-71 events II. Shooting War and Economic War
shows that only after American-sponsored Middle East politics, specifically the
capitulation to producing country de- Arab-Israel tension, have had no effect on
mands in January did anyone dare voice the price, and a Middle East settlement
public threats. The American policy maker will do nothing at all'to keep the price
did not blush to tell a Senate committee from increasing to the monopoly level.
that threats had been made be/ore the ca- The producing nations will take what they

257
AMERICAN ECONOMIC ASSOCIATION
can get. The monopoly revenues make "much" too high for Saudi Arabia's good,
peace unlikely. (See below.) twenty MBD is catastrophically too high,
The shooting war and economic war and we will owe them three times as much
waged by a subgroup of the cartelthe or more in 1980 than we do now. To keep
Arab oil producerswere invited by re- the oil lowing, we will impose a just peace
peated American statements, of which the in the Middle East this year. Next year it
public record is probably only the tip of will have to be even more just, and the
the iceberg, and whose complete explora- year after t h a t . . . and so on.
tion would richly repay a Congressional This official truth about needing to do
inquiry. The Saudis were told they were something for Saudi Arabia, because it is
the last best hope of civilization, we had not worth their while to expand output, is
to have their oil, and would they not all implicit, never set down for analysis.
please produce it, even though it was not But it appears to rest on two assungytkMss.
(we said) in their economic interest to do (a) "Oil in the ground appreciates faster
so? No revenues were high enough to in- than money in the hank/' abbreviated
duce the Saudi government to agree to big OGMB. It is often embellished by saying
production increases; something extra that the dollar has depreciated, and prices
must be done for them. (Wall Street on the New York Stock Exchange have
Journal [WSJ], Aug. 15, 1973; OGJ, gone to pot, ergo, there is no place to
Sept. 10, 1973.) This was a self-fulfilling invest. In fact the dollar may be an under-
prophecy. For if we believe it and are valued currency, or payment may be in
willing to do something extra for the another, and in any case the annual vol-
Saudis, they are glad to demand it. ume of capital formation in the developed
The buyer is asking to be had who tells world (not to mention the total stock of
a seller, " I know you don't want any more existing purchasable assets) is many times
business but please just to do me a favor "the future revenues of even Saudi Arabia.
won't you sell me something?" There are But let that go: OGMB is at best meaning-
few such buyers because they don't stay less without specific numbers. The current
in business very long. Not so in govern- price of Persian Gulf oil is about $8. If 8
ment. percent is a safe interest rate, then a bar-
Sheik Yamani, the Saudi Arabian petro- rel is worth holding) instead of a corporate
leum minister, recently asserted that be- bond, for four years for an expected price
fore the recent cutbacks, when Saudi rise to $11, and for nine years for an ex-
Arabia was producing eight million barrels pected price of $16. The price is not going
per day (MBD), "we were producing at a to appreciate indefinitely at 8 percent per
much higher rate than what we should for year: it is not going to $32 in eighteen
our economy (Meet the Press [MP], Dec. years, nor to $64 in twenty-seven years.
9, 1973). And that was a sacrifice on our But Saudi Arabian crude reserves are fifty
part" It amounted to "losing money." times current output, and can be greatly
Sheik Yamani says, without a smile, that increased at negligible cost. They are held
his government has been producing not back in order not to wreck prices. OGMB
for its benefit but for sweet charity. He is an irrelevance in a noncompetitive mar-
speaks as a man who expects to be be- ket.
lieved. But that's no wonder, for the (b) Saudi Arabia (and others) will limit
United States Government was saying this their oil revenues to what they "need."
publicly before he was. This meansif it means anythingthat
But if eight MBD is a production rate they will hold back output short of the

258
INTEXNATiONAl ENERGY SUPPLY
monopoly optimum, Le., the point where creases will hurt America's commercial
it maximizes the present worth of their competitors Europe and Japan," and
assets. I t is an odd assumption, to say the Saudi Arabian revenues would mostly be
least, and quite unsupported. If King invested in the United States (Economist
Faisal acts like a true dynast to serve his [Ec. J, Nov. 26, 1973).
successors, family, retainers, friends, etc., Saudi Arabia "planned the Arab strat-
the best way to insure this is to maximize egy for the [tm] Middle East War/'
present worth. both shooting war and economic war
We are better off with less talk of "need" (LeMonde \LMJ, Oct. 9, 1973; NYT
and a little thought about economics. News of the Week in Review [NWR], Oct.
Saudi Arabia, like the U.S. Steel Corpora- 14,1973; OGJt Oct. IS, 1973; NYT, Nov.
tion or the Texas Railroad Commission in 10, 1973; see also NYT Mag., Nov. 18,
other days, has the usual problem of Mr. 1973). King Faisal and Prince Saud
Big in a cartel: find the combination of al-Faisal had stated they needed to put
price and quantity which will maximize pressure on the United States. But "the
group profitsor more generally, best US. can get along without Arab oil until
serve the economic interests of the pro- the end of the decade" (OGJ, Sept. 12,
ducers. They can fix the price and let the 1973). Therefore it was necessary to re-
price determine quantity ; or fix the quan- duce total production deeply and deprive
tity and let it determine price, but these others of more oil in order to deprive the
are only two routes to the same goal. No United States of less. A selective embargo
blandishments will make them expand was taken seriously by our principal policy
output; anyone who thinks he can per- maker but by nobody else (Akins 1973).
suade them is merely stroking his ego and
reminding us howrightwas a Scottish pro- III. Surrender Without a Fight
fessor of moral philosophy who Warned The cutbacks have been a great political
against the "overweening conceit" of men success. We are right back to the 1930%
"in their own abilities." Repeated assur- when European nations looked for a deal
ances of how badly we need them are sim- with the aggressor in the hope he would go
ply taken as evidence of inelastic demand jump on somebody else, and when German
and signal the monopolist that there is generals opposed to aggression were dis-
greater profit in even greater restriction. credited by the willingness of the Western
The drift of American policy was visible powers to give away other people's lands
in these statements that we owed Saudi and lives; so too the moderates among the
Arabia, to whom we sent as ambassador Arabs. For, confronted with the cutbacks,
the principal architect and defender of the the Europeans and Japanese stood clear
Tehran "agreements." His earlier state- of the Americans, however dangerous that
ment that "a seller's market arrived in was for them. More important, in my
June 1967" disregards three years' price opinion, was their inaction at home: oil
decline but reveals his belief that the stocks were not spread over time by ra-
Six-Day War was a calamity to be re- tioning, i.e., not used as a defensive
versed. He "think(s) the OPEC countries weapon to gain time wherein to carry out a
should be granted substantial increases," plan, but as a means of putting off the un-
in order to induce alternative energy popular decisions to curtail demand. Most
sources needed "to avoid an energy crisis important was European eagerness to col-
in the 1980's, or 1990's," a "crisis" again laborate with the Arabs rather than each
assumed, never explained. Also, "price in- other. "Arabs don't have to police their

259
AMEMKAN ECONOMIC ASBOCtATfON
own boycotts. Sycophant nations are makes fresh wars likely if not inevitable,
doing it for them" (WSJ, Nov. 6, 1973). especially when the Saudis begin shopping
The Common Market countries refused to for the nuclear weapons they can weH
ship or pool oil resources, as requested by afford. Already there is a semiofficial
the Dutch who had been picked out as a Egyptian call for nuclear weapons, which
special victim. Apparently the Dutch are would cost only an estimated t l billion,
getting some covert helpbut only after stimulated by "a high-level Washington
they threatened to cut off natural gas de- visitor" to Cairo (NYT, Nov. 24,1973).
liveries to France and other nearby coun-
tries. IV. Economic Failure, Political Success
Japan had been more pro-Arab than any Yet the cutback failed badly to reduce
large country but France, and had stood American supply. At its maximum (as of
aloof from other consuming nations, lest December) it amounted to 4.7 MBD,
they offend (Petroleum Intelligence Week!y about 14 percent of aU oil moving in inter-
[PIW\, May 14,1971), only to find itself national trade. Hence had there been just
accused of "odious neutrality" (NYT, enough leakage and diversion to put us as
Oct. 18, 1973). Saudi Arabia was ready to well off as oil importers generally, our im-
make new demands "because of their suc- port loss would have been about 14 per-
cess in recent yean in enforcing a boy- cent. Now, for the four week* ending
cott . . ( W S J , Nov. 7,1973; NYT, Nov. November 16, our combined imports of
9, 1973). crude and products averaged 6J5 MBD.
A cut in British deliveries " . . . is dearly Since the boycott date was October 17,
causing embarrassment to the government, and Persian GulfU. S. transit time is
which . . . had received assurances [sk] about a month, this amount measures the
from Arab countries.. . " (Piatt's Oil- pieboycott level of shipments. For the
gram [POPS], Nov. 20, 1973). The next four weeks, through December 14, the
French government is embarrassed ova* average was 6.10 MBD, indicating a loss
reduced supplies (NYT, Nov. 20, 1973). of about 450 thousand barrels daily, 7 per-
Such governments are especially reluctant cent of imports, about 2.4 percent of total
to begin rationing because it would be an supply. The truly vulnerable place was the
"admission of failure," i.e., groveling did East Coast's heavy reliance on residual
not insure oil supply (PIW, Nov. 19, fuel oil, much from Caribbean and Ca-
1973; LM, Nov. 23, 1973). nadian refineries which also ran some Arab
The servility of consuming govern- crude oil and might therefore be forced to
ments, playing the Abbe Alberoni to the stop all shipments to this country in order
Arabs' Due de Venddme (see Luigi not to lose some supply. An Arab resolu-
Barztni), has made the original Arab de- tion of November 26 to cut off the Carib-
mands of no importance. A weapon which bean and other transshipment centers
makes consumer nations shake like jelly (OGJ, Dec. 10, 1973) shows that by mid-
cannot be contained by a scrap of paper November the Arabs realised their failure
enumerating Israeli security or Palestin- and their resolve to damage this country
ians' rights, etc.there are far bigger ob- where they could. Yet on November 8 our
jectives now to be considered. Moreover, ambassador to Saudi Arabia had warned
Saudi money, to be multiplied many fold, that the plight of the East Coast would be
can procure more arms from many sources, "critical" if Arab oil supplies were not in-
freeing the Arabs from whatever control creased "in a matter of days" (sic) (NYT,
the Soviet Union might exercise. This Nov. 10,1973). This was wildly untrue.

260
tNTMMNATtQNAL MNUtQT SOFTLY
The Arabs' 25 percent cuâck in their oil deficit, have already embroiled us with
production was scheduled originally to our main trading partners in Europe and
keep increasing 5 percent per month until Asia, not only because of John Connally's
Israel withdrew to her 1967 boundaries bluster and bullying but also over the sub-
and "the legal righto ol the Palestinian stance of our demand to get more than we
people" were restored. But the Arab ofl give (NYT, May 1G, 1973).
exporters1 meeting of December 26 re- (d) The risk of mineral exploitation in
duced the cutback to IS percent, ignored less-developed countries is much greater ;
the two conditions, and let it be under- concessions and contracts are now worth-
stood that the cutback would be cancelled less. (e) The hope of a rule of law for the
upon Israeli withdrawal from the west world's oceans has gone by the board be-
bank of the Suez Canal (NYT, Nov. 26, cause of the hugely inflated artificial
1973). Furthermore, the "friendly" na- value of any possibility of oil. (f) A vast
tions (Britain, France) were guaranteed arms buildup is just beginning in the
Arab oil even in excess of the base amount Persian Gulf. Producers have billions
(September 1973), which means that their available and every little patch of barren
previous imports of non-Arab oil are com- ground or barren seawater is actually or
pletely freed for the not-so-friendly (Ja- potentially worthfightingover.
pan) or the unfriendly nations (United The arms buildup reminds us that al-
States, Netherlands). though the oil monopoly will cost us dear,
To what extent this failure of the pro- there will be gains for exporters and for
duction cutback to reduce US. supply is contractors for construction, investment
due to cheating by the Arab producers management, public relations, etc. There
and to diversion of non-Arab oil is as yet will be plums for many in the industrial-
impossible to say. ised nations and crumbs for less-developed
countries. Those "working for the petro-
V. Monopoly Harmful to dollar,11 paid or enriched by the monopoly,
Consuming Nations are highly influential. Moreover, each in-
Relief at this failure should not obscure dustrialized nation can hope that the bur-
the fact that the oil cartel is very harmful den will be borne by them in proportion to
to American interests, (a) In 1974 cus- their oil consumption, but that they will
tomers, including us, will be paying out get a disproportionate shaie of export and
well over |100 billion, and over 1972-30 investment business. M. Pompidou ap-
cumulative the transfer to the producing pears to have talked to King Faisal of little
countries wiU be several times that. The else but French exports during their May
richer these nations are, the better they 1973 meeting (LMt May 15, 1973); he is
can maintain an embargo to make supply now "shocked" that anyone thinks exports
yet more insecureas the Arab production have much to do with his Middle East
cutbacks remind us, (b) The world mone- policy (LAf, Nov. 19,1973).
tary system will be harmed by huge
amounts of liquid funds ready to move at VI. Implicsrions for Policy
a moment's notice, not to serve the Only in the long run can we get the
holders' malice (the usual straw man) but cartel off our backs, and it will not be easy,
for self-protection. Controls on capital quick, or cheap. I t is necessary but no
movements to prevent this danger will in longer sufficient to stop the oil producing
themselves be harmful (c) Restrictions on companies from being the vehicle for the
American imports, because of the expected price-fixing agreement of the producing

261
AMS*KAN ECONOMIC ASSOCIATION
governments. (1) Expelling the companies probably sink below the $1.15 level and
and losing their know-how would be a huge t h a t . . . non-concessionary oil will drive
waste of resources, harmful to all. But if out concerniontry oil/' The price-under-
they simply produced (and developed and mining effect of direct sale by the produc-
explored) and were paid in money or a ing countries'natkmalcompanies("noncon-
modest share of the oil, the producing cessionary oil") remains a l i y variable if the
countries would have to do their own sell- consuming countries wanttomake it one*
ing and monitor thousands of transactions The American government ought not to
all over the world. The companies have force American companies into being con-
managed the difficult task of determining tractors, since they would merely be dis-
output shares because they have sold the placed by European or Asian companies.
bulk of the final product; the producer It must be done in unison or not at all.
nations would inherit the task without By the time moat consuming nations
the means. Nothing in the history of the see their inteiests a bit more dearer, some
trade suggests they would succeed; even will have taken another step: put oil im-
the tight cartel of the 1930's was eroded, ports under quota, to sell the tickets on
and it never faced an independent refining sealed competitive bids. Any country
industry. which wished to expand or even retain its
A managing director of Royal Dutch market in the United States would have to
Shell has well said that in buying from pro- share its gains with the Treasury. This
ducing countries the multinational oil would not reduce the price of oil to the
companies "have formidable advantages." consumer. There would be in effect a tax
(See G. A. Wagner and A. Glimmerveen.) on imported oil which would keep the
Once they become "formidable" buyers of domestic price level high also. (In my
crude oil rather than tax collecting agents, opinion a high energy price is desirable to
the market will look considerably differ- reduce pollution and congestion. Those
ent from what it does today. The oil com- who disagree with this policy judgment
panies are a big gun pointing toward the may yet prefer to have the money go to
consuming countries, which ought to be the American not the Saudi government.)
pointed the other way. Hence real na- If the producing countries succeeded in
tionalization is greatly to the advantage of coHusively fixing quota ticket prices, we
the consuming countries. would be no worse off, but chances of suc-
The producing countries may yet oblige cess are small because it would not take
us, as did Algeria and Iraq, byfirstexpell- much cheating to fill the quota. Detection
ing the companies and then inviting them of cheating would be difficult and might
back as contractors or by doing their own be made impossible by Theodore Moran's
selling of most of their oil as "participa- suggestion that prices in any given bid be
tion." This is good for the individual kept permanently secret. There would be
country in the short run and bad for the no way of knowing whether any country's
group in the longer runthe classic cartel higher exports were due to its cheating.
dilemma. It is imprudent to assume they The current price level is so much higher
will be so helpful, but the chances of this than the cost of producing oil, even in high-
happening look better in late 1973 than I cost depositssee Adelman (1972)that
expected a year earlier; see Adelman trickles, then streams of new supply in the
(1973). Perhaps such prophecies will be 1970's are a foregone conclusion, and they
realized as those of Thomas R. Stauffer in have been the bane of all cartels. Given
1970: "We conclude . . . that prices will supertankers and superports, a barrel of

262
MTBMMATIONM. MNSMGY SUPPLY
oil anywhere in the world is a barrel every- nopoly holds and the price can be rigged
where, at a transport cost ol a dollar, higher, up it will go. A lew weeks ago, in
which is little compared to the producing proclaiming the Tehran agreements dead,
nation's profit. Only the shortage ol men Sheik Yamani supplied a classic formula:
and materials keeps this potential from "We in Saudi Arabia would have liked
becoming actual. But even now the pro- to honor and abide by the Tehran agree-
ducing countries are not deceived about ments, b u t . . . " circumstances had
the "world oil shortage.'1 Saudi Arabia, as changed (Middle East Economic Survey
mentioned earlier, tried lor preferential (UEES) Sept. 7, 1973). Sheik Yamani
entry into the United States, which only may one day say that he and his col-
makes sense when more people are trying leagues would have dearly Umd to honor
to enter than there are places to set them. and abide by the Kissinger agreements,
Venezuela keeps proposing worldwide pro- but. . . circumstances, etc. The super-
rationing. Iraq expelled the Iraq Petro- subtle diplomat is no match for the fel-
leum Corporation from the largest oilfield low who grabs what is in his reach, then
because they refused to expand output, asks if you want to fight to get it back.
which under the new regime will have But it may not even be necessary. For in
doubled or tripled from 1972 to 1975. waving proudly an "understanding" with
When the consuming countries want to get Saudi Arabia to let output increase to 20
rid of the burden they can; but at present MBD or whatever, our government will
there is no will, hence no way. not realize that there is no meaning what-
This brings us back to the dismal pres- ever to an agreement which does not
ent and decisions to be made soon. The specify both quantity and price. For i!
Arabs have failed to cripple us; the Ad- Saudi Arabia's interests are better served
ministration is trying to snatch defeat from by producing less, it raises price to where
the jaws of victory to serve some grand there is less demanded.
design not yet revealed to us. Our greatest As regards supply outside this country,
immediate danger lies in a super-Tehran a sound world oil policy lor the short run is
agreement for "cooperation" of producing to do and say nothing. There are some
and consuming states, announced by a virtues in necessity. Without a world
flourish of trumpets on a TV spectacular, agreement, each producing nation will seek
with the same promise made by the same to maximize its own profit. If Saudi Arabia
people who brought us the first Tehran will for years play the statesman and hold
that this lime "the previously turbulent back on output expansion, we are no worse
world oil situation" will really "quiet off; if they retaliate against anyrivals,we
down." The ambassador to Saudi Arabia, have gained enormously. Similarly with
who in 1972 told the Arabs that it was in the consuming countries: some of them will
their interest to curtail output, told us that recover from their panic and will begin
for lack of oil our condition would be inviting producers to make some special
"desperate" by 1976, (Adelman 1973) and deals for disguised low prices, to put the
thought the Tehran agreement had worked cartel on the slippery slope. This country
well, etc., has suggested a world commod- needs not ordnung but disarray in the
ity agreement to set oil prices and ensure cartel. But we cannot by statesmanlike
availability (NYT, Apr. 16, 1973). It action cure the nonexistent world oil
would be a one-way street, preventing in- shortage.
dependent action by consumer states to However, there are some matters where
promote price reductions. But if the mo- action may help. Sheik Yamani warned in

263
AMKJUCAN ECONOMIC ASSOCUTfON
early 1973 that any attempt at consumers' King Faisal's shooting war, and it is insig-
sell-defense meant "war," and "their nificant compared with the losses of na-
[Le., our] industries and civilization would tional product here and throughout the
collapse" (Piatt's OOgrarn News Service world, due to the oil embargo: 1 percent of
[PONS], Feb. 22,1973). By November 9, GNP lost is $13 billion per year.
he and his colleagues "are letting the word In war one seeks not to be strong
out that the present cutbacks in oil out- everywhere, but only at the stiatqgk
put are the limit." The reasons mentioned points. For the non-Communist world the
are possible Western responses: food, decisive point is the United States. This
manufactures (including armaments), ami country should immediately take steps to
military action (ATF7\ Nov. 10, 1973). separate itself completely from Arab oil
They who had talked ol "war" and suited aarces.Once we are beyond the reach of
the action to the word understand the oil cutoffs, they can no longer pressure us.
language. We had better learn it quickly. Then there is no profit in tormenting
There is as yet no weakening in our in- Europe and Asia, and risking retaMation,
fatuation with Saudi Arabia, to whom we as an indirect means of pressuring the
seem resolved to return bounty for evil United States.
done to us. In late November "a very high Our overseas imports before the cutback
official in the Nixon Administration who is were about six MBD. Future imports wffl
a policy maker in this area" told a reporter for a time be larger, but will come nowhere
"he feels King Faisal... at the last min- near the ten or more MBD freely predicted
ute would prevent any serious economic a short time ago, because of the drive for
harm from being done to this country greater self-sufficiency. The four largest
because he is at heart a friend oI the non-Arab oil exportersIran, Venezuela,
% United States" (MP, Nov. 25, 1973). Nigeria, and Indonesiaalready produce
Meanwhile, King Faisal is "angry with thirteen MBD, and their production will
Mr. Sadat" of Egypt for being too cooper- grow substantially, Iran alone being a good
ative with the Americans (Ec., Nov. 24, bet for 10 million MBD in a few years,
1973). Without doubt the Saudis feel they especially if we act. (Our current ambassa-
have every right to be hostile to the United dor to Saudi Arabia insisted in September
States, and it is not for an American to say 1972 that Iran had been interested in pro-
they are wrong. But our safety demands duction increases, but no longer (OGJ,
that we recognize winch way is down. Sept. 25, 1973), which was contradicted
The Saudi connection, which our gov- by previous public evidence (OGJ, Aug.
ernment values so highly, is no asset but a 14, 1973, Sept 4, 1973, Sept 13, 1973),
heavy liability. The profits of Aramco, and also the expansion program decided
whose protection is a perfectly legitimate early in 1973.)
national objective, will be kept at a level Two routes ought to be examined. One
needed to secure incremental investment, is to bar or penalize imports from countries
and can scarcely amount to a billion dol-' declaring embargoes against us or pressur-
iars annually even if Aramco reaches ing third parties to embargo us (see above).
20 MBD. If the Saudi investment port- Or the United States could make contracts
folio reaches $100 billion, a 0.1 percent per with any countries desiring preferential
year management fee is the most the man- entry, in return for which they would
agement company can reasonably expect. guarantee certain minimum amounts. We
This is less than the extraordinary expen- would of course have to promiseand
ditures already forced upon us this year by keep our promiseto pay the very high

264
OmUUiAT/ONU MNMMOY supply
world prices. But as shown earlier, this address, Institute of Petroleum, 27, Jan.
price frill likely be in the neighborhood of 1973.
what it would cost us anyway to produce G. F. Keanan, "And Thank You Very Much/'
at home from substitute sources. Richard New York Times, Op. Ed., Dec. 2, 1973.
Gardner has embarrassed our government T. R. Scantier, "Price Formation in the East-
era Hemisphere: Concessionary versus
by pointing out that Saudi Arabia has vio-
Non-Concessionary OB," in Zuhayr Ifik-
lated their treaty with us providing for dashi, et aln Continuity and Change m the
mutual most-favored-nation treatment World OH Industry, Beirut 1970.
(NYT, Dec. 19, 1973). We need only tell G. A. Wagner and A. Gtimmcrreen, Pre-
the Saudis their embargo on shipments to sentation to a meeting offinancialanalysts
us is henceforth permanent, their status in The Hague on Oct. 4,1973.
having been cancelled by their own act. American Petroleum Institute, Weekly Statist.
As George F. Kenaan, a respected Butt. (API).
scholar and ex-diplomat, has *e& shown, British Petroleum Statistical Review of tke
in saving ourselves, we save our friends World Oil Industry (BP).
abroad, by making boycotts against them Bureau oj Mines, monthly releases (BP).
unrewarding and therefore unlikely. Economist, London (Be.)
LeMonde (IM).
REFERENCES Meet tke Press, NBC Television (MP).
ML A. Adelman, The World Petroleum Mar-Middle Bast Economic Survey (MEES).
ket, Baltimore 1972. New York Times (NYT).
"Is the Oil Shortage Red? DO Com- New York Times, News of tke Week in Re-
panies as OPEC Tax Collectors," Foreign view (NYT NWR).
Policy, 9, Jan. 1973. OH and Gas J. (OGJ).
J. E. Akios, "THs Time the Wolf is Here," Petroleum Intelligence Weekly (PIW).
Foreign Afairs, 51, Apr. 1973. Petroleum Press Service (PPS).
L. BanM, The Italians, 1964. Piatt's OOgram News Service (PONS).
G. Chandler, "Some Current Thoughts on the Piatt's OQgrsm Prict Service (POPS).
Oil Industry," Petroleum Rev^ Presidential Watt Street Journal (WSJ).

265
Aid from Oil Producers

IMF Survey Asked for Poor Nations
March 18,1974 Fund Managing Director H. Johannes
Witteveen and W o r l d Bank President
Robert S. McNamara met on March 12
with Inter-American Development Bank
(IDB) President Antonio Ortiz Mena,
African Development Bank President
Abdelwahab Labidi, and Asian Devel-
opment Bank President Shiro Inoue.
The meeting was held at IDB head-
quarters in Washington to assess the
impact of the current international
energy situation on the economies of
developing countries and to encourage
a flow of funds from the oil producing
countries to the developing world.
The participants recognized that

sharply higher oil costs represent not
only a heavy drain on the external pay-
ments of the developing countries, but
also a threat to the orderly execution
of their development programs and to
their economic growth.
The developing countries urgently
require additional external aid, both
short-term assistance to avoid harmful
adjustment measures and long-term fi-
nancing to sustain their development
efforts, and a considerable part of this
assistance should be made available on
concessional terms, the participants
agreed. They re-emphasized that the
advanced countries have a continuing
responsibility for providing aid re-
sources. At the same time they pointed
out that the oil exporting countries
now have a greater capability to share
the burden of the additional aid effort,
both through their o w n channels and
through cooperation with existing in-
ternational institutions.
The participants indicated that the
expertise and experience of their in-
stitutions in channeling resources to
the developing world give them the
capacity to play an important role in
the international aid effort. However,
to perform this function, additional
funds are required, and a special effort
is needed to mobilize such resources
from the increased financial assets of
the oil exporting countries. The heads
of the five organizations agreed to con-
tinue to coordinate their actions in light
of the new financial requirements.

266
I f r f f c ^ A p r i l 8,1974
A financial agency to supervise the flow

of Arab funds among the various Arab
countries has been suggested by El Sayed
Hassan Abbas Zaky, Economic Advisor to
the United Arab Emirates. The agency
could help Arab countries cover the defi-
cit in their balance of payments and
could also give long-term facilities to
Arab banks so that they might give
medium-term loans to finance local Arab
schemes* In addition, the agency would
reinforce the potentialities of existing de-
velopment funds in Abu Dhabi and
Kuwait as well as the Arab Development
Fund by granting loans to these funds.
The Egyptian official said that in spite of
the current large increase in oil revenues,
Arab countries suffered unique problems,
foremost among them being the absence
of machinery for channeling Arab funds
to Arab countries in need of them. He
advocated the establishment of a market
for Arab capital and the early institution
of the Arab Payments Union to serve as
a nucleus for an Arab monetary market.
He added that the idea of issuing an
Arab dinar should be revived, and sug-
gested the dinar be issued initially in
Arab countries on the Persian Gulf, and
then introduced gradually in other Arab
markets.
Egyptian Gazette, C a i r o , M a r c h 22

267
T H E OECD OBSERVER February 1974
CONSEQUENCES OF
THE OIL PRICE RISE:
The Need for International Aetion
Highlights from the speech of OECD's Secretary Generals
Entile van Lennep} to the Consultative Assembly of the Council
of Europe 23rd January 1974.
F
or the OECD countries three main types of problem energy price rise and to the importance of taking action to
result from the very sharp increase in oil prices. One support demand if and when appropriate.
problem is that a new twist is given to the price-wage
A third problem area concerns the balance-of-payments. Higher
spiral. There is the likelihood that, in the immediate future,
oil prices will raise the import bill of OECD countries: a figure
the price increase will rise beyond last year's 10 per cent rate
of around $50 billionwhich already allows for some economies
into the 'teens. The longer that anything like a double-figure
in the use of oilis an approximation of the higher bill for the
price rise is continued, the greater the danger that inflationary
first year. In normal cases, a rise in the bill which an OECD
expectations will become engrained in our thinking and in our
country has to pay for its imports could be expected, rather
economic behaviour.
quickly, to be followed by an equivalent rise in export possibi-
This means that a renewed attack on the problem of inflation, lities. But because the oil-producing countries cannot in the
using all the available weapons, must be made by OECD coun- short run be expected to use more than a small fraction of their
tries acting simultaneously, for when inflation is so widespread additional earnings for stepping-up their own purchases, OECD
a phenomenon as today, the efforts of individual countries are countries will be unable, as a group, to raise their exports in
bound to be frustrated unless they are matched by equal efforts step with their import bills. For this reason, OECD countries,
on the part of all. taken as a whole, are going to have to see their balances of
payments swing from a normal sizeable surplus on current
Another problem is the danger of an unwanted contractionary account to large deficit. For illustrative purposes only, instead
effect on the general level of economic activity and of employ- of earning a current account surplus of around $10 billion in
ment. Income which would have been spent by OECD residents 1974, OECD countries taken as a whole could go into deficit to
is being transferred to oil-producing countries. If they spent the tune of $30 billion. If individual countries seek to escape
the whole of their increased income on purchases of goods and this swing, it will only mean that the balances of other OECD
services, there could be no threat of recession. But for a countries have to swing further into deficit.
number of them it is certain that, in the short-run, they will This swing does not, of course, mean that the area will have an
not be able to step up their expenditure in line with their incomes. overall deficit on the balance of payments and a net loss of
Moreover, sharply rising oil prices may cause a general climate reserves. The oil-producing countries will certainly in one form
of uncertainty in OECD business circles. or another, invest their unspent earnings in the money and
These potential contractionary effects on activity and employ- capital markets of the OECD area. Nonetheless, a change of
ment may, at least in part, be offset by other expansionary this order of magnitude in the structure of the OECD's balance
elements. The appropriate inter-governmental bodies in OECD of payments can only be digested if governments take a highly
keep the prospects for demand and employment under continuous rational and sophisticated view of the position, and convince
review, and discussions in the early weeks of 1974 suggest that markets that this is going to be so. If countries struggle to
governments are alert to the possible depressive effects of the offset the impact which higher oil bills have on their current

268
balances, we could witness a spiral of competitiveand mutually- the markets or by other meansto recipient countries in rough
frustratingdevaluation, deflation and trade restrictionsthe proportion to their external financing needs. It is encouraging
disastrous spiral which we witnessed between the two World that discussions on this problem have already begun.
Wars. Governments could take this path through a simple
failure to accept that, for some time to come, current account
deficits will have to be the order of the day.
More likely, perhaps, will be a fear by individual governments Immediate Problems
that they may be unable to attract, to their own shores, a suffi-
cient part of the return flow of capital from oil-producing coun- for the Developing Countries
tries to offset their current account deficits. A further danger
may be that O E C D countries, in the attempt to ensure that they One obviously important group of countries to whom part of
attract a sufficient share of the return flow of capital, will engage these funds should be channelled are the less-developed countries
in a competitive escalation of interest rates that would raise the who are not, themselves, producers of oil. The facts speak for
cost of credit to levels inappropriate from the point of view of themselvesand in an alarming fashion.
the general expansion of activity. These poorer countries are likely, in 1974, to find their oil bills
put up by something near $10 billion as a result of the recent
To avoid these dangers emanating from the changed balance of
price rises. This would just about wipe out the whole of the
payments situation witt require an important measure of
official development assistance that the OECD area makes
agreement, inside the OECD, as to the aims which each country
available each year to these countries. For some developing
should now set itself on current account. Only thus shall we
countries, the higher oil bill will amount to about half their
escape the danger of seeing OECD countries scrambling, individ-
existing earnings from exports.
ually, to preserve or create for themselves current account sur-
pluses which the area as a whole cannot, over the next few years, The new conditions faced by developing countries call for three
achieve. The task of seeking agreement on individual balance major policy imperatives:
of payments aims is not new to OECD. We went through a First, existing official development assistance programmes
very similar experience in 1971, and without the understanding must not be slowed down or reduced. This would worsen the
reached between countries on that occasion, largely through difficulties of developing countries and would only add to our
OECD's Working Party No. 3, I do not think that the Smith- own problems.
sonian exchange rate agreement, and the further devaluation of Secondly, the developing countries that are worst hit will
the US dollar in 1973, would have been possible. need special help, largely in the form of cheap loans, to enable
them to adjust their economies and balance of payments to the
But the adjustments that now have to be accepted, are far bigger additional burden.
than the ones we had to negotiate at the time of the Smithsonian Thirdly, the new problems also present new opportunities.
realignment. And in the present case, questions of aims on There is going to be a substantial rise in world savings since
current account cannot be discussed without, at the same time,
the oil producers will not be able to spend all their extra revenue.
discussing what is going to happen to the capital which will be
It should be possible to find ways by which part of these savings
flowing back from the oil-producing countries. For we cannot
can be mobilised to accelerate economic progress throughout
expect an individual OECD country to resign itself to a rather
the developing world.
sizeable current account deficit unless it is reasonably confident
that it can obtain a sufficient capital inflow to finance it. Thus in the present situation, there are clear dangers of
uncoordinated policies which would lead to over-reaction both
An urgent task is, therefore, to consider what steps need to be to the inflationary and to the recession threats; of isolated moves
taken to enable the very large amounts of capital that will hence- to compensate the impact on foreign trade of higher oil prices;
forth be flowing out of oil-producing countries to be made of cutting on development assistance thus aggravating the situa-
available in the geographical locationsand in the formsthat tion of non-oil producing developing countries; of going to a
will most facilitate the continued expansion of world trade and sterile confrontation between oil-consuming and oil-producing
employment. Stable conditions in the international monetary countries. Such policies would be both inadequate and self
systemwhich are in the essential interest of all countriesare defeating. What is required, on the contrary, is. increased co-
unlikely to prevail unless the vast capital sums flowing from operation at all levels to solve problems common not only to
oil to non-oil countries are invested in a reasonably stable form the industrialised countries but to the international community
and unless they are channelled directly or indirectlythrough as a whole, including in particular the oil producing nations.

269
reserves of crude oil, their reserves of all fossil fuels, including

Longer-Term Problems coal, shale oil and tar-sands, probably account for the major
part of the world total, sufficientat a costto meet foreseeable
of World Energy Supply needs.
The main question now before these countries is how fast they
The suddenness of the price change over the last few months should, in fact, develop alternative sources of energy. This is where
should not obscure the fact that both oil producers and oil any rational person shou'.d see that the interests of the O P E C
consumers have a common interest in a price for oil which countries and the O E C D countries really coincide. First, because
correctly reflects the longer-run supply and demand for oil and investment in alternative forms of energy is extremely costly, and
alternative sources of energy. can have extremely damaging effects on the environment. There-
Looking first at this question from the point of view of the fore, it is in the interest of O E C D countries not to move faster
oil-producing countries, we should recognise that they them- in this direction than they have to. Second, because it is not
selves face difficult problems in the pricing of their oil. In in the interests of the OPEC countries if the industrialised
particular, it would be wrong to describe recent decisions by the countries were to embark on costly programmes for energy
oil producers as simply the actions of strong monopoly producers diversification which might, in time, seriously reduce the earning
who can fix the level of output or prices of their product without power of the O P E C countries before they have had time suffi-
concern for the future. ciently to diversify their own economies.
The speed with which O E C D countries build up alternative
First, the oil producers are having to exploit a depletable
energy supplies will depend, essentially, on the cost of imported
asset. How fast, at any given rate of consumption, their oil
oil in relation to the cost of the alternatives. If the cost, in
reserves will be depleted varies from country to countryand
O E C D countries, of imported oil is well above the cost of com-
this, in itself, may be a source of difficulty for the producers
parable alternative sources of energy (in economic parlance, if
when they seek a common approach to their problems. The
the substitution price is exceeded), a wild and wasteful scramble
task of government in any traditional oil-producing country is
for national independence through the exploitation of indigenous
to ensure that its oil is traded on optimal terms. On the price
energy resources will be set in motion with all the attendant
at which they sell their oil will depend their ability to raise the
disadvantages to O E C D countries and oil-producing countries
living standards of their own populations, and diversify their
alike. If, on the other hand, the price of oil is too low, there
economies against the day when their oil runs out or is in less
will be a wasteful use of the oil producers' valuable but exhaustible
demand. If the price is set too low, their incomes may prove
asset, while in O E C D countries the incentive to invest in altern-
insufficient for their future needsand some of them will see
ative energy sources will be insufficient to prevent at some
their oil resources disappearing at an alarming rate. If the price
stage, an energy crisis of far more serious proportions than
is set too high, they will enjoy great prosperity for a short while
today.
but the higher the price the shorter the period, because the
faster will be the action which their customers take to economise This is why I think that the price of oil in the next few years is
on traditional oil sources and to develop alternative energy going to be a matter of common interest to all countries, an area
supplies. in which international consultation can yield important longer-
A second very real problem for the oil-producing countries term benefits for all. The issues concerned cannot be limited
is to find suitable forms in which to hold their earnings until simply to the question of oil prices. They cover a wide range
such time as they wish to use them. It is both in their interest of associated economic questions concerning supply, the develop-
and that of the rest of the world that these investments should ment problems of the O P E C countries, investment outlets for
as far as possible go to increase the productive potential of the OPEC countries' savings, and (urgently I trust) those developing
world economy. But at the rate at which these assets seem now countries which are not producers of oil.
likely to accumulate, this may not be easy to achieve. All these are questions which can now profitably begin to be
Now let us look at these same problems from the point of view discussed in appropriate broad intergovernmental forums. And,
of the industrialised countries. It should first be noted that when they get under way, the discussions will benefit from the
O E C D countries are important producers of energy. Indeed, work which, in many of the important areas, has recently been
in 1971 about two-thirds of the energy consumed in the O E C D done inside the O E C D , including, in particular, the Organisation's
area was produced from indigenous sources. Moreover, there is comprehensive assessment of long-term energy trends. I hope
much potential for future development. Although O E C D coun- we can now carry these discussions forward into the wider inter-
tries account for only some 10-20 per cent of estimated world governmental arena.
3 7 - 2 1 1 O - 74 - 18

270
THE MONEY MANAGER
MARCH 4. 1974 through international organizations

and special development funds to
help ease -.the - balance-of-payments
impact of higher oil prices on indus-
trial and underdeveloped countries.
This is about of the anticipated
rise in all revenues this year and
Money Surges Out would be split three ways, between
the ' World Bank, the International
Monetary Fund (IMF), and a special
development fund which would be op-
To Meet Oil Costs, erated in some fashion jointly by the
two Washington-based institutions.
Islamic countries, meeting in La-
hore, Pakistan, rejected proposals that
But Only a Trickle Arab oil money should be used to help
all developing countries. Instead, the
meeting called for restrictions on aid
from Arab countries to Moslem coun-
Finds Its Way Back tries and also refused to set aside
a specific amount of money for aid.
Arab oil- countries earlier turned
down a request from African countries
By ROGER LOVE for preferential oil prices. The Arabs
argued inter alia that any attempt to
run a two-tier international oil mar-
A surge of oil payments money from ket would be unworkable. This caused
western countries is flooding into the Middle bitterness in Africa where many coun-
Eastand apparently staying, there. Re- tries had gone out of their way to
ports indicate that thus far this tidal wave break diplomatic relations with Israel
of money, which may reach $50 billion this
year because of the sharp increases in oil
prices decreed by Middle East producers Arab interest ki Switzerland
last year, is not reflowing significantly into may have been fanned
western markets or western corporations,
with the. possible exception of the Swiss by last month's decision of
franc. the Swiss Authorities to
Observers note* the following recent
development: remove many of the
Apparently less than $21 million of restrictions on non-resident
a recent $1.5 billion French Treasury inter-
national bond issue was taken up by Arab use of the Swiss franc
banks, despite France's efforts to cultivate a in making deposits.
special relationship with Arab states. This
cultivation included a refusal to join with ahead of and in the aftermath of the
other industrial countries at this month's Middle East war in October last year,
Washington energy conference in forming in sympathy with the Arab cause.
some kind of "united front" of consumers Iran- refused to roll back oil
to deal with producers' claim. prices, while pledging some unspeci-
In fact, the bulk of tl>e French bond issue fied help to developing countries.-The
appeared to be subscribed to by banks in the Shah did proclaim ' that the United
industrial countries which France had re- States was getting "more oil than any
fused to support. Barring $500 million taken time in the past" in spite of the Arab
embargo, a remark which drew furious
up by Government-influenced French banks, denials from U.S. energy officials.
the other big subscribers were U.S. banks, Iran, in turn, issued a harsh attack
with some $370 million, Canadian banks with against the United States and other
some $117 million and British banks with oil consumers for using the energy
soê $98 million, according to reports from crisis as a "scapegoat" for reducing
Paris. .. aid to developing countries.
The United States indicated that
Iran, which triggered the recent oil it would like to see Arab and other
crisis through unilateral price increases, has oil producers pick up the tab for the
now agreed to make $1 billion available estimated increase of some $10 billion
in oil import bills of developing coun-
tries. The Arabs and others showed
little inclination even to pick up the
tab for the higher import bills of
developed and industrialized countries
which in their eyes are much better
credit risks.

271
Various national Governments, I f the Lahore conference decision

including that of Germany, indicated is sustained, it would leave a large of them, Kenya for instance, esti-
that the impact of the il crisis, on numher of non-Moslem countries mated that the rise in oil prices had
top of other imponderables like higher directing their aid attempts even ade its entire current development
domestic wage, rates, already raging more clamorously to the fton^Moslem plan unrealistic and estimated that
inflation and a clouded export outlook, world, at a time when the industrial annual economic growth, currently
made economic policy decisions in- and developed countries are beginning running at about 7.5f, could f a l l to
creasingly difficult. Seriously to feel the pinch of Arab zero within the next 12 to 1ft months.
Reports that Arab cash to the ex- and Iranian oil price hikes arid sup- The African nations, as noted above,
tent of perhaps billion had gone ply cutbacks. had generally wholeheartedly sup-
into the Swiss franc in the last few ported the Arab cause last October
Two African countries are a par-
days were particularly interesting. and since.
ticularly poignant example. The most
The Swiss currency is a traditional heavily ipopulated are not overwhelm- But if friends of the Arabs can
refuge in times of international capi- expect such treatment, why would
tal and currency upheavals, even "enemies" expect to do any better?
though the interest rate structure of If friends of the Arabs The "enemies" are the industrial
the Swiss money market offers little countries iwho seem to be relying on
incentive to investors as compared
can expect such treatment massive injections of Arab cash into
western money markets, to permit in-
with other European countries or
New York.
why should 'enemies' dustrial countries to borrow to cover
Arab interest in Switzerland may expect to do any better? their balance of (payments deficits,
in effect paying western cash to Arab
have been fanned by last month's de-
and other producers for oil, then bor-
cision of the Swiss authorities to re- ingly or even in majority Moslem, rowing the cash back to cover the
move many of the restrictions on non- and these countries supported the gap caused by the oil payments, then
resident use of the Swiss franc in mak- Arab cause without stint in last year's paying more cash for oil, then bor-
ing deposits, investments or purchas- confrontation with Israel, losing in rowing more back to close the gap.
ing for instance real estate. The the process considerable Israeli de- The great .problem with this sce-
presence of such restrictions over the velopment aid and technical assistance. nario is that none of the oil .producing
last year or so did succeed in turning
The African countries as a group countries has as yet indicated any
away some inflationary money in-
paid about <$350 million on oil im-r eagierness whatsoever to play its part,
flows, while the lifting of the restric-
ports last year at $8.60 a barrel, ac- whether through normal channels of
tions has now returned the Swiss
cording to estimates of the Organiza-
franc to its traditional role, that of
tion of African Unity, headquartered the International Monetary Fund
a currency one oan get into or out
in Addis Ababa, Ethiopia, but this (mainly for industrial countries) er
of without too many questions being
bill is likely to rise to at least $1 through the World Bank (for undes-
asked.
billion this year. This compares with developed countries).
However, the apparent Arab opting total African reserves of some $2.9
for low Swiss returns and a high Meanwhile, th*e lines in front of
billion held by Libya and some $600
degree of guarantee of exchange rate ticket windows in the international
million held by Nigeria.both oil pro-
risks raises some disturbing questions money markets are. getting longer and
ducers. ^
on the willingness of oil producers to longer. France which ihas already bor-
The Arab countries told African rowed i$l.S billion in the medium-area
play the part sketched in for them by states recently that no concessionary
western nations in saving what is left of the Eurodollar market,.is seeking
prices could be granted to Africa or at least another $1J5 billion to $2
of the world's monetary system and indeed to other developing countries.
economy from total collapse. billion through state-owned and state-
The Arabs did make proposals for the contrqlled corporations. I t a l y seems
The Lahore iconference decision is establishment of an Arab development bent on raising as much as possible,
perhaps the most disappointing blow bank for Africa, with a capital of perhaps $4 billion, before its credit
to efforts to get oil producers to ac- some $500 million and on the estab- resources run dry. Britain has indi-
cept a ' role in helping developing lishment of a separate $200 million cated that it may be seeking as much
countries, most of whom are excluded fund which African countries could as $7 billion internationally this year.
from western capital markets by the draw from to help defray the costs And Japan is seen as a likely candi-
shaky conditions of their economies of increased oil. date either for direct official borrow-
ar.d by their low credit ratings. But African countries were cautious ing, or for government-sponsored cor-
The number of poor Moslem coun- in the face of these (proposals. Some porate borrowing. .
tr'es which would benefit from the The total of demand in the first
largesse of oil producers under the half this year could easily reach $15
Lahore decision is sizable enough. I t billion with little end in sight if other
would include Egypt, Syria, Jordan, industrial countries start to join the
Tunisia, Morocco, Sudan, Mauritania, scramble. Where the funds to finance
Mali, Niger, Somalia, both Yemen this demand are coming from is un-
rep.blks, Pakistan .and Afghanistan. clear, but at the moment it appears
I t would, however, exclude India, unlikely that it will be from the Arabs
Ceylon, Burma, Thailand, Kenya, and others.
Tanzania, most of southern Black
Africa and all of iLatm America, bar-
ring a mass Conversion of these coun-
tries to Islam.

272
London Letter
BY JOE ROEBER JUNE 1974
Arab Oil Money and the City of London shown in the equity market and, even more suprisingly,
A yeat-ago the only people you would expect to find in the gold market. Considerable sums, however, have
in the offices of a London merchant bank at 7 AM in the been invested in UK Government bonds. According to
morning would be the char-ladies. These days it is not C. P. Lunn, a general manager of Barclays Bank Inter-
uncommon to find a banker at his desk. In Bahrain it is national, up to 500 million has gone into gilts this year
10 AM and the working day, which starts at 7 AM, is half (on two days alone 80 million is thought to have been
over. London's bankers are only too aware that a few so invested). The bulk of it has gone into 5 to 7 year
sacrifices have to be made if they are going to profit maturities. Others pitch their estimates somewhat lower
from the Arab's new found wealth. but it is generally agreed that the reason why the
Britain has always had close ties with the Arab world. 1980 Tap stock ran out so quickly was due primarily to
Kuwait, Oman, Qatar and the United Arab Emirates are Saudi Arabian demand.
all in the Overseas Sterling Area. London, along with
other continental centres such as Paris, Zurich and Diversification
Geneva, have been havens for Arab funds for many A certain amount of money (primarily Kuwaiti) has
years. But only recently these funds were modest. Total been channelled into the UK property market, which is
011 revenues of the major Arab oil-producers and Iran currently in desperate need of funds, following the
in 1972, amounted to a mere $10 billion. The recent collapse of its primary deposit reservoir, the belea-
sharp rise in oil prices has changed all that. At the end guered secondary-banking sector. One merchant bank,
of this year oil revenues could be running at an annual which has been busily arranging loans in Kuwaiti dinars
rate of close to $70 billion. for UK property companies, estimated that up to 70
Saudi Arabia's oil revenues this year will probably be million might have been invested in this sector. But
8 times as high as in 1972. In a 7-month period it can despite their shortage of funds many UK companies still
earn enough, at present oil prices, to cover the entire shy away from the exchange risks involved in taking
cost of its 1970-75 development plan. A similar situation foreign-currency loans.
faces Libya, Kuwait, Abu Dhabi, and Qatar. All are won- The bulk of the surplus oil funds, however, are being
dering what to do with their new funds. deposited in the eurocurrency market a large chunk
of which is based in London. Once again estimates of
Petrodollar Tidal Wave
the Middle East involvement vary considerably. The
M. Jean Parrey, president of Arab Bank International, Bank for International Settlements estimated almost 12
estimated recently that around 60% of these surplus month ago that $8 billion of Arab money was depo-
funds would find its way into international money mar- sited in the euromarkets. Since then the market has
kets. If true this would amount to more than $30 billion grown substantially Morgan Guaranty estimate that
this year alone. How large this inflow is, can be gauged its size in April 1974 was $16 billion. Arab and Iranian
from the fact that publicized medium-term credits on deposits may now amount to $25 billion.
the euromarkets amounted to only $21.6 billion in 1973. As in the past, much of the money is placed very
Even before the latest surge in oil revenues London short-term and handled by the big American banks,
was attracting a large amount of Arab money both in such as Chase Manhattan, Morgan Guaranty and First
sterling and foreign currency. The latest Bank of Eng- National City Bank, all of which have close links with
land statistics, which refer to December 1973, show that the Middle East. Whereas in New York considerable
non-sterling liabilities of UK banks to Middle Eastern sums of Saudi Arabian money have been channelled
countries, not members of the sterling area (such as into Treasury bills, most of the funds moving into Lon-
Saudi Arabia, Libya and Iran), had risen from $1.7 bil- don and the euromarkets are from Arab banks and
lion in 1972 to $4.2 billion. The sterling holdings of private individuals.
Kuwait, Bahrain, Qatar, the UAE and Oman had risen Just how these funds are managed varies consider-
rather more slowly from $1.3 billion to $1.8 billion. ably, depending on the expertise of the Arab countries
Until the Bank of England releases fresh statistics in concerned. Kuwait is probably the most sophisticated.
June it is impossible to gauge the inflow of Arab money In London, apart from the United Bank of Kuwait, the
this year. Nevertheless there are signs that it has been state-run Kuwaiti Investment Office places substantial
substantial. In the first three months of 1974 sterling official funds in the overnight-market. Another state-
rose 20% against the dollar, a large part of which City owned vehicle, the Kuwait Foreign Trading and Con-
experts ascribe to the inflow of Arab funds. tracting Company, has also been aggressively devel-
The inflow has been patchy. Little interest has been oping its business. In February it surprised the London
FINANCE MAGAZINE JUNE 1974

273
London Letter
financial community by appearing as co-manager of a taken a 20% stake in UBAF Financial Services Ltd. New
$34 million loan to the City of Bristola novel and wel- York may still attract the bulk of the Arabs' funds but
come departure for an Arab institution. More recently London is certainly in the running.
still it has notched up another first, acting as co-man-
ager of an Arab-currency-related eurobond issue, in The Eurobond Situation
partnership with First Chicago Ltd, European Banking If the one place the Arabs have not been putting their
Company, and Kredietbank Luxembourgeoise. money is into eurobonds, then who has? In contrast to
New York, where, despite rising interest rates, new is-
Short-Term Preferred
sues have been sold in bigger volume than ever before,
KFTC's aggressive approach is exceptional. So far this year, issuing activity in the eurobond market has
Arab banks have been noted for their absence in run to a virtual standstill. In the first four months of this
medium-term lending syndicates contenting them- year less than $700 million has been raised, compared
selves with placing money short-term on the euro- to $1.64 billion in the same period of last year. With even
markets, much to the consternation of loan managers tiny issues of $10-$15 million being slow to get away,
fearful of a liquidity squeeze. Their absence probably issuing houses have had to plumb the depths of inven-
reflects lack of expertise rather than unwillingness to tiveness to interest investors, and one or two novel
join in. This is being partially solved by Arab partici- issues have been appearing for instance, one deno-
pation in a growing number of consortium banks being minated in Canadian instead of US dollars and another
established both here and in the Middle East. (UBAF, offering an Arab currency option. Mostly, however, un-
based in London, is a prime example). Another draw- derwriting has become such a hazardous affair that
back is that a substantial proportion of Arab funds is issuing houses are simply telling their clients to stay
controlled by Arab central banks, which are unable to away or to turn to the rapidly expanding medium-term
participate in syndicated loans. The government-owned eurodollar bank lending market.
Libyan Arab Foreign Bank was formed to get round this
obstacle.
Iranian banks have been more visible there are 4 in
London in addition to a new consortium bank, the Iran
Overseas Investment Bank. Bank Melli Iran, which has
been in London since 1967, and Bank Saderat Iran, have
underwritten a $200 million loan to the City of Glasgow
and a $500 million loan to the Electricity Council. With
the exception of the Kuwaiti banks, Arab banks have
tended to deal in London at arm's length.
Preferential Prejudices
A considerable amount of business is being put
through a few London merchant banks; most notably
Morgan Grenfell, Kleinwort Benson, Hambros, and to a
lesser extent Robert Fleming. Morgan Grenfell, one of
the most traditional of the Acceptance houses, and a
breeding ground for future governors of the Bank of
England, is typical. Lord Catto, its chairman, stresses
that the bank is particularly strong in the Gulf states
because "we are effectively a non-Jewish bank" and
has emphasized this aspect. At the time of the Yom
Kippur War the bank aroused widespread criticism by
going ahead with a $180 million loan to Abu Dhabi.
Politicalor rather religiousconsiderations rule out
a large number of London's merchant banking elite.
Much of their work is straightforward dealing in the
foreign exchange market, buying and selling gilts and
equities, and generally advising their Arab customers.
Even if the funds are not deposited in London, the mer-
chant banks often earn commissions for their advice.
With an eye on the day when the Middle East may con-
trol two-thirds of the world's monetary reserves (one
source predicted this will happen by 1980) the banks
are consolidating their Middle Eastern ties. Morgan
Grenfell recently took a 50% stake in the Arab and
Morgan Grenfell Finance Company and Hambros has

274
I " F L O A T I N G ON OIL - A W O R L D M O N E Y
THE ECONOMIST M a r c h 2 3 , 1974
SURVEY"
Without precedent
There will be no agreement between centres in the competition for the most
governments on a grand new monetary sought-after funds of all times.
system by this summer as had been Every banker naturally thinks he has
scheduled. Instead, the formal debate the edge over the next one, and stands,
on it is about to be wound up. It would therefore, to be disappointed. But it is
probably have never really made the encouraging that the oil problem is now
winning post, anyway. But the decisive widely recognised as one of recycling
point has been that the very framework funds through either private or insti-
of the debate has been torn apart: every tutional channels and not one to be taken
variant of the system which finance by exchange rates or by domestic defla-
ministers have been consideringand tions designed to make room for exports.
squabbling overassumed that the The flexibility provided by floating
major industrial countries would strive exchange rates can help industrialised
to keep their overseas accounts roughly countries adjust among themselves
in balance over a reasonable length of to the differential impact of higher oil
time. That is now neither practical nor prices, but not eliminate it. However
desirable. cheap industrial goods became, there is
The sudden, sharp rise in the cost a physical limit to how much of them
of imported oil has made it impossible the Arab countries could absorb in the
for the world to maintain a balanced short run. Indeed, the upshot of com-
pattern of payments. Even if oil prices petitive depreciations would probably
fall a little, as seems likely, the sums be to shift the bulk of the aggregate
involved are huge. Whether it turns deficit on to the United States, since
out to be $30 billion or $50 billion, the payments for imported oil are largely
increase in trade payments to a handful made in dollars and therefore countries
of countries this year will be without trying to depreciate their currencies
precedent Only America and Germany would appear in the exchange markets
among the big industrialised countries as buyers of dollars and sellers of their
have any hope of seeing their current own currencies. That sort of beggar-
overseas account anywhere near the my-neighbour policy could all too easily
black this year. At a stroke, the oil prob- precipitate a world slump in a year when
lem has altered the whole international the American economy promises at best
industrial and trading scene. It follows to stand still and only France, Italy expect to get more than its fair share;
that it has also altered the monetary and Canada, among the industrialised the International Monetary Fund could
system needed behind it. nations, hold out any prospect of decent counter the effect in part simply by
But in what way? Tke Economist economic growth of 4 or 5 per cent. making more liquidity available all round,
has long been on the side of the floaters The problem has been put elegantly through special issues of SDRs. (For
and is more than ever convinced that a by Mr Robert Solomon, a vice-chairman definition of those unsexy bits of paper,
system offloatingcurrencies is the only of the deputies of the Committee of see glossary, page 16.) However, clearly
one for today's uncharted waters and Twenty; he points out that it is useful some redistribution or recycling of
beyond them. But dofinanceministers to visualise the oil price increase as a funds among oil consumers will be
and bankers agree with us? At the same large sales tax on the use of petroleum essential
time, we feel there are parts of the reform products. Internally, that tax has a The money may come back from the
under consideration before the oil crisis deflationary effect on demand which is oil producers in all sorts of ways: direct
that should still be brought in piece- likely to require offsetting action to investment in industry or in property,
meal, while others should be adaptoi avoid unemployment. But the proceeds bank deposits, purchases of equity,
to the new energy situation. But, again, of the tax are transferred unilaterally fixed-interest securities or Treasury
what do the politicians and practitioners to the oil-producing countries who, bills, gold or commodity purchases,
think? unable to increase their imports in the development loans (such as World Bank
We have interviewed some of the key short run, cannot avoid lending their bonds) or loans to a central international
politicians and advisers who have been receipts back to the rest of the world. clearing-house. All that can really be
leading the official debate in the Com- So the effect of the higher oil prices in argued about as yet is whether most
mittee of Twenty and some private terms of absorption of real resources of the recycling will, or should, be done
bankers too, questioning them on the will only be felt in the long run when through the Eurocurrency market or
solutions they would like or expect, and oil producers are in a position to receive through the IMF.
are grateful for their co-operation. Their repayment, with interest, of their loans But since the IMF was not set up to
replies arc on pages 12-53, preceded to the industrialised world. deal with something like the oil crisis,
by our summary, of the main points If only the oil producers were to lend it can only play a central role if a special
they make. The rest of this survey re- back to each country exactly what they oil facility is set up, as its managing
ports on the various plans being hatched have levied in the oil tax, there would director. Mr Johannes Witteveen. is
in national treasuries and banking par- be no effect on a country's total balance urging (again, see glossary, page 16).
lours to capture the new Arab oil money of payments in the short run. But, of Countries would be able to draw on this
and, more specifically, how bankers course, they will not. This survey em- facility in amounts related to their oil-
rate the chances of individual financial phasises that the United States can induced deficits, to the size of their

275
St.'RYl.Y INTERNATIONAL BANKING THE ECONOMIST MARCH 2}. l')74
reserves, nnd lo ihcir quotas in the IMF; is holding up well. No one should mourn look mini. If a chaotic slip into world-
it would be supplementary to their other the demise of the Committee of Twenty; recession is to be avoided, an unprece-
access to Fund resources. But. of course, if truth were told, the finance ministers dented degree of international co-
the schcmc depends on the oil-producing were glad of an excuse to wind it up. operation will be needed.
countries supplying the funds, prefer- The writing was on the wall when The The deputies of the Committee of
ably dircctly. Iran lias indicated it would Economist wTOte in September, 1972,
more than a year before the oil crisis Twenty will at least have something to
play;at market-related rates. But some get their teeth into when they meet in
broke:
exchange rate guarantee will have to be Washington next week. Not only will
given. r.nd will the Arabs like the idea If the committee does spin out its job. its efforts there be the new oil facility to discuss,
of that being related to the "basket of will be in danger of being overtaken by one of but a paper from the I M F which puts
currencies", in which SDRs are to be two events. There may be another currency the emphasis on getting an "interim"
defined, as seems to be the idea? Bankers crisis which will reintroduce floating generally agreement on managed floatingand
are dubious: the Arabs have shown no . . But even if there is no such crisis, the Com- you can interpret "interim"' as you like.
interest in such abstract concepts in the mittee of Twenty could neverthelessfindthat its
The proposals are basically two: a hefty
reform, if not introduced for another three or
past. Only Mr Witteveen. who will tour guidebook of rules which, funnily
four years, is out of date. The distribution of
the Middle East next month, can hope enough, would in some ways give the
power will go on changing: significantly, Japan
to discover the answer. Unfortunately and the Middle East now have 16 per cent of I M F more powers than it ever had under
it looks as if he will not go with the full the free world's reserves, compared with per the old Bretton Woods system; and, by
blessing of Washington. The Nixon cent only two years ago. implication, the notion of target values
Administration has reservations about But it is now essential to set up a top- for exchange rates. Also, a definition of
the plan, both tactical and technical. level decision-making forum for dealing SDRs in terms of a standard basket of
But at least some constructive pro- with international money problems. major currencies is spelt out. The ques-
posals are being made and in the face The movements of funds round the world tion is whether in the end the politicians
of a huge upheaval the monetary system this year will be of a size that will make will be able to swallow it whole.
the operations of the multinationals
Figuring out the oil crisis

On top of all the usual uncertainties importing countries will be less than bined deficit for the industrial countries
plaguing payments forecasts, especially it would have been in the days of as a group will be at the higher, rather
in a floating world, there are the new cheap energy, but only to the extent than the lower, end of the range in our
questionmarks about consumers' ability that higher prices themselves induce table is quite simply the unhappy likeli-
to economise on oil. producers' readiness economies. hood that the less-developed countries
to supply it and whether, or for how long, (3) Oil producers will step tip their im- will not be able to finance a current
present oil price levels will be held. ports from oil consuming countries, account deficit of much over $15 billion
Nevertheless, the debate about appro- more particularly the industrial coun- (see page 73). If they are enabled to do
priate policy responses cannot get far in tries, this yearbut not by very so, by increased aid flows or by special
a vacuum. The world's policymakers much. The usual range of guessti- oil-financing schemes, that will help
have been getting most of the key statis- mates here varies from a cautious $5 countries like America, Britain and Japan
tical workas well as early warnings billion to an optimistic $10 billion. to improve their own current account
about the dangerous implications of the The best compromise guess is, per- performances. If they are not, the burden
arithmetic for world growth and trade haps, that the OECD countries wffl of oilfinancing,superimposed on exist-
if countries react without regard to the enjoy a $7 billion boost to their ex- ing payments imbalances, looks frighten-
consequences for othersfrom the ports. However, against that must ingly large and lop-sided. Just three
Organisation for Economic Co-operation be set what they will have to pay out countriesJapan (especially vulnerable
and Development in Paris. Normally very in interest on increased Arab invest- to the oil crisis itself), Britain and Italy
little of the OECD's work is made public ment funds placed in their markets (both of which have had the bad luck to
although the Bundesbank's Dr Otmar a sum that will probably amount to be hit by the oil crisis just when their pay-
Emminger last month admitted that the about $2 billion this year (andriseto ments were anyway weak)could be left
latest estimates put the likely current closer to $5 billion next year). carrying well over half of the total current
account deficit of the industrial countries One reason for thinking that the com- account deficit of the industrialised world.
in 1974 closer to $40 billion than the
$32 billion that was being bandied about The current account arithmetic
in January, and more details have since
become available. 1974 guesstimates
-
Reserve
holdings
The Economist has attempted its own Additional Post-oil
end'73
exercise. The key assumptions under- oil bills crisis
lying the data in our table are: (inc. = - ) forecast*
(1) Oil prices will remain at the levels United States +1 ^ to 3
Canada -u>i
implied by today's posted prices
throughout 1974. If you disagree,
make your own corrections; a rough
Japan
Britain
France
-3.7
+ 0.4
f? 7-Jto 9
rule of thumb is that every change of

$1 a barrel in the price adds (or sub-
Germany
Italy
+3.8
=a
tracts) $10 billion from the total oil Other industrial
bill of the OECD countries. countries +H
(2) Actual oil supplies will not fall short Industrialised world -33 to-40 139.8
of "normal" demand at current prices; Less developed
oil importers
that is, straight political rationing will Opec countries
cease, as now looks on the cards.
Column 3 of our table does imply s: America's deficit is put at S4 billion.
that the volume of oil consumed by l St billion mxacihf.

276
THE ECONOMIST MARCH 23. 1974 INTERNATIONAL BANKING
intermediaries like the World Bank.
The forgotten poor Though some promising noises are

being made from various quarters,
notably Iran, the actual aid effort of
Tha less-developed countries are the real victims of oil oil-producing countries to date has not
been impressive. Middle East countries
The combined oil bills of the less- maybe, some say. by nearer $1 billion. (and particularly Kuwait) have been
dev eloued countries will rise by no more At most India can cover about $300m lending about $700m-$750m a year to
th in S3 billionSlO billion in 1974. from its own slim resourcesbut not the World Bank, but such sums amount
This is less than a fifth of the expected much more and not for long. A modest to no more than a recycling of the net
rise in the oil bills of industrial countries $62m drawing from the International aid ($770m in 1972) garnered by the
and amounts to no more than a quarter Monetary Fund has pushed the dead- 12 major oil producing countries from
of the accumulated reserves of a country line back a shade but before that came, OECD sources in the first place. To the
like Germany. But those are not the it looked as if India would be out of extent that the oil producers do not
comparisons that count. Paying up on funds entirely by end-May. Other themselves give back to the developing
oil will mean, in effect, handing over countries particularly hard-hit by the countries as much as they take from
virtually the whole of the gains of the oil crisis include the rest of the sub- them on oil, the industrial countries
poorer countries from the commodity continentBangladesh, Pakistan and (which, obviously, will be the net
boomor, alternatively, the whole of Syr Lankaand some of the Latin and gainers) will have to bridge the gap
their normal receipts of aid central American countries, particularly instead.
The picture is even less pretty when it Uruguay. Mo&t of these are such obvious
is realised how cruelly uneven the im- hard-luck cases that, at the crunch, their Which route?
pact will be from one country to the next very weakness might prove their strength
Unfortunately, the industrial countries,
It is not only such obvious weak brethren the rich are resigned to bailing out
facing payments problems of their own,
like India who will need rescuing. So will India regularly. But other countries
will be tempted to reduce, rather than
some high performers like Korea who normally regarded as at least the partial
increase, their own aid programmes.
have been particularly successful in successes of past aid programmes will
Indeed, even the relatively well-placed
building up industry, yet whose income also be in serious trouble, above all
Americans have been making ominous
Korea, as we have already said, but also
a head remains vulnerably low. They noises. Not only has the House of
Taiwan and Thailand.
have not been the main gainers from the Representatives baulked at contributing
commodity boom. Far that matter, The need for special outside help to towards the replenishment of the ex-
it is easy to forget to what extent the pay increased oil bills may be held down hausted resources of the World Bank's
gainers have been the industrial countries this year to perhaps no more than S3 soft-loan agency, the International
themselves: members of die Organisation biliion-$4 billion. Current earnings of Development Association (IDA); the
for Economic Co-operation and Develop- key commodity producers are still very normally responsible Senator Fulbright
ment are 80 per cent self-sufficient in healthy; there is perhaps $3 billion in has gone so far as to argue that the
raw materials. On food and fertilisers developing countries' reserves that can United States should scrap all of its aid
alone the terms of trade have swung be used in payments. Another S2 billion save some modest "compassionate"
against the developing countries to the might still be winkled out of the Euro- programmes. This may be silly as well as
tune of $5 billion over the past year. markets by the creditworthy countries. meanafter all, a dollar given to the
The World Bank divides the develop- But what of next year? The commodity less-developed countries *is likely to
ing countries into three broad groups price boom, already past its peak, will come back almost immediately in the
leaving aside those oil-lucky devils like then have been finally punctured by the form of an export order and so help
Nigeria and Indonesia in a league all of lagged impact of the slowdown in world both to sustain growth and to diminish
their own. There are those, Eke Ghana, growth, and the fat now in countries' the current payments imbalance of the
which have built up their reserves on reserves will have been eaten up. Also, OECD countries as a whole. It is none-
the back of the commodity boom (or, mounting debt burdens and curtailed theless a political fact of life.
like Turkey, on the backs of their export earnings will make the Euro- This danger makes it all the more
emigrant workers). Second, there are bankers most unreceptive to calls from important that the major international
those, like Brazil and Mexico, which the third world. (Obviously the more
have high enough credit ratings to hope you have borrowed the lower your T h o oil burden
credit rating goes.) The financing gap
to keep their toeholds in die Euro- Estimated increase in 1974 oil b:!ls as % of
for the less developed countries in 1975
currency marketsthough the going 1973 exports
is more likely to be on the order of $7
here will be much tougher this year than
billion-$9 billion than this year's $3
last (when publicly-announced medium-
billion$4 billion.
term Eurobank lending to less developed
countries soared to $8 billion) and Who will fill the gap, and how? The
Ethiopia C
relative newcomers to the market, like popular answercertainly from the
Chile, may find themselves pushed to industrial countries facing oil deficits
Brazil
the very end of the queue, liiird, there of their ownis that the money ought
arc those unfortunates with virtually to come from the oil producers them-
no reserves, insufficient credit ratings selves. This is fair enough, but never-
to tap the private international markets theless it will be disastrous if the rich
for funds and yet not much capacity think they need not play a part. The
to reduce imports. oil producers are extremely unlikely Bangladesh
India, of course, is the prime example to be willing to lend enough either
in the last group. Its oil bill will rise direcdy to the less-developed countries Pakistan
this vear by at least $550m-600m, or or, at one remove, to the established

277
INTERNATIONAL BANKING THE ECONOMIST MARCH 25. 1974
organisations, which can act as inter- to Mexico but also S75m to Iran, while pletely, not only on the fund-raising
mediaries for Arab money, do their jobs Venezuela obtained S22m the month but also on the lending side of the
efficiently. Two points follow. First, before. Also the World Bank, like most equation, and a single schedule of rules
the International Monetary Fund will of its regional counterparts, is geared drawn up to govern which less-developed
have to become more of a source of to financing specific projects; the in- country would be allowed to borrow
medium- to long-term general support evitable time spent finding these, then how much on what terms. Such a
aid for the poora point already noted vetting and launching them explains schedule should make the relatively
implicitly in the plans of the new why the bank's disbursements have strong eligible for loans only if alterna-
managing director. Mr Johannes Witt- lagged so embarrassingly behind its tive finance is not forthcoming from
eveen. for a special oil-financing facility. commitments. There is no quick-footing private market sources and then make
Second, the rules of World Bank lend- here. Nor is that all: although the bank it available only on commercial terms.
ing. and the demarcation lines between has made some effort to discriminate The very poor, on the other hand, should
the Bank and its affiliate organisation. between various categories of borrowers be given particularly concessionary
I D A , will need a radical rejigging. in the past few years, all too often all termsand the scale of charges in
Much has been made of the ability comers, relatively strong and weak alike, between judged much more flexibly,
of the World Bank to tap the oil pro- have wound up being subsidised, getting on a case by case basis, than it is now.
ducers' new wealth indirectly, through their money at less than it cost the Finally, there should be much closer
the Euromarkets or New York, as well bank to acquire the funds. co-ordination between the I M F on the
as directly, through, for example, Probably it would be wrong to argue one hand and the World Bank group on
Kuwaiti dollar issues. The bank's own that the Work) Bank should drop its the other. It is reassuring that the
credit rating is excellent, but it does project approach to lending altogether; staff of the two organisations are already
not have the flexibility to direct its the job offindinggeneral balance of pay- swapping data and guesstimates on the
funds where they are most needed, or ments support (as well as specific impact of oil on their members. It is
as quickly as they are needed. Because financing for oil) for the poor might be less reassuring that their respective
its loan terms are relatively hard, the better left to the I M F . However, it would chiefs, Mr Witteveen and Mr Robert
World Bank tends tofinancethe relatively clearly be useful if the World Bank MacNamara, are touring the Middle
strong, just those countries which do, could use its financial muscle more East on separate fund-raising missions.
or should, go directly to the commercial directly to help beef up the resources of This is a time for a policy of togetherness
Euromarkets. This February alone the IDA. Indeed, perhaps the demarcation in all fields of international finance but,
bank not only lent as much as S2l4m lines here should be broken down com- above all. on development aid.
The gold conundrum

Will gold be mobilised to finance aid?
For nearly two years now, ever since brink of recession. Unlocking gold, Raise or abolish the official price?
the free market price of the metal really of course, is not the only answer; The EEC opts for an increase in the official
took off, no central bank has willingly emergency issues of SDRs, enlarged price. After all, its members hold nearly
parted with gold. The 1.2 billion oz swap lines among central banks and half of the official gold of all industrial
hoard locked into official vaults does special I M F facilities are more sophis- countries combined. From Brussels's
not bulk large; it could all be jammed ticated solutions. But gold is familiar point of view there would be something
into a short freight train. Yet at today's and already at hand, and the advocates to be gained even if such a step were
rates of output it would take the world's of using it are growing. taken unilaterallythat is, if the gold
mines more than three decades to pro- Three different approaches suggest price were raised for transactions among
duce. Even at the nominal official price, themselves: a straight rise in the official EEC central banks aloneif only
of $42.22 an oz, it is worth almost $50 gold price; the abolition of any official because the move would make it easier
billionan amount uncannily close to price; or the funding of national gold for the present defectors (particularly
the windfall oil producers hope to exact holdings into. say. the I M F (which could France) to rejoin the European snake.
this year through higher oil prices. either use the metal as a secondary But that would be relatively small beer.
Valued at free market pricessay, in asset in effect, as a backing for its own Obviously Brussels would prefer it if a
mid-February when gold first burst paper money. SDRs, or could gradually higher price could be applied in dealings
through the $ 1 SO an oz barrier in London sell it off on the free market or, perhaps, with other central banks as well
it would be worth roughly $180 directly to Arab oil producers). In The especially Arab ones.
billion, an increase that would boost Economist's view the third choice would But the problem of getting everyone,
total world reserves (including the 154m be by far the best. Unfortunately, it is gold-rich or gold-poor, to agree may
oz of gold held by the International probably also the least likely, just prove difficult enough even within the
Monetary Fund) by two-thirds. because it is the least straightforward common market, let alone on the inter-
The effective freezing of gold was and time (or, rather, patience) is running national plane. Moreover, even if finance
occasionally inconvenient even in the out. By May at the latest the common ministers can come to terms, there
days of world boom, dollar glut and market's monetary committee is sup- remains the time-consuming hurdle of
cheap energy. It now looks totally, posed to come up with its own proposals parliamentary (more especially. Ameri-
even dangerously, absurd. Resistance for a joint EEC approach. So it is im- can Congressional) assent to clear. Then
to using reserves as one option for portant that governments get their there is the question of what price.
financing oil deficits has obvious dangers thinking clear on the alternatives while The fashionable answer these days
in a world already teetering on the there is still time. is a "market-related" one. But no one

278
THE ECONOMIST MARCH 13. 1974 INTERNATIONAL BANKING SURVEY
has defined precisely what that means: The abolitionists propose a back- Funding in the I M F
today's price, an average of the past door route to a market-related price For all these reasons, The Economist
six months* prices, the price on settle- for official stocks. Its advantage over would favour funding national stocks
ment day, the market price less, say, the front-door approach is that it ducks into the I M F . In exchange for their
10 per cent or what? Finance ministers the problem of coming up with one gold, central banks could be offered
may not simply pull a figure out of a definitive price formula. Each central special profit-linked SDRs; if the I M F
hat (however market-related at the time) bank would be left free to strike what- subsequently sold gold at a higher price
and then attempt to stick to it come ever deal it could with whatever partner than it had paid to buy it in, some part
what may. But even a floating gold it likedthe Arabs, presumably, standing of the profit, say half, would be distri-
price could prove tricky. to get prime terms. The solution would buted proportionately among the original
It is easy to forget how thin and vola- amount to formally treating central owners, the balance to be applied to
tile the free markets in gold are. A heavy bank gold holdings as second-line beefing up the IMF's resources for
day's turnover in the London and Zurich reserves, rather like Britain's old dollar concessionary lending to less-develcoed
markets combined is only 25 tons or, portfolio. That might be more realistic. countries (a link in another guise) or,
even at S150 an oz, only $120m, a ludi- It would still require international agree- during an interim period, to Mr Witt-
crously tiny sum compared with turn- ment and still ran foul of the equity eveen's proposed oil-financing scheme.
over on the world's bourses or foreign argument. Actual sales, if any, would be left to the
exchanges, t h e price has been known Then there are the awkward impli- discretion of the I M F . Normally they
tofluctuateby 12 per cent in a day. cations for the future of SDRs. That a would be made through the free markets
Moreover, although U is difficult to higher official price would make a non- and all central banks would be free to
put a precise figure to the proportion of sense of the current debate about defining buy (and seD) gold on those markets after
total market demand coming from SDRs in terms of a basket of currencies the initial funding of their existing hold-
"investors" and speculators (because no (or in terms of currencies in general) ings. Alternatively, for an interim period,
one knows how to break down the data would not be too serious if an official the I M F could be authorised to sell gold
for jewellery), it is obviously very large. gold price remained: the simple solution directly to die central banks of oil-
Certainly in recent months the market then would be to leave the valuation producing countries.
has been dominated by wheeler-dealers provision of SDRs alone. As matters Even this scheme would not be wholly
rather than firm holders of gold. Bet- are now the unit is effectively defined "fair". Today's official gold hoarders
ting on the free market price of gold is in terms of gold. Coping with an aboli- would still get something of a windfall,
likely to prove as wild a ride as betting tion of the official gold price would be both because the initial conversion
on the price of any other commodity. much stickier. price of gold would have to be pitched
Although the rules now allow the big But the more serious objection is the higher than the present official gold price
central banks to sell on the free market, likelihood that a rehabilitation of national ami because they would share in the
not one has tested the water yetpartly gold reserves would unleash Gresham's profits of any subsequent I M F sales.
because the bankers are not sure that law. Though they may differ in their But it would be fairer than the other
present I M F rules would allow them to recipes for mixing exchange rate alternatives. Moreover, while giving a
change their minds and repurchase flexibility and stability, virtually all needed initial boost to the resources
but also because they are all too well finance ministers now pay lip service to both of the I M F and of individual
aware of the depressant factor on the the idea that any permanent system of countries, it would not prejudice the
[Mice of any significant unloading. world money should be based on SDRs long-term position of the SDR but,
In the long ran, no doubt, gold will and must not risk a return to a sloppy rather, directly or indirecdy, enhance it.
continue to appreciate, however drama- compromise between a gold and a dollar Agreement would not be easyand our
tic its gyrations along the route. But standard. Whether these sentiments sketchy outline is full of technical gaps.
that probability is of limited help. would be translated into practice once But such an approach should at least
Indeed, if anything, it throws fur- official gold stocks were revalued, how- be discussed before the issue is pre-
ther doubt on the efficacy of the whole ever, is another matter altogether. judged by the actions of one small club.
exercise of linking the official price T H * official hoarders
of the metal to the market price. For
(at $ 4 2 . 2 2 an oz)
it suggests that central banks might Official As a % of:
continue to regard their gold hoards gold total normal additional
primarily as an investment not to be <$ billion) reserves imports oil bills
used except as a very last resort. Industrial countries:
Finally, there is the old problem of United States 11.7 81 16 128}
Germany 5.0 15 9 86}
equity. A rise in the official price of France 4.3 50 85
11}
gold to market-related levels would not, Switzerland 3.5 43} 29 426
of itself, reward private speculators in Italy 3.5 54 12 84}
the metalthey nave managed to do Holland 2.3 35 9 139
Belgium 1.8 35} 8 108
quite nicely on their own. It would award Canada 0.9 16 4 112
the official hoardersthat is, precisely Japan 0.9 7 2 10
those rich countries which were most Britain 0.9 14 2 21}
bloody-minded about international Austria 0.9 30} 11* 267
Other developed countries:
co-operation in the days of dollar glut Portugal 1.2 4U 34 n/a
while doing nothing to help the poorer S. Africa 0.8 65$ 13} n,'a
countries. Where gains did match oil Spain 0.6 9 6 61
deficits, that happy outturn would be Less developed (excl.
oil producecs) 2.6 9 3 2}
pure accident. I f the object of the IMF 6.5
exercise is to increase world liquidity,
there arc better ways of gong about i t >973 (rg. baton tha first nsn in ti pneast Additional o Mis an i

279
DECEMBER 27, 1973
Hobart Rowen
The Impact of Arab Oil Demands

greed should convince sriy fair-piinded
The Western W6rld, which should person that the oil weapon is being pects that once the Arab-Israeli dis-
, have known better, can now see that wielded primarily, to enhance the pute is settled, the Persian Gulf na-
, appeasement of the Arab nations wealth and the economic leverage of tions will lower the price of oil in
didn't pay: Europe and Japan, which grateful acknowledgement that their
the m a l l group oi nations clustered
had gracelessly bowed to Arab black- political goals have been metT.
mail, are confronted with a new dou- around the Persian G u l l
bling of tile price of crude oil, which is Their embargo 'against a handful of If the price of oil ever moves down,
likely to plunge them into an economic nations, and the onagain, off-again se- it will be becsyae_the Arab Oil weapon.-
tailspin. - ries of production cutbacks are merely the boycott combined with the unbe-
devices by a well-run cartel to maxim lievable price jumpspropels others
International oil experts calculate ize already swollen profits. into a crash program to develop alter-
'that the world's imported oil bill has nate sources of energy.
suddenly jumped about $40 billion, on What will be the Western response
top of a $17 billion increase created by if the Arab nations, inundated by The new market priee few Persian
higher prices announced October 16. paper money, take it into their heads Gulf oil is about $8.80 a barrel, which
works out to a delivwvd price here of
Oil price inflation of this magnitude about $10a barrel, aibiir-itold increase
which'bears no real relation to costs in * year. But accondlng to energy czar
a - can have a disastrous effect on the WilUam E. Simon, the United State*
less developed nations, and poses ex-
traordinary problems possibly un-
" What will be the could boost domestic prodmtfiop
4 blUiori to 0 tthumhamw t ' t t ' E
manageable Iter tome of the indtu- Western response if the barret v
trial countries.
The "Christmas present" of reduced Arab nations demand Nonetheless Slkofc mates clear that
the administration, i f "toot actually as
cutbacks means very little when the
payment for their sured of an -end to the.-Arab embargo,T
more important factor of prices is con- is indeed quite hopeful that its
sidered* This sober thought is begin-
ing to be reflected in reaction from, oil in gold?9' mends, the Saudis; Kill soon turn toe
spigot on.
consuming countries all over the worid.
Japanese authorities, for example, non's, decision against coupon rn-
estimate that if oil imports are main- tig d gaaollhe at thte tiaie is &
tained at this year** volume, their en- to demand partial or total payment compound not otriy of a fear the bu-
tire currency reserves of $13 billion for their oil in gold? reauoatte mfess Involved but an total
will be wiped out by the higher costs. tion thititfeally wont be necessary.
So far, the1 Western World, the
And the ball game isn^ over yet: the United States included, has betrayed a Wfcat is needed at this point, ill
new prices, according to the Kuwaiti shameful impotence in the face, of the tiJt te a long-run prpgntmlor n f r
oil minister, cover just the first quar- Arabs' economic aggression,, 1 '
ter, of 1674. Another boost iî in the off- Prof. Rfchird Gaxdnpr of Columbia
v h a s pointed outviolates existing to-
There may be some naive observers trials, along the lines of prppoealsja-
left who still believe that the Arab oil The world has been willing to de- r ~ d y initiated by Sen. Me**
dale(MBnn.) ,
weapon is merely a diplomatic tool lude itself into thinking that if the In-
yielded to force Israel back to her old raett "liability" Couldbe brushed aside, The Arab nylons, as Gardner mA^
borders. all would be well. should he p u t S n not** t h a t t b e y k
- ,But t h r ' latest examples of Arab But is there anyone around who ex- taUSe"'e0(>l,0lniC * * * * * * *

280
THE MONEY MANAGER
Gnomes' of Moscow Recycling
Oil Money to West

By ROGER LOVE
A portion at least Of Arab oil reve- Besides the oil-currency-arms cir-

nues are.being recycled through the. cuit to Moscow, the Soviet Union has
also been profiting on foreign sales
Eurodollar market to frantic oil- of raw material^ at high world prices,
hungry borrowexa-rbut perhaps not including the prices paid for Soviet
in th way that Western monetary oil deliveries to .many European coun-
draftsmen had intended. triesat Middle-East prices. Soaring
prices for gold, in Western markets,
Demand for money is certainly in small part reflecting Arab demand
there; first quarter medium-term. for the metal rather than currencies,
Eurodollar l o a n s by international has attracted some Soviet bullion
banks are estimated to have reached sales, helping to feed the Moscow^
dollar pool and expand Soviet Euro-*
a record $10.5 bttlkm, nearly four dollar lending, sources say.
tittles the $2.9 bUHon total of the Some of this Moscow money, at
1973 first quarter and more than interest rates of 100 or better, has
doubl* the $4*9 billion of the 1973 been going to beth oil-strapped indus-
fourth quarter. trial countries and chronieally-cash-,
short developing countries through
The iat*et berretwing? -compare the Eurodollar market, with hard-
with the previous quarterly record' of- nosed Soviet bankers* apparently no
$728 billion in the 1978 third quarter. readier than-anybody elseincluding
the oil producer*to make cash avail-
France, Italy and the United King- able to the poorest countries at any-
dom drew an estimated $8.2 billion thing less than the highest going,
in official borrowings from the Euro- rate.
market in the first quarter, and may The demand for medium-term
be seeking more than$-billion addi- Euromoney to meet oil and other pay-
tional in the ncirt few months. ments deficits, appears insatiable.
France raised $?.3 billion in this area
Sources say that a portion of the in the first quarter this year', con-
money borrowed did originate with trasted with no borrowing last year,
oil-producing countries, but some of and may be seeking a further $8 bil-
it 'bypassed th# traditional financial lion in the ne*t few months. Italy
raised $2.2 billi+n in the first quarter
pipelines through Zurich, London or alone, against about $4.4 billion
Frankfurt, and came instead through through all of last year, and some
Moscow.
The recycling: .mechanjenr of the
Moscow "gnomes" worfcd.afe foHo^s:
hard currencies from Western and
other consumers to oil producers to
pay for oil; hard currencies from oil
producers to Bgypt and Syria for.
Mideast war and re-armament ex- '
penses; hard currencies from Egypt
and Syria to the Soviet Union for
military hardware; and hard curren-
cies from the Soviet Union to Euro-
markets for foreign borrowers.
The amounts v involved are difficult
to determine, but some sources indi-
cate that activity of Soviet banks as
Eurocurrency offerers, mainly dollars,
increased substantially in the first
quarter this year, to the extent of
several billion dollars.

281
"projections are that it may seek a

further $2.5 billion in the near future.
British Eurodollar borrowing totaled Into Proposes A New 'World Bank'
$3.7 billion in the first quarter,
against $2.3 billion in all of last year, U N I T E D NATIONS-Iran has pledged $1 billion for a series of wide-
and London may seek another $1 bil-
lion. Some Euromarket sources see ranging measures to increase world money flows and provide development
a further $20 billion in demand for funds for the less advanced countries, Iranian Finance Minister Jamshid
Ipurocredit in the coming period: Amouzeghar told the three-week special General Assembly session on
France, $3 billion; Britain, $1 billion;
Italy, $2.5 billion; Japan, $2 billion.; economic problems.
Brazil, $2. billion; Spain, $1 billion, " A t the core of these proposed measures is the establishment of a new
and the rest split among other coun-
special development fund with an initial.capital of $2 billion to $3 billion,
tries.
to be financed jointly by the oil-exporting as well as industrialized
A t the same time, demand and in-
flationary pressures have caused a countries," he said.
sharp shift f r o m the long end of the Iran will open its plan to any oil-ex-porting and industrialized countries
Euromarket' iftto the medium-term
willing to put up capital, M r . AmMuegit&r said.
area, at seven-ta-ten years maturity.
This - largely. neftecis; accelerating in-
v \
His country wants to establish a special development fund, he said,
flation in all industrial countries,
which is making investors increas- because "10 industrial countries have 51% of the vote in. the World Bank
ingly, reluctant to put money into and, as a result; vexy imps>riantprojects hve been prpsed by developing
long-term securities.
countries and been rejected on political grounds."
I n fact, the total of long-term Euro His government wants a "one man, one vote" board of governors for
issues in the first quarter was down
over 40$ from the final quarter of the new institution, representing developing, oil-exporting and developed
1973, with continuing inflation making countries equally, he added. .
it unlikely that the trend will be re-
versed. The secondary1 Eurobond
market has also been adversely af-
fected, by a general malaise, sharp
price declines and reports that major major British commercial banks would also safeguard against cur-
Swiss investment funds were unload- handling the issue. rency depreciations and devaluations.
ing large portions of the Eurobond The Arabs appear to wish to keep
The spread London obtained over
portfolios and shying away from new veto power over the end-use of their
thxee, s i * or twelve month Euro-
issues in the face of demands from funds, even in development and bal-
deposit rates (at the borrower's
fund holders for repayment. ance of payments aid to the poorest
option) is staggered from a respect-
The unprecedented demand for able 0.375# for the first two years of countries, which generally supported
Euromoney from industrial countries the issue to 0.75$ for the final three the Arab cause in the Mideast war.
> has of course boosted interest rates years, the latter a rate generally im- Borrowers from the industrial world,
posed on lesser-quality borrowers.
The "base" Eurodollar deposit rates
Activity of Soviet banks as have recently been running at a There is little indication of
shade above or below 10 though in
Eurocurrency offerers, mainly recent weeks they shot to 10% % and any decline in Eurodollar
higher.
dollars* Jntreased substantially rates, given both the enormous
There is little indication of any
in the first quarter this decline in these rates, given both the projected demand and the
enormous projected demand and the
year, to the extent of several iack of evidence of any intergovern- lack of staggering
mental consensus on staggering bor-
billion dollars. rowing to avoid driving interest rates of borrowings.
through the roof..
and caused governments to- resort to Japan was switched from a lender who were generally lukewarm if not
considerable "arm twisting" pres- to a borrower of Eurodollars under opposed to the Arab cause, may well
sures on underwriting and issuing the lash of the oil crisis. Optimists find similar policies affecting their
syndicates over terms of their issues hope that Arab oil revenues will more attempts to tap Arab cash, via the
and in some cases the reluctance of than make up the gap of supply and
Eurodollar market. Denmark, for in-
syndicates to proceed with planned the increased demand. But Arab oil
stance, is a traditionally heavy Euro-
offerings. Some observers say that producers have thus far shown re-:
the British Government was lucky to luctance to lend money at even mar- dollar borrower and is also in Arab
get the terms it did for its recent $2.5 ket rates to international institutions, badbooks for its alleged pro-Israel
billion ten-year borrowing, even with which are "politically safe" and which attitude.
3 7 - 2 1 1 O - 74 - 19

282
WORLD FINANCIAL MARKETS

m a j o r p o r t i o n of O P E C i n v e s t m e n t s .
Morgan Guaranty T r u s t
Energy self-sufficiency* W h i l e t h e r e is a n e l e m e n t of t r u t h
percentage derived from C o m p a n y of N e w Y o r k
domestic sources, in 1971 in all t h e s e presumptions, the ad-
J a n u a r y 1974 v e r s e i m p a c t of t h e c u r r e n t l e v e l of
oil prices on the U.S. balance of
payments for the next few years
Japan 0 11
should not be underestimated. As
Italy 6 15
s h o w n in T a b l e 2, n e t i m p o r t s of oil
Belgium 1 18
France 5 22 and gas a m o u n t e d to 1 0 % of t o t a l
United Kingdom 2 53 U.S. imports in January-October
Germany 7 51 1973. This ratio is considerably
Netherlands 7 64
h i g h e r o n l y in J a p a n , b u t it is l o w e r
Canada 98 110
74 i n all E u r o p e a n c o u n t r i e s . S i n c e it
United States 89
requires s o m e time to d e v e l o p sub-
"Source: OECD, Economic Outlook stitutes for oil, these ratios give
s o m e i n d i c a t i o n of t h e r e l a t i v e ad-
v e r s e i m p a c t of h i g h e r oil p r i c e s o n
various countries' imports. Further-
more, as the table shows, the share
of oil a n d g a s in t o t a l U . S . imports
The impact of oil rose sharply in r e c e n t y e a r s . This
reflects the fact that i n c r e a s e d do-
on the dollar mestic d e m a n d for s o m e y e a r s now
has had to be c o v e r e d entirely by
i m p o r t s . Irv f a c t , b e f o r e O c t o b e r , i.e.
In r e c e n t m o n t h s t h e e x c h a n g e m a r -
before the embargo and price in-
k e t s ' a s s e s s m e n t of t h e d o l l a r and
creases were announced, and al-
other currencies has b e e n influenced
lowing for the completion of the
h e a v i l y by t h e d e v e l o p m e n t s in t h e
Alaska pipeline, it w a s anticipated
s u p p l y a n d p r i c e of oil. S o o n after
that the volume a n d v a l u e of U.S.
t h e c h a n g e s b e g a n t o o c c u r in O c -
oil i m p o r t s w o u l d i n c r e a s e a t a v e r -
tober, market participants adopted
a g e a n n u a l r a t e s of a b o u t 1 3 % and
the view that the United States'
e c o n o m y a n d b a l a n c e of payments 20%, respectively, between 1973
would be affected less adversely a n d 1 9 8 0 a n d t h a t t h e s h a r e of o i l
than those of Japan and Europe. in t o t a l U . S . i m p o r t s w o u l d c o n t i n u e
T h i s v i e w is b a s e d o n s e v e r a l pre- to mount. This underscores the be-

Table 2 s u p p o s i t i o n s . First, t h e U n i t e d S t a t e s lief t h a t it w i l l r e q u i r e a m a j o r e f f o r t
Net oil and gas imports is less d e p e n d e n t o n f o r e i g n e n e r g y o n t h e p a r t of t h e U n i t e d S t a t e s t o
as percentage ot total imports reverse the trend toward increasing
sources than most other industrial
c o u n t r i e s ( s e e T a b l e 1). S e c o n d , its f o r e i g n oil imports.
1970 1972 1973'
industrial activity w o u l d b e directly Estimates of increased net oil
United States 6.3 7.6 10.0 a f f e c t e d r e l a t i v e l y little a s t h e U n i t e d a n d g a s i m p o r t s , a n d of t r a d e and
Japan 15.1 19.6 17.3 States has a large capacity to save current-account b a l a n c e s for major
United Kingdom 8.5 8.6 8.5 oil a n d e n e r g y in g e n e r a l , particu- industrial countries are given in
Germany 7.1 7.8 8.5
larly in t h e h o u s e h o l d s e c t o r . T h i r d ,
France 8.6 9.9 7.7 Table 3. U.S. oil a n d gas imports
Italy 8.2 9.6 7.6 this country has a very g r e a t p o t e n -
a r e p r o j e c t e d t o rise b y a b o u t $11
Switzerland 4.8 5.2 6.0 tial f o r i n c r e a s i n g its d o m e s t i c en-
billion on the a s s u m p t i o n that the
Belgium 4.0 5.6 3.5 e r g y supplies and could again be-
p h y s i c a l volume of imports in 1974
Netherlands 1.2 3.4 2.2 come self-sufficient in e n e r g y in a
Canada" (2.5) (3.2) (4.4) will not exceed that of 1973 and
m a t t e r of y e a r s . F o u r t h , t h e United
t h a t t h e r e will b e s o m e weakening
"based on data for i mports prior to the effects of States' large and sophisticated fi-
of oil prices. This will push the
oil price increases in October nancial markets would attract a
"net exports t r a d e a n d c u r r e n t a c c o u n t s into d e f i -
World Financial Markets / January 1974

283
cit a g a i n in 1 9 7 4 a f t e r 1 9 7 3 ' s brief earnings of U.S. companies may

respite. T h e trade b a l a n c e could be well decline in line with reduced
in deficit by $3 billion this year, growth and profitability abroad, in
following an estimated surplus of response to e a s e d U.S. foreign-di-
$1 b i l l i o n (customs basis) in 1973. rect-investment controls, and due
In v i e w of t h e c o n t i n u e d h i g h g r a i n to t h e a p p r e c i a t i o n of t h e d o l l a r in
prices, agricultural exports will again recent months.
do well, and may even exceed In contrast, net tourist expendi-
the already high $181/2-billion level tures as well as direct military ex-
of last y e a r . T h e balance on non- penditures abroad could decline
a g r i c u l t u r a l t r a d e ( e x c l u d i n g oil a n d moderately, and overseas military
gas) should be considerably more sales may well increase, partly to
favorable, assuming at least the the oil-producing countries. Thus,
current level of dollar devaluation t h e o v e r a l l c u r r e n t a c c o u n t m a y re-
is maintained, and may rise from flect rather closely the expected
approximate balance in 1973 to w e a k e n i n g of t h e t r a d e b a l a n c e , a n d
a b o u t $6 b i l l i o n this y e a r . shift a d v e r s e l y by a b o u t $4 billion
However, it s e e m s unlikely that t o a d e f i c i t of p e r h a p s $2 b i l l i o n or
t h e a d v e r s e s w i n g in t o t a l t r a d e , in- more in 1974. Beyond 1974, the
c l u d i n g oil, will b e o f f s e t s i g n i f i c a n t - trade and current accounts could
ly by an improvement of net in- deteriorate further on account of
v i s i b l e t r a n s a c t i o n s in 1 9 7 4 . A m o n g the 10% effective appreciation of
the m a j o r items, U.S. interest pay- t h e d o l l a r o v e r t h e p a s t six m o n t h s
m e n t s to nonresidents m a y not be and in t h e event that agricultural
very much different. Outstanding e x p o r t s s h o u l d fall.
U . S . l i a b i l i t i e s t o f o r e i g n o f f i c i a l in- Along with the United States,

s t i t u t i o n s of industrial countries on n e a r l y all o t h e r i n d u s t r i a l countries
average are likely to be well be- will e x p e r i e n c e c o n s i d e r a b l e deter-
low those of last year, but there i o r a t i o n in t h e i r t r a d e a n d current-
could be an offsetting increase in account balances. There will be
interest-bearing liabilities to oil- w i d e v a r i a t i o n in t h e e x t e n t of t h i s
producing countries. Since it is weakening, however. Germany still
s o m e w h a t doubtful that U.S. interest is likely to h a v e a s i z a b l e t r a d e sur-
r a t e s in 1 9 7 4 o n t h e a v e r a g e will b e plus. T h e c u r r e n t p a y m e n t s b a l a n c e s
below those in 1 9 7 3 , i n t e r e s t pay- of Britain and Italy, already bad,
ments on these foreign liabilities will probably worsen further. Can-
m a y not c h a n g e m u c h . Repatriated a d a and Holland are hardly affected
a t all by t h e oil d e v e l o p m e n t s , o n a
Table 3 net payments basis, because of
Trade and current-account guesstimates t h e i r o w n c o n s i d e r a b l e oil a n d gas
in billions of dollars resources.
The guesstimates presented in
change in net
oil/gas balance trade balance current account T a b l e 3 imply that the m a j o r indus-
in 1974 1973 1974 1973 1974 trial c o u n t r i e s will achieve a sub-
stantial collective improvement in
United States -11 +1 -3 +2 -2
their non-oil and gas trade perform-
Canada + 1/2 + 11/2 +1% -1/2 -1/2
Japan -11 +3% -31/2 0 -7 a n c e . M o s t of this g a i n c a n b e a n -
United Kingdom -4 -51/2 -81/2 -31/2 -6 t i c i p a t e d to a r i s e t h r o u g h i n c r e a s e d
Germany -6 + 12 + 51/2 +31/2 -31/2 OPEC-country spending on indus-
France -6 + 1V2 -31/2 + 1/2 -41/2
trial products, together with some
Italy -51/2 -5 -8 -3 -51/2
Belgium-Lux. -21/2 +3/4 net improvement vis-d-vis non-oil,
+ 1/2 -2 -2
Netherlands - 1/2 + 1/2 0 +11/2 + 1/2 developing countries perhaps
Switzerland -11/2 -21/4 -3 +1/4 0 t h r o u g h s o m e d e c l i n e in c o m m o d i t y
Morgan Guaranty Trust Company j

284
p r i c e s or t h r o u g h e n l a r g e m e n t of account balance. Indeed, progress

the Socialist countries' net deficit is b e i n g m a d e o n f a c i l i t a t i n g c a p i t a l
position with the West. o u t f l o w s . A t t h e t u r n of t h e y e a r , a
S o m e of t h e c o n j e c t u r e t h a t has s i g n i f i c a n t r e l a x a t i o n of U . S . c a p i t a l
been circulating as to t h e amount controls w a s announced: the inter-

of O P E C i n v e s t m e n t s l i k e l y t o f l o w est equalization tax was reduced;
t o t h e U n i t e d S t a t e s in 1 9 7 4 is a l - the regulations covering U.S. direct
most certainly exaggerated. Deci- investment abroad were eased to

s i o n s c o n c e r n i n g t h e i n v e s t m e n t of the extent that they no longer c o m -
s u r p l u s oil r e v e n u e s w i l l b e based p e l t h e f i n a n c i n g a b r o a d of n e w in-
on a variety of factors, including v e s t m e n t , a n d in f a c t p e r m i t n e t r e -
r a t e s of r e t u r n , s a f e t y of principal, p a y m e n t s of p a r t of U . S . c o m p a n i e s '
a n d l i q u i d i t y . F r o m t h e v i e w p o i n t of outstanding foreign debts; and the
such criteria, U.S. financial markets ceilings covering foreign claims of
offer s o m e attractive investment o p - banks and nonbank financial insti-
portunities. H o w e v e r , as will be dis- tutions were raised by a modest
c u s s e d in a s u b s e q u e n t s e c t i o n , in- amount.
vestment in the United States is As regards capital inflows, the
just one of a number of possible c o n t i n u e d a p p l i c a t i o n of F e d e r a l R e -
c h a n n e l s for c a p i t a l f l o w s f r o m the serve Regulation M w h i c h imposes
oil-exporting to the oil-importing reserve requirements on banks'
countries. O P E C c o u n t r i e s will un- Euro-dollar repatriation to the U n i t e d
doubtedly want to diversify their S t a t e s a p p e a r s to i n d i c a t e t h a t t h e
investments in terms of currency Federal Reserve is interested in
a n d p o l i t i c a l risks. E v e n a s r e g a r d s moderating short-term capital in-
dollar-denominated investments, the f l o w s . It a l s o s h o u l d b e recognized
Euro-dollar and Euro-bond markets that the possibility of large-scale
m a y offer relatively m o r e attractive equity investments in U . S . compa-
r a t e s of r e t u r n t h a n a r e obtainable n i e s a n d in U . S . r e a l e s t a t e by f o r -
in t h e U . S . d o m e s t i c m a r k e t . Funds eign parties already has stirred con-
invested in the Euro markets, of cerns in some quarters, including
course, do not result in capital the Congress.
flows to the United S t a t e s unless the
funds are relent to U.S. residents.
The use of
If t h e United States w e r e to re-
c e i v e l a r g e net c a p i t a l inflows, ob- OPEC revenues
viously the dollar would become
very strong. Too strong a dollar The oil r e v e n u e s of t h e O P E C na-
would adversely affect our trade and t i o n s c a n b e p r o j e c t e d t o rise f r o m
c u r r e n t - a c c o u n t b a l a n c e s . In e f f e c t , about $22 billion in 1973 to ap-
a l a r g e s h a r e of t h e c o m b i n e d cur- p r o x i m a t e l y $ 1 0 5 b i l l i o n in 1 9 7 4 . T h i s
r e n t - a c c o u n t d e f i c i t of i n d u s t r i a l n a - projection assumes that OPEC
tions with the O P E C countries would crude oil production averages ap-
be shifted to the United States p r o x i m a t e l y 3 4 m i l l i o n b p d in 1974
probably an unacceptable develop- c o m p a r e d with nearly 3 0 million bpd
ment. in 1 9 7 3 p o s s i b l e o n l y if t h e Arab
T h u s , if t h e U n i t e d S t a t e s r e c e i v e s producers end their cutbacks and
a d i s p r o p o r t i o n a t e s h a r e of t h e oil- t h a t oil p r i c e s r e m a i n a t r o u g h l y t o -
exporters' investible funds, these day's levels. This projection also
large inflows will n e e d to be offset m a k e s a l l o w a n c e for t h e i m p a c t o n
by U . S . c a p i t a l o u t f l o w s to a v o i d t o o average oil prices of participation
strong a dollar and excessive de- a g r e e m e n t s n o w in e f f e c t in a n u m -
t e r i o r a t i o n of t h e c o u n t r y ' s c u r r e n t - b e r of o i l - p r o d u c i n g countries.

285
T h e p o s s i b i l i t y of s u c h a n i n c r e a s e w o r l d ' s l a r g e s t oil e x p o r t e r , h a s p u b -
in oil r e v e n u e s h a s r a i s e d q u e s t i o n s licly expressed reservations about
concerning their disposition, and t h e m a g n i t u d e of t h e m o s t r e c e n t oil
p a r t i c u l a r l y w h e t h e r it is f e a s i b l e for price increases, and has suggested
the world's financial m a r k e t s to ab- that s o m e price reduction should be
s o r b s u c h l a r g e s u m s not o n l y this considered. A relatively small reduc-
y e a r but in t h e y e a r s a h e a d . S e v e r a l tion, e.g., about 10% would still
observations concerning the magni- l e a v e c r u d e oil p r i c e s h i g h relative
tude of these revenues and their to t h e p r i c e s of m a n u f a c t u r e d g o o d s
absorption can be made. a n d to t h e m e d i u m - t e r m e q u i l i b r i u m
It is q u e s t i o n a b l e w h e t h e r t h e oil p r i c e level f o r oil, b u t it w o u l d b e a
r e v e n u e s of t h e O P E C nations ac- s t e p in t h e d i r e c t i o n of m a k i n g p a y -
tually will r e a c h $ 1 0 5 billion. C u r r e n t ment of the consuming countries'
p r i c e s f o r oil a r e o n t h e h i g h s i d e . oil i m p o r t bills, a n d t h e e m p l o y m e n t
In the past, OPEC countries ex- of producing countries' revenues,
pressed concern because the price more manageable.
of t h e i r m a j o r e x p o r t h a d n o t r i s e n It s e e m s , f u r t h e r m o r e , not u n l i k e -
in t a n d e m w i t h t h e p r i c e s of their ly that the combination of higher
i m p o r t s . A s s h o w n in T a b l e 4, h o w - oil p r i c e s , n e w c o n s e r v a t i o n meas-
ever, the most recent r o u n d of oil ures, and slower e c o n o m i c growth
price increases has much more than in t h e i n d u s t r i a l c o u n t r i e s m a y c u r b
r e d r e s s e d t h e p a s t i m b a l a n c e in rel- s o m e w h a t t h e d e m a n d for oil. It is
ative price m o v e m e n t s . T o be sure, p o s s i b l e t h a t t h e v o l u m e of oil c o n -
the many years during which crude s u m e d in t h e i m p o r t i n g c o u n t r i e s a s
oil p r i c e s l a g g e d w e l l b e h i n d t h e in- a g r o u p in 1 9 7 4 m a y b e little c h a n g e d
c r e a s e s in p r i c e s of manufactured from the 1973 level.
goods represent substantial OPEC If oil p r i c e s w e r e to b e reduced,
country income foregone. Nonethe- say, by 10% from today's levels,
less, t h e oil p r i c e a d j u s t m e n t s m a d e a n d if O P E C oil p r o d u c t i o n w e r e to
last O c t o b e r w e r e m o r e t h a n suffi- remain at its 1973 level, then the
cient to restore the purchasing 1 9 7 4 oil r e v e n u e s of t h e O P E C c o u n -
p o w e r of t h e o i l - e x p o r t i n g c o u n t r i e s . tries w o u l d be a b o u t $85 billion
T h e f u r t h e r d o u b l i n g of oil p r i c e s at perhaps a m o r e realistic expectation
t h e t u r n of t h e y e a r h a s put t h e p r i c e than the previously mentioned $105
of c r u d e oil s u b s t a n t i a l l y o u t of line billion.
relative to t h e prices of manufac- The new oil prices represent
t u r e d g o o d s , a s w e l l a s of a g r i c u l - a b o v e all a v e r y s i g n i f i c a n t i n c r e a s e
tural commodities and non-ferrous in t h e ability of t h e O P E C c o u n t r i e s
metals. to p u r c h a s e g o o d s a n d s e r v i c e s in
Table 4
It appears also that crude oil the world market. The capacity of
Comparative export prices
prices may be above medium-term the oil-exporting countries to m a k e
in U.S. dollar terms
e q u i l i b r i u m l e v e l s . W i t h t h e m o s t re- productive u s e of s u c h g o o d s and
c e n t r o u n d of p r i c e i n c r e a s e s , t h e r e s e r v i c e s t e n d s to b e u n d e r e s t i m a t e d ,
index numbers, base 1950 = 100
1970 latest > w a s a d r a m a t i c c h a n g e in t h e e c o - h o w e v e r . T o b e s u r e , s e v e r a l of t h e
n o m i c s of t h e e n e r g y i n d u s t r y . T h e OPEC countries, including Saudi
1960
150 209 p r e s e n t oil p r i c e level will s p u r in- Arabia, the largest producer, will
Manufactured
111 203 t e n s i v e d e v e l o p m e n t of e x i s t i n g a n d for the f o r e s e e a b l e future be able
goods 126
Food 94 n e w oil a n d g a s r e s o u r c e s , a s w e l l to make u s e of o n l y a f r a c t i o n of
Non-ferrous 215 269
as m a j o r e f f o r t s to d e v e l o p a l t e r n a - their revenues. Many others, how-
base metals 124 e v e r , will b e a b l e t o s p e n d produc-
tive e n e r g y s o u r c e s w h i c h in t h e
Saudi Arabian 105 681
l o n g run c o u l d t u r n o u t t o b e c h e a p e r tively m o s t or all of t h e i r oil earn-
light crude 108
"Third quarter 1973 for manufactured goods, t h a n oil at t o d a y ' s p r i c e s . I n d e e d , a ings.
food, and non-ferrous base metals; January 1,
1974 for Saudi Arabian light crude spokesman for Saudi Arabia, the T h e major oil-exporting countries'
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286
g o o d s i m p o r t s f r o m t h e r e s t of t h e likely t o r e m a i n v e r y l a r g e .
world totaled about $17 billion in M o r e o v e r , t h e p r i c e s of t h e g o o d s
1 9 7 2 . In 1 9 7 3 , t h a t f i g u r e m a y well p u r c h a s e d by the p r o d u c i n g coun-
h a v a b e e n close to $25 billion. As tries will increase c o n s i d e r a b l y as a
t o t a l O P E C oil r e v e n u e s w e r e a b o u t result of t h e i n f l a t i o n a r y f o r c e s set
$ 1 5 b i l l i o n a n d $ 2 2 b i l l i o n in 1972 in motion by the recent oil price
and 1973 respectively, it is clear increases. This would bring about
t h a t in b o t h y e a r s s o m e of t h e o i l - at least a partial reversal of the
exporting countries spent more on r e c e n t s w i n g in t h e t e r m s of trade
imports than they received in oil between the oil-producing and con-
revenues. suming countries. Since exchange
In f a c t , six of t h e O P E C c o u n t r i e s r a t e s c a n p l a y o n l y a m i n o r r o l e in
Algeria, Iran, Iraq, Indonesia, Ni- the adjustment process b e t w e e n the
g e r i a , a n d V e n e z u e l a h a v e in t h e oil-producing and consuming coun-
past been substantial capital im- t r i e s , t h e a d j u s t m e n t is l i k e l y t o o c -
porters, both as recipients of de- cur directly through relative price
velopment assistance, and as bor- changes.
rowers in t h e international capital In s u m , it s e e m s likely that the
markets. The combined external combined expenditures on imports
debt of these countries probably of g o o d s b y t h e o i l - e x p o r t i n g coun-
e x c e e d e d $ 1 7 b i l l i o n a t t h e e n d of tries could easily r e a c h $35 billion
1 9 7 3 , i n c l u d i n g m o r e t h a n $5 b i l l i o n or m o r e in 1 9 7 4 , i m p l y i n g unspent
b o r r o w e d in t h e E u r o - c u r r e n c y m a r - oil revenues on the order of $50
ket since 1970. billion. Since many of the oil ex-
Furthermore, per capita incomes porters will b e a b l e to s p e n d most,
in t h e six O P E C c o u n t r i e s j u s t m e n - if not all, of t h e i r r e v e n u e s , t h e b u l k
t i o n e d r e m a i n v e r y l o w by t h e s t a n d - of t h i s $ 5 0 b i l l i o n will a c c r u e t o a
ards of the developed countries, h a n d f u l of c o u n t r i e s . T h i s $ 5 0 b i l l i o n
e v e n c o n s i d e r i n g t h e r e c e n t oil p r i c e also represents the approximate
i n c r e a s e s . In t h e a t t e m p t to i m p r o v e current-account deficit of the oil-
living s t a n d a r d s a n d t r a n s f o r m t h e i r importing countries with the OPEC
economies, m o s t of t h e oil-export- nations, w h i c h o n e w a y or another
ing c o u n t r i e s a l r e a d y have, or are h a s t o b e f i n a n c e d in 1 9 7 4 .
in t h e p r o c e s s of m a p p i n g o u t , v e r y There are a number of possible
a m b i t i o u s d e v e l o p m e n t p r o g r a m s in- approaches to channeling funds
v o l v i n g s i g n i f i c a n t e x p a n s i o n of t h e i r from the oil-exporting to the oil-im-
e c o n o m i c and social infrastructures, porting countries. The latter could
and major industrialization pro- transfer primary reserve assets to
grams. T h e y also are b e c o m i n g di- the former. Some observers have
rectly involved in m a n y sectors of suggested, for e x a m p l e , that oil-im-
the petroleum industry, ranging p o r t i n g c o u n t r i e s c o u l d sell g o l d t o
from the exploration for and devel- the producers at market prices. Non-
opment of crude supplies, to the O P E C countries have gold reserves
production and distribution of end amounting to approximately one
p r o d u c t s . M a n y of t h e p r o j e c t s a n d billion o u n c e s . Oil-importing coun-
p r o g r a m s e n v i s a g e d by t h e p r o d u c - tries also could transfer S D R s , the
ing c o u n t r i e s a r e h i g h l y c a p i t a l in- s u p p l y of w h i c h c o u l d b e i n c r e a s e d
tensive, and will require expendi- by n e w a l l o c a t i o n s .
tures and imports of billions of S o m e of t h e e x c e s s O P E C reve-
dollars. In a d d i t i o n , military equip- n u e s c o u l d b e p l a c e d in t h e Euro-
m e n t p u r c h a s e s by s o m e O P E C n a - c u r r e n c y m a r k e t , l e a v i n g it t o Euro
tions, f r o m both the W e s t and from b a n k s to c h a n n e l the funds to the
the Soviet bloc, have been and are oil-consuming nations, partly to help

287
finance their current-account defi- oil-exporting countries.

cits. W i t h t h e n e t s i z e of t h e Euro- A n o t h e r a p p r o a c h to r e c y c l i n g t h e
currency market having a p p r o a c h e d surplus oil revenues would be to
a n e s t i m a t e d $ 1 5 0 b i l l i o n at t h e e n d channel them through a multilateral
of 1 9 7 3 , up f r o m a p p o x i m a t e l y $105 organization, such as the IMF. One
b i l l i o n a t t h e e n d of 1 9 7 2 , this m a r - proposal being given consideration
k e t h a s d e m o n s t r a t e d t h e a b i l i t y to w o u l d involve a n e n l a r g e m e n t of t h e
a b s o r b a l a r g e influx of n e w f u n d s . General Arrangements to Borrow,
T h i s is not to s a y t h a t t h e r e are whereby the Fund would borrow
no l i m i t a t i o n s o n t h e Euro-currency from the oil-exporting countries, and
m a r k e t ' s c a p a c i t y to a b s o r b funds. relend to the oil-importing coun-
There are l i m i t s to t h e a m o u n t of tries. The value of the exporting
credit risk t h a t Euro banks would countries' claims on the I M F could
b e w i l l i n g to t a k e in r e l e n d i n g the be guaranteed in terms of SDRs.
f u n d s to countries with w e a k cur- T h e t e r m s of t h e o i l - e x p o r t e r s ' l o a n s ,
r e n t - a c c o u n t b a l a n c e s of p a y m e n t s , including the value guarantee, would
and mounting external indebted- h a v e to b e s u f f i c i e n t l y a t t r a c t i v e to
ness. T h e r e is, in s h o r t , no assur- induce them to participate. More-
a n c e t h a t t h e d i r e c t i o n of s u c h l o a n s o v e r , I M F c r e d i t s w o u l d h a v e to b e
which would be determined in for m u c h l o n g e r t e r m s t h a n c u r r e n t
l a r g e p a r t by f a c t o r s s u c h a s rela- short-term facilities. However, if
t i v e i n t e r e s t rates, c r e d i t demands, such a scheme could be worked
creditworthiness as d e t e r m i n e d by out to the mutual satisfaction of
the Euro banks, and national capital the creditor and debtor countries,
flow policies would be the best it c o u l d p e r m i t a n o r d e r l y recycling
in t e r m s of i n t e r n a t i o n a l payments of oil revenues to the consuming
equilibrium. c o u n t r i e s , a n d m a k e it p o s s i b l e for
S o m e of t h e s u r p l u s oil r e v e n u e s t h e latter to a v o i d a b r e a k d o w n into
m a y b e i n v e s t e d d i r e c t l y in t h e n a - c o m p e t i t i v e t r a d e a n d p a y m e n t s bi-
tional money and bond markets of lateralism.
the developed countries, with or Still a n o t h e r p o s s i b i l i t y c o u l d in-

without special bilateral arrange- volve long-term capital flows from
ments involving e x c h a n g e - r a t e guar- t h e o i l - e x p o r t i n g to t h e o i l - i m p o r t i n g
antees, or special security issues. countries. In this category would
The oil-producing countries already fall d e v e l o p m e n t assistance to the
h o l d p a r t of t h e i r r e s e r v e a s s e t s , for less-developed countries (LDCs).
e x a m p l e , in s t e r l i n g a n d d o l l a r bal- Part of this a s s i s t a n c e could take
a n c e s ( b a n k d e p o s i t s , T r e a s u r y bills, the form of bilateral grants and
a n d g o v e r n m e n t b o n d s ) in t h e U n i t e d credits. T h e oil-exporting countries
Kingdom and the United States. But have also indicated their intention
in t h e p e r s p e c t i v e of t h e combined of e s t a b l i s h i n g v a r i o u s d e v e l o p m e n t
size of the major industrial coun- institutions through w h i c h assistance
tries' money and bond markets would be c h a n n e l e d . M o r e o v e r , ex-
whether measured in t e r m s of the isting development finance organ-
value of o u t s t a n d i n g securities, or izations, including the World Bank,
t h e v o l u m e of a n n u a l n e w i s s u e s the Asian Development Bank, the
the amount of oil revenues that African Development Bank, and the
c o u l d b e a b s o r b e d by t h e s e m a r k e t s Inter-American Development Bank
is s u b s t a n t i a l . In f a c t , s u c h invest- c o u l d s e e k f u n d i n g for a p o r t i o n of
ments might initially involve little t h e i r l e n d i n g p r o g r a m s f r o m t h e oil-
more than a shift in a s s e t owner- exporting countries.
s h i p f r o m t h e c e n t r a l b a n k s of oil- S o m e of t h e s u r p l u s oil r e v e n u e s
i m p o r t i n g c o u n t r i e s to t h o s e of t h e also probably will be utilized for
Morgan Guaranty Trust Company

288
various long-term investments, in approximately $27 billion at end-

e q u i t i e s , in r e a l e s t a t e , a n d e v e n in 1973 represented about 4 months'
direct investments. However, in cover, based on the import outlook
1 9 7 4 it is likely t h a t t h e b u l k of t h e for t h e c o m i n g y e a r . A d r o p b a c k to
revenues will be employed in the 3 months' cover would allow a re-
ways described earlier: deposited s e r v e r u n d o w n of $3 b i l l i o n , which
in the Euro-currency market; in- would cover 1 3 % of t h e estimated
v e s t e d in n a t i o n a l m o n e y a n d bond current-account deficit. A drop to
markets; channeled through the 2Va months' cover would yield $7
I M F ; a n d d i s b u r s e d a s a i d to d e v e l - billion, or 3 1 % of t h e d e f i c i t .
oping countries. Only a relatively The remainder of the increased
modest p o r t i o n is l i k e l y to g o into c u r r e n t - a c c o u n t deficit will have to
stock markets and other equity in- be met through capital inflows.
v e s t m e n t s in t h e n e a r f u t u r e . Many uncertainties obviously exist
in t h i s a r e a . In t h e p a s t , n e a r l y t w o -
t h i r d s (or a b o u t $11 b i l l i o n in 1 9 7 2 )
Impact of the oil of t h e t o t a l n e t c a p i t a l f l o w f r o m t h e
O E C D countries (about $18 billion)
situation on the LDCs
to t h e L D C s h a s b e e n f r o m private
F o r t h e l a r g e g r o u p of t h e less-de- s o u r c e s . In s o m e L D C s , t h e a d v e r s e
veloped countries (LDCs) which are impact of the oil situation on the
not m a j o r p e t r o l e u m producers, the current account of t h e balance of
c o s t of p e t r o l e u m imports will rise payments may m a k e private lenders
f r o m a n e s t i m a t e d $5 b i l l i o n in 1 9 7 3 and investors more cautious.
to a r a n g e of $ 1 3 - $ 1 5 b i l l i o n in 1 9 7 4 , As regards official capital flows,
assuming currently prevailing prices it is w o r t h n o t i n g t h a t o f f i c i a l d e v e l -
a n d 1 9 7 3 v o l u m e s . T h e 1 9 7 3 oil i m - opment assistance from the OECD
port level represented already a c o u n t r i e s in 1 9 7 2 a m o u n t e d to a b o u t
substantial increase over the 1972 $ 7 b i l l i o n . T h i s a i d e f f o r t b y t h e in-
l e v e l of $ 3 . 7 billion. A l s o , s o m e s l o w - dustrialized nations would be more
ing in L.DC export growth is ex- t h a n o f f s e t by t h e e s t i m a t e d $9-bil-
p e c t e d . A s a result, a t r a d e deficit lion i n c r e a s e in L D C p e t r o l e u m im-
of about $22 billion (c.i.f. basis) p o r t c o s t s . M o r e o v e r , in v i e w of t h e
for all non-oil-exporting LDCs for industrialized nations' o w n projected
1 9 7 4 s e e m s likely, v e r s u s a b o u t $11 current-account deficits, the main-
b i l l i o n last y e a r a n d $9.5 b i l l i o n in t e n a n c e of t h e a i d f l o w a t present
1972. Their net deficit on services l e v e l s m a y n o w b e in q u e s t i o n . P r e -
w o u l d a d d p e r h a p s a billion dollars. vious commitments may hold the
The non-oil-exporting LDCs are f l o w s a t s o m e t h i n g c l o s e to recent
therefore facing a current-account l e v e l s in t h e n e a r t e r m , b u t c e r t a i n l y
d e f i c i t of a b o u t $ 2 3 b i l l i o n t h i s y e a r , no i n c r e a s e a p p e a r s f e a s i b l e . T h u s ,
which compares with an annual a s e a r c h f o r w a y s to s h i f t m o r e of
a v e r a g e of $ 1 0 billion in t h e 1970- the aid effort to the O P E C nations
73 period. is likely. This search essentially
P a r t of t h i s d e t e r i o r a t i o n n o d o u b t b r e a k s d o w n into t w o p a r t s : ( a ) r e -
will be covered by drawdowns of d i r e c t i o n of f l o w s w i t h i n e x i s t i n g a i d
these countries' international re- programs; and (b) mechanisms to
serves. Indeed, recent record rates directly increase the aid flows from
of e x p o r t g r o w t h a n d c a p i t a l i n f l o w s the O P E C nations toward the non-
have given the non-oil-exporting oil-exporting LDCs.
L D C s a c u s h i o n to a b s o r b a portion As regards the former, the poten-
of the increment in oil costs. In tial seems limited. Based on mid-
t e r m s of import cover, reserves of 1973 figures on d e v e l o p m e n t credits

289
from the World Bank, IDA and the these possibilities b e c o m e s an im-
Inter-American Development Bank, portant question. In t h e s h o r t run,
12 major oil-exporting countries ac- the OPEC countries could grant
c o u n t e d for a b o u t 1 2 % , or m o r e t h a n short-term credits to finance the
$ 3 billion, of t o t a l o u t s t a n d i n g l o a n s p u r c h a s e of oil, w h i c h c o u l d later
a p p r o a c h i n g $ 2 7 billion. A c t u a l net r o l l e d o v e r or r e - f i n a n c e d intojofig-
f l o w s of aid funds from all OECD er-term debt. Another possibility
sources to these 12 countries w o u l d be the creation o f a new I M F
amounted to $ 7 7 0 million in 1972, l o n g - t e r m f a c i l i t y s i m i l a r to t h a t n o w
or 9 . 8 % of t h e t o t a l of s u c h f l o w s to a v a i l a b l e to L D C s for c o m p e n s a t i n g
all LDCs. Some redirection could d r a w i n g s d u e to e x p o r t s h o r t f a l l s .
be accomplished in t h e short run However, other possibilities will
by partial prepayment of already no d o u b t take more time. For ex-
disbursed loans and relending of ample, the World Bank and similar
current aid flows by oil exporters regional organizations essentially
back to t h e s o u r c e . T h e short-run m a k e project loans, so t h a t unless
p o t e n t i a l f o r r e d i r e c t i o n of this sort, t h e W o r l d B a n k w e r e w i l l i n g to start
h o w e v e r , p r o b a b l y d o e s not e x c e e d making program (or general sup-
$2 b i l l i o n to $3 billion. port) loans, it m i g h t b e s o m e time
T h e p o t e n t i a l in t h e s e c o n d c a t e - before greater funding from the
gory increasing OPEC funds di- OPEC countries would have much
r e c t e d t o w a r d t h e L D C s is c l e a r l y impact on new funds available to
m u c h greater. T h e various possibili- LDCs. Further, the organization of
ties rechanneling through the an OPEC-financed development
IMF, development assistance direct- b a n k , a l r e a d y m e n t i o n e d by t h e S e c -
ly f r o m O P E C to t h e L D C s , greater r e t a r y - G e n e r a l of O P E C , will r e q u i r e
f u n d i n g of e x i s t i n g i n t e r n a t i o n a l d e - considerable time.
velopment organizations from the Among the non-oil exporting

OPEC nations have already been LDCs, the primary and secondary
mentioned in t h e p r e v i o u s section. impacts of the new international
However, the near-term financial petroleum situation will of course
n e e d s of s o m e L D C s will b e suffi- v a r y w i d e l y , d u e to t h e s k e w e d dis-
ciently urgent that the timing of tribution of gold and foreign-ex-
c h a n g e r e s e r v e s , d i f f e r e n c e s in rel-
Table 5 ative d e p e n d e n c e on imported pe-
t r o l e u m a n d l e v e l s of development.
Selected less-developed countries
A l t h o u g h v e r y a p p r o x i m a t e in some
estimated 1974 oil imports c a s e s , t h e d a t a in T a b l e 5 a t t e m p t

millions of dollars, c.i.f. % of energy some evaluation of t h e primary ef-
consumption not f e c t s in a s e l e c t i o n of c o u n t r i e s for
increment vs covered by
increment % of domestic w h i c h dar-i a r e r e a d i l y a v a i l a b l e . Of
1974 total 1974 over 1973 gross reserves production (a)
this g r o u p , C h i l e a p p e a r s to b e t h e
Chile most vulnerable due to relatively

$ 295 $ 175 59% 60%
Korea 800 500 48 h i g h d e p e n d e n c e o n oil a n d low in-
54
Philippines 600 350 41 97 ternational reserves, although the
India 1,200 550 40 17 oil c r i s i s c o m e s at a t i m e w h e n t h e
Taiwan 820 500 33 52 international financial community
Central America (t>) 225 145 31 93
Brazil 2,200 has b e c o m e m o r e disposed toward
1,300 20 45
Mexico 450 200 17 9 Chilean credits. Brazil, w h i c h heads
Peru 110 75 13 39 the bottom half of t h e ranking, is
Argentina 225 145 12 10 a n i n t e r e s t i n g c a s e of h i g h overall
dependence on petroleum imports
(a) Based on U.N. data (or 1971, except for Brazil and Chile.
(b) Excludes Panama. but s u f f i c i e n t f i n a n c i a l r e s o u r c e s to
Morgan Guaranty Trust Company

290
g e t t h r o u g h t h e s h o r t run.
Secondary impacts of the oil
c r i s i s w i l l a f f e c t all L D C s in some
degree regardless of relative de-
p e n d e n c e o n oil i m p o r t s . F o r e x a m -
ple, the slowdown in economic
g r o w t h in t h e U n i t e d S t a t e s , J a p a n ,
a n d W e s t e r n E u r o p e , b r o u g h t o n in
p a r t b y t h e w o r l d w i d e oil s h o r t a g e ,
will reduce d e m a n d for m a n y LDC
exports probably affecting com-
modity prices as well as the growth
of m a n u f a c t u r e d e x p o r t s . A l s o , s h a r p
p r i c e i n c r e a s e s for i n d u s t r i a l g o o d s
i m p o r t e d by m a n y L D C s for u s e in
manufacturing as well as direct
increases in fuel costs w i l l add
to inflationary pressures. Finally,
petrochemical scarcities will ad-
versely affect both industry and
agriculture, t h e latter d u e to fertilizer
shortages. Thus, the secondary im-
p a c t of t h e oil s i t u a t i o n , w h i l e not
quantifiable at present, will tend
mainly to aggravate the primary
balance-of-payments effects dis-
cussed above.

291
Big Powers to Tap

Euro-dollar Mart1
For Arab Oil Debt
From News Dispatcher
TOKYOA meeting of at the meeting, the United He added that "under the
some of the world's major States by outgoing Treasury present circumstances" the
industrial countries on the Under Secretary Paul A. , Eurodollar mechanism ap-
oil problem ended yesterday Volcker. peared able to handle the
with forecasts they would The group's spokesman, . task.
have to pay billions of dol- Dr. Otmar Emminger, vice But the Dow Jones Now
lars to Arab and other pe- president of West Germany's. Service reported from Lon-
troleum producers and then Central Bank, p r e d i c t e d ; , don that there has been con-
borrow much of the money the huge sums of dollars be- - cern expressed in the Euro-
back. ing accumulated by oil pro>. bond market over the drop
The conclusion emerged ducing countries, would br; m the dollar exchange rate,
from a two-day meeting of a partly channeled back to ' notably against the German
working party from the Or- western nations and Japan,, mark.
ganization for Economic Co- through the European cur- ' The service observed that
operation and Development, rency market. Emminger, at the Tokyd
a club of 24 of the world's Although Emminger re- ^ meeting hinted that the
advanced countries. Eleven fused to discuss figure*, con- mark could appreciate fur-
countries were represented ference sources said OECD ; ther. Emminger said that
countries would suffer bal- ' West Germany is willing to
ance of payments deficits of' assume some deterioration
|25 to $40 billion this year ; in its balance of payments
trying to pay for oil. to make it possible for defi-
They forecast also that ' cit countries to improve
Middle East countries and ; their payments positions.
other producers would eon- * He went on to say that ex-
trol a hoard of $200 to $250 ; change rates must play
billion in "oil dollars" by * some role even if they
1980, couldn't be used exclusively
"In any case the figure* : to even out surpluses and
are enormously large," Em- deficits.
minger told a news confer- With both the interest
ence. "The problems they : rate and currency outlook
raise for the advanced coun- unfavorable to the Eurodol-
tries and international fi- * lar bond market, underwrit-
nancial markets are great." ers have been looking for
The West German official special situations that will
said that as oil countries ac- ; appeal to investors.
cumulate dollars the prob-
lem of investing them is .
bound to arise. , ;
"TO begin with, a rela-
tively large part will be in- *
vested in liquid form in in- ;
ternational money markets,"
Emminger said.
"Up to now international ^
money markets, particularly -
the European dollar market,
have performed reasonably :
well as a medium between
oil producing countries and
medium term borrowers."
Emminger said medium
term loans totaling around
$12 billion have been chan-
neled through the European
currency market so far this
year.

292
_ _ _ MARCH 4, 1974
IMF Survey
Shah Offers Proposal
Fund Advances Work on New Oil Facility
As Iran Pledges to Lend Its Financial Aid
Intensive international efforts are c o n t i n u i n g in the search for solutions to the
balance of payments problems arising from the recent sharp increases in
petroleum prices.
I n W a s h i n g t o n , t h e F u n d ' s E x e c u t i v e B o a r d is c u r r e n t l y d i s c u s s i n g a n outline
p r e p a r e d b y t h e staff f o r t h e e s t a b l i s h m e n t o f a n e w f a c i l i t y , o f t e n r e f e r r e d to
as t h e o i l f a c i l i t y , t o assist c o u n t r i e s i n f i n a n c i n g c u r r e n t a c c o u n t d e f i c i t s from
h i g h e r oil bills. S u c h a facility w a s p r o p o s e d b y M a n a g i n g D i r e c t o r H . J o h a n n e s
W i t t e v e e n to the C o m m i t t e e of 20 ( C o m m i t t e e o n R e f o r m of the International
Monetary System and Related Issues) at its Rome meeting (IMF Survey,
January 2 1 , 1 9 7 4 , page 17), a n d the C o m m i t t e e of 20 asked the Executive Board
to explore the idea urgently.
In T e h e r a n , m e a n w h i l e , the c o n c e p t that the n e w oil facility w o u l d receive
s u p p l e m e n t a r y financing f r o m t h e h i g h e r earnings of t h e oil p r o d u c i n g coun-
tries w a s a d v a n c e d as t h e Iranian authorities pledged to set a s i d e at least
$1 b i l l i o n this year, t h e b u l k o f w h i c h is t o b e d i r e c t e d to the new facility.
T h e b a l a n c e is t o b e u s e d t o p u r c h a s e W o r l d B a n k b o n d s , a n d t o p r o v i d e part
of the financing of a n e w institution proposed by the Shah of Iran to make
loans o n concessionary terms to d e v e l o p i n g countries that d o not p r o d u c e oil,
a n d are thus especially hard hit by h i g h e r oil prices.
Iran's p l e d g e of $1 billion for t h e t h r e e purposes f o l l o w e d discussions in
Teheran a m o n g Iranian authorities, M r . W i t t e v e e n , and R o b e r t S. McNamara,
President of the World Bank Group. Iran's Prime Minister, Amir Abbas
Hoveida, announced t h e d e c i s i o n at a press c o n f e r e n c e on February 21 that
was attended by jahangir Amuzegar, the Minister of Finance, and by
Mr. M c N a m a r a and Mr. Witteveen. Staff m e m b e r s o f b o t h t h e B a n k a n d the
Fund have b e e n h o l d i n g discussions w i t h authorities of oil p r o d u c i n g c o u n t r i e s
on the problems stemming from higher prices, and in the months ahead,
M r . W i t t e v e e n p l a n s t o visit o t h e r o i l p r o d u c i n g nations.
Role of Oil Facility

F o l l o w i n g t h e d e c i s i o n o f t h e C o m m i t t e e o f 2 0 in f a v o r o f u r g e n t exploration
o f t h e n e w oil facility, the 13 industrial c o u n t r i e s r e p r e s e n t e d at t h e W a s h i n g t o n
Energy C o n f e r e n c e a g r e e d o n February 13 to lend i m p e t u s to this a n d other
efforts to deal w i t h oil-related b a l a n c e of p a y m e n t s disequilibria u n d e r w a y in
the Fund, the W o r l d Bank, a n d t h e O r g a n i z a t i o n for E c o n o m i c C o o p e r a t i o n and
Development ( I M F Survey, February 18, 1974, page 49).
T h e o i l f a c i l i t y w o u l d assist F u n d m e m b e r countries in m e e t i n g t h e initial
i m p a c t o f t h e i n c r e a s e i n o i l i m p o r t costs b y p e r m i t t i n g d r a w i n g s i n amounts
related to their o i l - i n d u c e d deficits, to t h e size of their reserves, a n d to their
q u o t a s in t h e F u n d . Access to the n e w facility w o u l d b e s u b j e c t t o a n assess-
m e n t o f m e m b e r s ' b a l a n c e o f p a y m e n t s p o s i t i o n , a n d it w o u l d b e supplemen-
tary t o t h e i r o t h e r access t o F u n d resources.
F r o m t h e o u t s e t it has b e e n e n v i s i o n e d t h a t t h e F u n d w o u l d u s e its e x i s t i n g
resources but might n e e d to s u p p l e m e n t t h e m by b o r r o w i n g m a i n l y f r o m oil
exporting countries. T h e Fund's recent discussions w i t h these countries have
b e e n to s o u n d o u t the possibilities for such financing, a n d Iran's p r o p o s a l for
l o a n s t o t h e F u n d f o r t h e o i l f a c i l i t y is a t m a r k e t - r e l a t e d rates.
T h e existing resources of the Fund consist of holdings of gold and SDRs
a n d currencies w h i c h can be s u p p l e m e n t e d by additional (Please turn to next page)

293
borrowing under Article VII, Section 2, of Currencies of oil exporting countries and changes in other prices create very
the Articles of Agreement to replenish held by the Fund were equivalent to SDR large surpluses among a number of oil
the Fund's holdings of any member's cur- 1.17 billion, including Venezuelan boli- producing countries and a number of very
rency. The financing of a new oil facility vares equivalent to SDR 218.5 million, large deficits among both developing and
in part by borrowing w o u l d be an in- Trinidad and Tobago dollars to SDR 63 industrial countries. Under such circum-
stance of the Fund's obtaining additional million, Iranian rials to SDR 144 million, stances, he said, it is important that gov-
resources f rom its member countries. Iraqi dinars to SDR 81.5 million, Kuwaiti ernments react in an appropriate way, for
At the end of January, the Fund's hold- dinars to SDR 45.3 million, Saudi Arabian if they were to. react in the wrong way,
ings of currencies were equivalent to riyals to SDR 100.5 million, Algerian dinars applying more or less mechanically old
SDR 23.889 billion, its holdings of gold to SDR 97.5 million, Libyan dinars to classical doctrines of restoring balance of
to SDR 5.370 billion, and its SDR hold- SDR 18 million, Nigerian naira to SDR 102 payments equilibrium immediately, the
ings were SDR 508 million. Am&tig the million, and Indonesian rupiahs to SDR world might face very serious problems.
currencies were holdings of U.S. dollars 279.2 million. The proposed oil facility, he said, would
equivalent to SDR 6.129 billion, deutsche overcome immediate difficulties in an ap-
marks to SDR 481.2 million, and Canadian
v Proposal of the Shah propriate way, with the Fund helping to
dollars to SDR 819.6 million. In Teheran, Mr. McNamara and Mr. finance the deficits, and for this purpose
Witteveen promised urgent and sympa- he said it would be desirable if some of
thetic consideration by the World Bank the surplus countries would give their
and the Fund of the Shah's proposal for a Regarding the developing countries
new lending institution to provide conces- which do not produce oil, Mr. Witteveen
sionary loans to developing countries that recognized that their problem will be
do not produce oil. Under the Iranian especially acute, and not merely one of
proposal, the institution would have total financing the deficit, but also a problem
capital in the first year of from $2 billion of the debt burden which has to be met.
to $3 billion, contributed in about equal
parts by the oil exporting countries and
by industrial nations. Iran will present
the proposal to the Organization of Petro-
leum Exporting Countries.
The proposal calls for the institution to
have a board of governors providing
about equal representation for oil export-
ing, industrial, and developing countries.
This board would supervise and direct
policy, and would appoint a board of
directors, selected on the basis of their
economic and financial competence, to
conduct normal operations. Technical and
administrative work would be done by
the management and staffs of the World
Bank and the Fund. For the future, it is
envisioned that the new institution's lend-
ing would be primarily long term in char-
acter, and for development projects; but
at the outset, it would make shorter-term
loans for balance of payments support.
Press Conference Comments

As explained in the Teheran press con-
ference by Mr. Amuzegar, the Iranian sug-
gestion is for the 12 member countries of
the Organization of Petroleum Exporting
Countries and 12 industrial countries each
to contribute some $140 million to $150
million to the institution to provide its
capitalization of $2 billion to $3 billion.
Mr. Witteveen welcomed the Shah's
proposal as constructive not only under
present conditions, but for the future as
well. He noted that the higher cost of oil

294
THE ANNUAL REPORT

OF THE
COUNCIL ON INTERNATIONAL ECONOMIC POLICY
February 7, 1974
The Rise of Oil Prices: Implications for the Gulf members of OPEC that the posted prices an-
World Economy nounced in October would be doubled beginning
Export prices have now been divorced from fac- 1 January 1974. Current oil prices are shown in
tors such as costs and return to capital and are the table on the following page.
largely determined by the producer governments. Price and Balance of Payments Impacts
Beginning in February 1971 with the Tehran Pact, The drastic increases in oil prices w i l l have a
effective control over oil prices has rested increas- significant short-term impact on both the domestic
ingly with producer countries working through the economies of all nations and on international eco-
Organization of Petroleum Exporting Countries nomic relationships. However, because a pricc
(OPEC). Posted prices rose approximately 70% change of this magnitude for a basic industrial
between October 1970 and October 1973. In Oc- product has no modern precedent, the extent of the
tober 1973, the Persian Gulf producers announced impact is uncertain.
unilaterally that posted prices would rise another
70% immediately. Libya joined them in announc- Impact on Domestic Economies
ing larger price increases. Nigeria, Venezuela, and Even before the recent price hikes, many of the
Canadathe three largest suppliers to the United world's economies were already decelerating. It
Statesalso declared substantial increases in their was expected that growth would slow from its
export pricesin some cases beyond those imposed recent exceptionally high pace to a more sustain-
for oil from the Persian Gulf. Then in December, able one, where product shortages and inflationary
the Shah of Iran announced on behalf of the Persian pressures would ease. The higher oil prices will

295
PRICE STRUCTURE FOR SELECTED CRUDE OILS, 1 JANUARY 1974

(See also oil price tables in Appendix B)
US $ per Barrel
(34 Crude) (34 Crude) (40 Crude) (26 Crude)

(Saudi Arabian) Nigerian Libyan Venezuelan
Persian Gulf
Posted price1 11.65 14.69 15.77 13.67
Production cost 0.10 0.35 0.30 0.51
Government revenue 7.01 8.73 9.49 8.59
Of which:
Royalty 1.46 1.84 1.97 2.28
Profit tax 5.55 6.88 7.42 6.31
Estimated oil company profits .. 0.50 0.50 0.50 0.50
Estimated safes price (f.o.b.) .. 7.61 9.58 10.29 9.60
Estimated transport cost*
(to US Gulf Coast) 1.48 0.67 0.65 0.46
Estimated sales price (c.i.f.)
(to US Gulf Coast) 9.09 10.25 10.94 10.06
'Differences in posted prices reflect differences in oil quality and transport costs.
'Transport costs are assumed to be about the same as the average for 1973 (i.e.. World-
scale 100).
accentuate this slowdown by reducing consumer Impact on the World Economy

purchasing power, slowing demand for petroleum-
T h e price increases w i l l also affect balance-of-
based products, and causing deferral of some busi-
payments accounts and international financial mar-
ness investment as w e l l as consumer purchases.
kets. T h e consuming countries' oil import b i l l w i l l
The result w i l l be a reduction i n economic growth,
increase dramatically this year if current crude oil
somewhat higher unemployment than expected and,
prices are maintained. A t present consumption
of course, a continuing h i g h rate of inflation w i t h
increased oil costs adding to other price pressures. levels, w o r l d o i l imports w o u l d j u m p f r o m $45 b i l -
lion i n 1973 to about $115 b i l l i o n i n 1974 or about
The reduction of growth, however, should be a $70 b i l l i o n increase. E x p o r t i n g countries' revenues
only temporary. T h e duration of the expected slow- w i l l increase i n 1974 to nearly $100 b i l l i o n or
down w i l l depend largely on the ability of each three-and-a-half times the 1973 level. As shown
economy to adjust to the new price structure. Pro- below, the Arab states w i l l receive about half of
duction patterns i n the world's industrial countries the total revenue increase, w i t h Saudi Arabia show-
are n o w beginning to shift to meet demand for ing the largest gain.
products w h i c h contain or use less petroleum. The
REVENUES FROM OIL EXPORTS
prime example i n the US is of course the shift to-
w a r d smaller automobiles. The investments needed (Billion US$)
1973 1974
to make this structural shift w i l l help to avoid an
Estimated Estimated
economic d o w n t u r n , and even to increase g r o w t h Total 27 95
in the near future. For these reasons, and because Arab 15 51
of the general soundness of the w o r l d economy, Saudi Arabia 5 20
many observers believe that the economies of most Kuwait 2 8
Libya 2 7
nations w i l l begin to accelerate again d u r i n g the Algeria 1 3
latter half of 1974. Iraq 2 6
This sequence w i l l not come automatically. Gov- Other 3 7
N on-Arab 12 44
ernments w i l l have to carefully adjust their mone- Iran 4 18
tary and fiscal policies so that they can help to Indonesia 1 4
accelerate the structural shifts w i t h o u t adding fur- Nigeria 3 8
Venezuela 3 11
ther inflationary pressures. Further, all nations must Other 1 3
cooperate to avoid a competitive trade war, w h i c h
could lead to a serious recession: some nations Most producers w i l l be able to spend only a
might be tempted to t r y to stimulate employment small part of their increased revenues on foreign
during this d i f f i c u l t period by providing export goods and services. Even before the recent price
incentives or imposing import barriers, and such increases, the earnings of Saudi Arabia, Kuwait,
"exporting of unemployment" could provoke re- and the other small Persian Gulf states exceeded
taliation by other countries. their absorptive ability. Their imports and aid dis-

296
bursements w i l l probably grow substantially in The reflow of most oil exporting revenues back to
1974, but by nowhere near the amount of the in- the oil consuming countries w i l l mean that, as a group
crease in earnings. Other Arab producers have a their overall payments position w i l l be balanced. In-
greater current need for oil earnings to finance dividual nations, however, may experience prob-
their economic development and military programs, lems, since there is no necessary relationship between
but even in these countries the magnitude of the a country's higher oil import bill and the reflow
revenue increase and the normal delays in planning of funds from the producing countries. The US w i l l
make it virtually impossible to spend all revenue be in a fortunate position because it possesses sub-
this year. stantial quantities of domestic oil and alternative
The major non-Arab oil exportersIran, Indo- energy sources. The sharp strengthening of the
nesia, Nigeria, and Venezuelawill find it some- dollar in exchange markets in January 1974 reflects
what easier to expand imports immediately. For in part the expectation that the US balance of
the most part, these countries have larger popula- payments w i l l be less severely affected than those
tions and greater opportunity for economic diversi- of other industrial nations. The dollar's renewed
fication than do most Arab producers. Nevertheless, strength, however, is a mixed blessing: continued
the revenue increases are bound in the short run appreciation of the dollar may reduce the com-
to outstrip the ability of even these countries to petitiveness of US goods in world markets.
absorb foreign goods and services. I n all, oil-produc- Developing countries face especially serious prob-
ing countries w i l l probably have extremely large lems as a result of the price increases. The non-oil-
surpluses to invest or deposit abroad. producing L D C s face an increase in their collective
These available investment funds w i l l flow mainly oil import bill of near $10 billion this year, an
to oil-consuming countries. Some w i l l be invested amount roughly equivalent to the total develop-
in long-term assets such as real estate and secu- ment assistance being disbursed by developed coun-
rities. But because these types of investment deci- tires. An undetermined but substantial figure must
sions take time, most of the funds w i l l probably go be added for the impact Of the increased prices
into short maturity assetssuch as Eurodollars for imports which grow out of the increase in
and dollar deposit accounts. While the international energy costs. It may be that some of these countries
financial markets w i l l be able to absorb these in- could borrow to meet increased costs, but, to the
vestment funds, their magnitude w i l l probably de- extent they do so, their ability to borrow for other
press interest rates. Lower interest rates should, purposes is reduced. The alternatives are to reduce
in turn, stimulate new investments in productive their standard of living, receive more foreign aid,
facilities. or see energy prices reduced.

HO 9560 Gen. 74-33 5
TMt m e t OT THE RISE IN THE PRICE
OF CRUtt OIL ON THE WOftLO SCONOMY:
Prognosis t n d P o l i c y Options

298
THE IMPACT OF THE

RISE IN THE PRICE OF CRUDE OIL
ON THE WORLD ECONOMY
--Prognosis and Policy Options--
Table of Contents
I. Impact on Prices 1
II. Impact on Demand and Output 3

III. The Balance of Payments 5
IV. Policy Options for the United States
and the Other Industrial Countries 7
A. Reduce price of crude oil 8
B. Policies to offset economic recession 9
C. Balance-of-payments
--Financing policies 9
9
--Adjustme nt 10
D. Less Developed Countries 13
V. Another Look at the Numbers 1
List of Tables
Table 1 - - Impact of October and December 1973

Increase in Price of Imported Oil.
Table 2 - - Increase in Oil Revenues of OPEC
Countries, 1974 over 1973
Table 3 - - Balances of Payments on Current

Account
Table 4 - - The Increase in Oil Exports of OPEC
Countries, 1974
Appendix
Petroleum Exporting Countries: Oil

Exports and Revenues

299
T H E I M P A C T OF T H E
RISE I N T H E P R I C E OF CRUDE O I L
ON T H E W O R L D E C O N O M Y
- - P r o g n o s i s and P o l i c y Options - -
In October and D e c e m b e r 1973, the O P E C c o u n t r i e s r a i s e d e f f e c t i v e

o i l p r i c e s f r o m $3. 45 a b a r r e l landed in N o r t h A m e r i c a and W e s t e r n
E u r o p e to roughly $9 a b a r r e l . E v e n i f the A r a b o i l e m b a r g o and c u t - b a c k of
production w e r e ended s h o r t l y , the p r i c e i n c r e a s e alone w i l l r a i s e m a s s i v e
economic p r o b l e m s f o r the w o r l d :
- - I n f l a t i o n , a l r e a d y a s e r i o u s p r o b l e m , w i l l be given a s h a r p
s t i m u l u s : s o m e 3 p e r c e n t a g e points w i l l be added to
to the r a t e of p r i c e i n c r e a s e in 1974.
- - D o m e s t i c d e m a n d , and hence output, e m p l o y m e n t , and r e a l

i n c o m e , m i g h t be r e d u c e d s i g n i f i c a n t l y i n 1 9 7 4 - - b y s o m e 2
p e r c e n t a g e points m o r e than would o t h e r w i s e have been the case.
- - A c u t e b a l a n c e - o f - p a y m e n t s p r o b l e m s w i l l face m o s t
c o u n t r i e s - - n o t a b l y n o n - o i l p r o d u c i n g less developed
c o u n t r i e s , but a l s o Japan, the United K i n g d o m , and
I t a l y i n 1974.
W h e t h e r these p r o b l e m s m a t e r i a l i z e in a s u b s t a n t i a l way w i l l depend

in p a r t on the p o l i c i e s adopted by the i n d u s t r i a l countries and the d e g r e e
of cooperation a m o n g t h e m . M o r e o v e r , the p r o b l e m s a r e so m a s s i v e , and
the r i s e i n the p r i c e of o i l so g r e a t , that it s e e m s u n l i k e l y that c u r r e n t
o i l p r i c e s can be long m a i n t a i n e d .
T h i s m e m o r a n d u m discusses the above e s t i m a t e s and t h e i r i m p l i c a t i o n s

f o r p o l i c y . The e s t i m a t e s a r e n e c e s s a r i l y rough. T h e i r only p u r p o s e i s to
p r o v i d e a r e a s o n a b l e f r a m e w o r k f o r the development of e c o n o m i c p o l i c y .
I. I m p a c t on P r i c e s
The i n c r e a s e in the p r i c e of i m p o r t e d o i l w i l l have a m a j o r i m p a c t

on w o r l d p r i c e s . A s can be seen in table 1, f o r the O E C D c o u n t r i e s as
a whole the i n c r e a s e d cost of i m p o r t e d o i l should r a i s e d o m e s t i c p r i c e s
( m o r e t e c h n i c a l l y , the G N P d e f l a t o r ) by m o r e than one p e r c e n t a g e point.

300
CRS-2
TABLE 1
I m p a c t of October and D e c e m b e r 1973

I n c r e a s e i n P r i c e of I m p o r t e d QlT
E f f e c t s on I m p o r t s A s % of T o t a l
$ billions a/ E x p e n d i t u r e s (1973)
Selected Countries
U.S. 9. 5 0. 7
Japan 8.3 1. 5
France 4. 5 1. 2
Germany 5. 3 1.2
Italy 5.0 1. 8
U. K. 5. 0 1.8
BLEU 1. 5 1. 8
Netherlands 1. 5 1.5
O E C D total 46.6 1. 2
Non-OECD 7.5
Grand Total 54. 0
a / The e s t i m a t e s show the e f f e c t of the change i n o i l p r i c e s on the 1973

v o l u m e of o i l i m p o r t s .
S o u r c e : O E C D , E c o n o m i c Outlook, P a r i s , D e c e m b e r 1973 and F e d e r a l R e s e r v e

e s t i m a t e s J a n u a r y , 1974 ( M e m o r a n d u m of H e l e n J u n z ) .

301
CRS-10
M o r e o v e r , since the increases w i l l be passed along m o r e in percentage

r a t h e r than absolute t e r m s (in o r d e r to m a i n t a i n m a r k - u p m a r g i n s constant
as a percent of costs), and since wage-push inflation is also l i k e l y to develop,
the p r i c e increase for the O E C D countries could w e l l be higher than that
i m p l i e d i n table 1. Indeed, it might amount to 3 percentage points or
m o r e . (The impact on the United States would be w e l l below a v e r a g e since
domestic energy supplies a r e l a r g e . )
II. I m p a c t on Demand and Output
The p r i c e i n c r e a s e for i m p o r t e d o i l i s i d e n t i c a l in its economic

i m p a c t to a tax on o i l consumption. The net economic i m p a c t depends
on the public's r e a c t i o n to the "tax" and the use to which the "tax c o l -
l e c t o r ' puts the r e v e n u e .
Helen Junz of the F e d e r a l R e s e r v e e s t i m a t e s that the d i r e c t

impact of the i n c r e a s e in the p r i c e for i m p o r t e d o i l would be to reduce
G N P by 1. 5 to 2. 2 percentage points below what i t otherwise would have
been, a / This seems reasonable since, as can be seen in table 1, the
i n c r e a s e in the p r i c e of i m p o r t e d o i l - - t h e additional "tax" imposed by the
o i l - e x p o r t e r s - - a m o u n t s to some 1 . 2 percent of 1973 G N P .
As can be seen in the appendix, the " t a x " , or increase in o i l earnings by

the o i l - e x p o r t i n g countries, is expected to amount to some $60 b i l l i o n i n
1974 as earnings of O P E C countries, which w e r e $25 billion in 1973, soar to
$84 b i l l i o n i n 1974. b / P a r t of this w i l l be offset by i n c r e a s e d purchases
of goods and service's by the o i l - e x p o r t e r s .
In 1973, these countries bought some $20 b i l l i o n w o r t h of goods and

s e r v i c e s f r o m the r e s t of the w o r l d . A 50 percent i n c r e a s e - - a n i n c r e a s e
in purchases of $10 b i l l i o n - - c o u l d be r e a d i l y financed but would be d i f f i c u l t
to accomplish in one y e a r . Y e t , even if such an i n c r e a s e took place, it
would leave the r e s t of the w o r l d with a deflationary i m p a c t of roughly
$50 b i l l i o n .
A g r e a t e r i n c r e a s e in expenditures by the o i l - e x p o r t i n g countries is

not l i k e l y . As can be seen in table 2, a substantial p a r t of tne i n c r e a s e in
revenue w i l l accrue to A r a b countries with l i m i t e d absorptive c a p a c i t y - -
s m a l l populations and unambitious p r o g r a m s for economic development.
Even the other oil countries w i l l experience a lag before they can t u r n
their increased f i n a n c i a l r e s o u r c e s into effective purchasing p r o g r a m s .
a / M r s . Junz uses i n d i r e c t tax e l a s t i c i t i e s d e r i v e d f r o m Bent Hansen

( F i s c a l Policy in Seven Countries, 1 9 5 5 - 6 5 , O E C D , P a r i s , M a r c h
1969) or f r o m n a t i o n a l m o d e l s .
b/ The data in the tables a r e roughly consistent. Such inconsistencies as

exist do not a l t e r the a n a l y t i c a l or policy conclusions.

302
CRS-4
Table 2: I n c r e a s e in O i l Revenues of O P E C C o u n t r i e s , 1974 o v e r 1973
A r a b Countries with
limited absorptive
capacity $26. 0 b i l l i o n
Saudi A r a b i a
Kuwait
Abu Dhabi
O t h e r P e r s . Gulf
Libya
Other A r a b C o u n t r i e s 6. 6
Iraq
Algeria
Other
Other C o u n t r i e s 30. 6
Iran
Nigeria
Other W. A f r i c a
Venezuela
Other L a t i n A m e r i c a
Indonesia
Other F a r E a s t
USSR & E . E u r o p e
OPEC 59. 3
World Total 62. 8
Source: Appendix.

303
CRS-10
U n t i l that happens, the impact of the i n c r e a s e in the p r i c e of o i l

is c e r t a i n to depress demand and income i n the o i l - i m p o r t i n g countries.
The fact that the i n c r e a s e in f i n a n c i a l assets of the o i l - e x p o r t i n g countries
w i l l be invested in the o i l - i m p o r t i n g countries does not offset this conclusion.
III. The Balance of Payments
The i n c r e a s e in the p r i c e of o i l w i l l have a staggering i m p a c t of the

balances of payments of a l l countries. The m o s t r e c e n t e s t i m a t e s , shown
i n table 3, a r e exceedingly rough but they suggest the following g e n e r a l
conclusions:
- - T h e o i l exporting countries m a y e a r n some $55 b i l l i o n net

i n 1974, compared to $6 b i l l i o n in 1973.
- - T h e United States, which r a n an e s t i m a t e d surplus on c u r r e n t

account (trade, s e r v i c e s and p r i v a t e t r a n s f e r s ) of $4. 5
b i l l i o n i n 1973 now is p r o j e c t e d to run a deficit of $1 to 2
b i l l i o n (instead of an e a r l i e r forecasted surplus of $9 b i l l i o n ) .
- - T h e United Kingdom and Japan e s p e c i a l l y , but I t a l y , F r a n c e and

G e r m a n y as w e l l , face l a r g e c u r r e n t account deficits in 1974.
- - F i n a l l y , the n o n - o i l producing less developed countries,

which r a n a deficit of $9 b i l l i o n in 1973, a r e expected to
show a deficit of $23 b i l l i o n in 1974 if i t can be financed.
W i t h foreign aid running at $8 b i l l i o n , financing such a
deficit w i l l be quite d i f f i c u l t .
These e s t i m a t e s , which, to r e p e a t , a r e subject to wide m a r g i n s f o r e r r o r and

a r e not f o r e c a s t s , give a reasonable idea of the o r d e r s of magnitude involved
in the change in the p r i c e of oil. The swings envisaged a r e enormous.
T h e r e would be no b a l a n c e - o f - p a y m e n t s p r o b l e m i f the o i l exporting

countries spent t h e i r i n c r e a s e d earnings for goods and s e r v i c e s , though there
would be a m a j o r t r a n s f e r of r e a l r e s o u r c e s f r o m o i l i m p o r t i n g to exporting
countries. (Indeed, u n t i l the l a t t e r increase t h e i r purchases in other
countries, no r e a l burden is placed on the o i l i m p o r t e r s . )
N o r would t h e r e be a b a l a n c e - o f - p a y m e n t s p r o b l e m if the i n c r e a s e d
earnings of the o i l e x p o r t e r s came back to the i m p o r t e r s as e i t h e r s h o r t -
t e r m or l o n g - t e r m investments. This is almost c e r t a i n to happen at least
for the next y e a r and m o r e . But these loans and investments would have to
equal, country by country, the i n c r e a s e in net i m p o r t s f r o m the o i l countries.
This is a most unlikely constellation. Thus, 1974 seems c e r t a i n to p r e s e n t
the developed countries and the rton-oil producing less developed countries
with m a j o r policy p r o b l e m s .

304
CRS-6
T a b l e 3: B a l a n c e s of P a y m e n t s on C u r r e n t A c c o u n t a /
($ b i l l i o n )
1973
1972 Projection: 1974
Before Dec. After
Oil Price Dec. Oil
Rise P r i c e Rise b/
Oil exporting countries 1.6 6. 1 12. 5 55.0
U n i t e d States -6.2 4.5 9.0 -1.5
A l l other countries 8. 1 -1.1 -21.5 -53.5
Japan 7.0 1.5 -0.9 -6.0
France 1.0 0.6 -0.2 -3.7
Germany 2. 2 5.5 3.6 -2.5
Italy 2. 4 -1.4 -2.0 -3.5
U. K . 0.7 -2.4 -3.5 -7.5
N o n - o i l producing
p r i m a r y producers -7. 5 -9.0 -17.7 - 2 3 . 0 c/
a / Goods, s e r v i c e s and p r i v a t e t r a n s f e r s .
b / The e s t i m a t e s a l s o a l l o w f o r a s o m e w h a t l o w e r v o l u m e of o i l i m p o r t s and
a d d i t i o n a l e x p o r t s to the o i l p r o d u c i n g c o u n t r i e s .
c j L a r g e l y n o n - o i l L D C s , but a l s o includes S i n o - S o v i e t c o u n t r i e s and e r r o r s
and o m m i s s i o n s .
S o u r c e : F i r s t two c o l u m n s : I M F , O E C D " W o r l d E c o n o m i c O u t l o o k " D e c e m b e r 26,

1973. T h i r d : c o l u m n H e l e n Junz of F e d e r a l R e s e r v e . L a s t column: O E C D , s o u r c e ,
J a n u a r y 12, 1974.

305
CRS-10
IV. P o l i c y Options for the United States and the Other I n d u s t r i a l Countries
The policy options open to the i n d u s t r i a l countries s e e m c l e a r . M o s t

i m p o r t a n t , m o r e than any t i m e since the G r e a t D e p r e s s i o n of the 1930's,
economic cooperation among the i n d u s t r i a l powers is essential. T h i s point
seems obvious, but r e c e n t developments suggest that the cooperation
may be no m o r e forthcoming now that i t was a l m o s t half a century ago.
The g e n e r a l lines of policy a r e not in dispute as broad p r i n c i p l e s . The

communique of January 18, 1974 of the I n t e r n a t i o n a l M o n e t a r y Fund's
C o m m i t t e e of Twenty m e e t i n g in R o m e , spelled t h e m out as follows:
. . . i n managing t h e i r i n t e r n a t i o n a l payments countries must

not adopt policies which would m e r e l y aggravate the p r o b l e m s
of other countries. A c c o r d i n g l y , they s t r e s s e d the i m p o r t a n c e
of avoiding competitive depreciation and the escalation of r e -
strictions on t r a d e and payments. They f u r t h e r r e s o l v e d to
pursue policies that would sustain a p p r o p r i a t e levels of economic
activity and e m p l o y m e n t , while m i n i m i z i n g inflation. They
recognized that serious difficulties would be created for many
developing countries and that t h e i r needs for f i n a n c i a l r e s o u r c e s
w i l l be g r e a t l y i n c r e a s e d and they urged a l l countries with
available r e s o u r c e s to make e v e r y e f f o r t to supply these
needs on a p p r o p r i a t e t e r m s . The C o m m i t t e e agreed that
t h e r e should be the closest i n t e r n a t i o n a l cooperation and
consultation i n pursuit of these objectives.
The only question is whether actions w i l l conform to these p r i n c i p l e s .
These p r i n c i p l e s , with one m a j o r addition, and t h e i r r a t i o n a l e a r e

spelled out below:
A. Reduce p r i c e of crude o i l
Though not agreed by the C o m m i t t e e of Twenty, the most obvious

and most effective policy would be to induce the O P E C countries to l o w e r the
p r i c e of crude oil. To do this, the r e s t of the w o r l d would have to show that
such action is in the s e l f - i n t e r e s t of the O P E C countries. Such an approach
might be f a c i l i t a t e d i f it took place in an atmosphere which does not condone
the O P E C action on p r i c e .
A r a b spokesmen, c e r t a i n l y , but even a number of i m p a r t i a l

o b s e r v e r s in the A m e r i c a n press and e l s e w h e r e suggest that the O P E C
action is a n o r m a l and l e g i t i m a t e use of economic p o w e r , analogous to
the p r i c i n g policies of A m e r i c a n corporations. I t is also argued that the
action is m o r a l as w e l l since income is t r a n s f e r r e d f r o m the r i c h to the
poor. Both propositions a r e questionable.

306
CRS-10
If the oil countries were companies operating within the

United States, they would be in violation of anti-trust laws and subject
to civilian and criminal penalties.
Moreover, there is generally a close relationship between

the cost of production of a product--the intellectual and physical
effort involved--and its price. But Middle East oil costs an esti-
mated 13 cents a b a r r e l to produce a/ and the price to the oil com-
panies is now about $7 a b a r r e l , for a mark-up of some 4, 000 p e r -
cent. Nor are the price increases accomplishing a more equitable division
of world income by taxing the rich to help the poor. As shown e a r l i e r ,
the non-oil less developed countries, which have incomes of some $300
per person, w i l l be hit hardest. And the o i l - r i c h countries of the
Persian Gulf w i l l have per capita incomes amounting to some thousands of
dollars per person.
The OPEC countries might be persuaded to lower their price

for a number of more compelling reasons:
1. They must realize that the large and precipitous rise in

the price of oil is creating major economic problems
for both the developed and less developed countries. As
noted e a r l i e r , the increased price is a major stimulus to
inflation and economic recession. With such conditions,
all would lose. Sheikh Yamani, Minister of Petroleum of
Saudi Arabia recognized this in a statement in Tokyo on
January 27th.
2. Balance-of-payments problems and an economic recession

would result in trade restrictions and reduced demand for
all imports, so that attempts of the OPEC countries to
diversify their economic base and to export oil would be
inhibited.
3. The OPEC countries must recognize that the increased

price of oil is encouraging the development of alternative
sources of energy. The result could be lower prices for
oil in the future so that oil-in-the-ground would be less
valuable than oil sold today.
4. Finally, the OPEC countries must recognize that if

business and governments make major investments to
develop alternative sources of energy, they will protect
these investments through import restrictions if
necessary. This implies future economic problems
for oil exporters.
a/ This is the cost for Persian Gulf oil; other costs are higher: 38 cents
in Nigeria, 40 cents in Venezuela, 45 cents in Libya, 75 cents in Algeria,
and $1. 08 in the United States and Canada.

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B, P o l i c i e s to offset economic r e c e s s i o n
The developed countries must take positive m e a s u r e s to avoid

letting the deflationary i m p a c t of the i n c r e a s e in the p r i c e of o i l r u n its course.
And, countries must not let f e a r of b a l a n c e - o f - p a y m e n t s deficits inhibit
expansionary economic m e a s u r e s .
I f a l l the developed countries move to expand t h e i r domestic

economies together, the a d v e r s e b a l a n c e - o f - p a y m e n t s i m p a c t w i l l be m i n i m i z e d .
And, as the l a r g e s t single economic unit, the United States has a s p e c i a l
responsibility not to let i t s e l f and the w o r l d continue its slide into an
economic r e c e s s i o n .
C. B a l a n c e - o f - p a y m e n t s policies
T h e r e a r e two basic ways countries can m e e t a b a l a n c e - o f - p a y m e n t s

deficit. They can finance i t . They can adjust to i t - - e n c o u r a g i n g economic
changes which w i l l wipe out the d e f i c i t .
T h e r e a r e good reasons why financing the deficit is the p r e f e r r e d

route for most countries in 1974.
- - F i r s t , the adjustment r e q u i r e d is e n o r m o u s - - o f the o r d e r

of $55 b i l l i o n , as can be seen in table 3.
--Second, it is c l e a r that a l l countries w i l l be unable to a d j u s t - -

that the n o n - o i l i m p o r t e r s , as a group, w i l l n e c e s s a r i l y r u n a
trade and b a l a n c e - o f - p a y m e n t s d e f i c i t . Thus, the attempt of one
c o u n t r y - - F r a n c e , f o r e x a m p l e - - t o get a balance can succeed only
at the expense of another c o u n t r y - - t h e United States or G e r m a n y ,
perhaps.
- - T h i r d , c u r r e n c y devaluations or depreciations can only

contribute to f u r t h e r inflation and serious s o c i a l p r o b l e m s
in the devaluing country.
The i n c r e a s e in o i l p r i c e s w i l l throw e v e r y m a j o r country's balance of

payments into d e f i c i t . To avoid this having an unhappy psychological effect
on policy, o i l i m p o r t s - - o r at least the i n c r e a s e in the value of o i l i m p o r t s - -
could be excluded f r o m the n o r m a l t r a d e account. This segregation of data
would be only cosmetic, but it could c l a r i f y thinking about a p p r o p r i a t e policy.
Financing: The o i l producers w i l l have to lend o r invest most of t h e i r

sharply i n c r e a s e d earnings to the r e s t of the w o r l d . T h e r e is no a l t e r n a t i v e .
Indeed, much of the i n c r e a s e d earnings m a y w e l l a c c r u e to the United States
with the m o s t developed and sophisticated capital m a r k e t .
The O E C D countries can " r e c y c l e " , or r e l e n d , the loans and investments

of the oil countries to those in need of such finance. T h e r e is ample precedent
for this.
Much of this " r e c y c l i n g " w i l l be done by m a r k e t f o r c e s . H o w e v e r , i f

they prove inadequate, governments, the I M F and national c e n t r a l banks can
complete the task.

308
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If the oil producers buy gold or SDRs f r o m central banks and

reduce the amount of monetary reserves thereby, the international community
can replace these assets by another issue of SDRs.
Adjustment: There w i l l be a temptation for countries to t r y to

adjust their balances of payments rather than borrow to finance their
1974 deficits. Some countries may try to hold or attract reserves in a
variety of undesirable ways--by raising interest rates above what would
be required for domestic economic reasons, or by enduring deflation and
unemployment. If they do, unemployment w i l l be intensified and passed on
to other countries.
There w i l l be a temptation for countries to let their currencies

f l o a t - - o r s i n k - - o r to r e s t r i c t imports in order to restore their trade
surpluses and slow their losses of financial reserves.
But countries must recognize that such actions w i l l not draw funds
from the oil producers, but w i l l merely shift reserves f r o m one industrial
country to another. The result w i l l be unhappy in both economic and
political terms as unemployment is exported to other countries.
Real cooperation among the industrial powers is needed. The

countries w i l l have to work out common policies on:
--interest rates specifically and overall economic policies

more generally;
--exchange ratesthe free market or floating solution could be

disasterous in 1974 however useful it was in 1973 and
might again become in the future.
The argument for coordinating the monetary and fiscal policies of the major
countries is clear and not controversial. This is not true of the proposition
on exchange rates.
The argument against letting the market decide on the appropriate

exchange rate during this period of great strain on every nation's balance
of payments is twofold. F i r s t , the market generally exaggerates the i n -
fluence of new factors. Second, as a result, major and partly unnecessary
economic adjustments are forced on countries. These can be quite costly
in terms of unemployment and inflation.
Recent events may provide an example. Since the beginning of the

oil crisis the effective devaluation of the dollar has been cut in half.
This reflects the assessment of the market that the United States w i l l be
relatively much less damaged by the rise in oil prices than the other major
nations. The result w i l l be to stimulate U.S. imports and to inhibit U.S.
exports. Unless countervailing action is taken, this could result in in-
creased unemployment in the United States. In addition, the depreciation
of the European currencies and the Japanese yen w i l l contribute to inflation
in both areas with resultant social turmoil, and without affording any clear
r e l i e f to their balances of payments.

309
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D. Less Developed Countries
I t is c l e a r that the n o n - o i l producing L D C s face especially

difficult t i m e s . In o r d e r to m a i n t a i n t h e i r recent r a t e of economic growth
they w i l l need at l e a s t a doubling of economic aid to finance the b a l a n c e -
of-payments deficit due solely to the i n c r e a s e d p r i c e of o i l .
T h e r e a r e only three ways out of the i m p a s s e :
- - F i r s t , the L D C s w i l l have to r e s t r i c t i m p o r t s or reduce

domestic demand, i f they cannot finance the i n c r e a s e d
d e f i c i t . This means m o r e unemployment, a l o w e r r a t e
of economic growth, if any, at home, and i n c r e a s e d
deflationary p r e s s u r e on the developed countries.
--Second, the usual aid donors could double or t r i p l e

t h e i r aid d i r e c t l y or provide a s p e c i a l c r e d i t f a c i l i t y
in the I M F or W o r l d Bank for loans to the L D C s . The
o i l producers could provide the financing and would ask
for guarantees on their investments plus a reasonable
r a t e of r e t u r n .
This approach has serious drawbacks. The L D C s a l r e a d y have

too heavy a burden of indebtedness. T h e i r a b i l i t y to r e p a y new
loans is seriously in doubt. And, such loans would not finance
capital i m p r o v e m e n t s which would r e s u l t in future i n c r e a s e s in
output, but would m e r e l y finance c u r r e n t consumption. Thus,
the liklihood is that there would be defaults on the new loans
leaving the I M F or W o r l d Bank and, consequently, the m a j o r
developed countries with another burden in addition to the one
placed d i r e c t l y on them by the oil p r o d u c e r s .
- - T h e t h i r d way to m e e t the L D C s p r o b l e m is for the o i l

producers to finance d i r e c t l y the i n c r e a s e d b a l a n c e - o f -
payments deficits of the L D C s . The o i l producers created
this special p r o b l e m , they ought to be p r e p a r e d to help
ease i t . They have ample financial r e s o u r c e s to help.
V. Another Look at the N u m b e r s
It is most unlikely that the projections for 1974 in this r e p o r t w i l l

actually be r e a l i z e d . T h e r e a r e three basic reasons for this:
- - F i r s t , it is unlikely that the less developed countries w i l l be able to

finance a l l of the i n c r e a s e d cost of i m p o r t e d o i l . Thus, t h e i r i m p o r t s w i l l
l e s s - - a s w i l l their d e f i c i t - - t h a n the projections in table 3.

310
CRS-10
- - S e c o n d , the sharp i n c r e a s e in o i l p r i c e s is l i k e l y to r e s t r i c t d e -
m a n d . The F i r s t N a t i o n a l City Bank e s t i m a t e s , roughly, that the 140
p e r c e n t i n c r e a s e i n p r i c e s since October w i l l r e s t r a i n w o r l d demand by
some 10 p e r c e n t in 1974. In addition, conservation m e a s u r e s , p r i n c i p a l l y
in the United States but e l s e w h e r e as w e l l , w i l l also cut demand.
- - T h e drop in the demand for o i l w i l l be r e f l e c t e d in a f a l l i n p r i c e .

T h i s is put at roughly $2 p e r b a r r e l .
The i m p a c t of these f a c t o r s on the i n c r e a s e in earnings of O P E C

countries is s u m m a r i z e d in table 4, below.
T a b l e 4. - - T h e I n c r e a s e i n CXI E x p o r t s of O P E C Countries, 1974

(billions of d o l l a r s )
From From
OECD non-OECD
countries countries Total
P o t e n t i a l r i s e in r e c e i p t s $50 $10 $60

F a l l in demand due to high p r i c e s - 8 - 2 - 10
A s s u m e d $2 p r i c e cut in June 1974 - 8 - 2 - 10
A c t u a l i n c r e a s e in r e c e i p t s 6 40
A m o u n t spent on i m p o r t s - 8 - 2 - 10
A v a i l a b l e f o r investment 4 30
Source: Monthly Economic L e t t e r , F e b r u a r y 1974, F i r s t National City Bank.
The r e s u l t a n t s t r a i n on the w o r l d economy and the policy options a r e not

significantly changed by even such a m a j o r change in the financial e s t i m a t e s
f o r 1974.

CRS- 3K3
AppendixPetroleum E x p o r t i n g C o u n t r i e s : O i l E x p o r t s and Revenues
Exports: M i l l i o n Barrels a Year: Revenues: $/Barrel Total Oil Revenues: Million

1972 1973 1974 1972 1973 1974 1972 1973 1974
Arab C o u n t r i e s with
capacity 4,,897 5 , ,270 5,,125 1 . ,509 2. ,19 7. 32 7, ,390 1 1 . ,524 37,516
Saudi A r a b i a 2,,163 2,,664 2,,600 1 . ,437 2,.06 7.,00 3,,107 5 , ,500 18,200
Kuwait 1,,176 1,,022 1,,000 1. ,409 2. .02 6 . .90 1,,657 2,,064 6,900
Abu Dhabi 384 425 425 1.,434 2..09 7..15 551 890 3,039
Other Pers. Gulf 361 393 410 1. ,323 1..96 6 , ,85 477 770 2,808
Libya 813 766 690 1.,966 3..00 9. .52 1,,598 2 , ,300 6,569
O t h e r Arab Countries 815 1.,095 1,,235 1.,700 2,.58 7,,67 1,,386 2,,832 9,472
382 680 00
Iraq 850 1,,507 2,.50 7,,10 576 1,,700 6,035
O Algeria 373 365 330 1,,877 2,.74 9,.00 700 1,,000 2,910
Other 60 50 55 1,.833 2,,65 8..50 110 132 467
Other Countries 4,,377 5:,085 5,,485 1,.587 2,.47 7, . 8 8 6,,945 12,,580 43,209
Iran 1.,752 2,,080 2,,280 1..358 2,.16 6. .95 2,, 3 8 0 4,,500 15,846
Nigeria 628 730 850 1..870 2,.90 8,.80 1 ,174 2,,117 7,480
O t h e r W. A f r i c a 81 93 120 1..870 2,. 9 0 8,.80 151 270 1,056
Venezuela 1., 1 3 3 1:, 1 6 8 1,, 1 3 0 1,.719 2,.57 8 .55 1 ,948 3,,000 9,661
O t h e r L a t i n America 82 110 125 1,.719 2,.57 8,.55 140 383 1,069
Indonesia 330 475 560 1,.748 2,. 5 3 8,.65 577 1,,200 4,844
O t h e r Far East 67 79 90 1,.748 2,. 5 3 8,.65 117 200 778
USSR & E. Europe 304 350 330 1.500 2,. 6 0 7,. 5 0 458 910 2,475
OPEC 9,,495 10,,768 11,,125 1..553 2,.32 7,.58 14,,745 25,, 0 4 1 84,352
World T o t a l 10,,089 11,, 4 5 0 11,,845 1..558 2,.35 7,.57 15,, 7 2 1 26,,936 89,725
Note: The d a t a f o r 1972 a r e a c t u a l ; f o r 1 9 7 3 , e s t i m a t e s ; and f o r 1 9 7 4 , projections.

Source: F e d e r a l Reserve Board, J a n u a r y 9 , 1974.


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INTERNATIONAL PETRODOLLAR CRISIS

SUBCOMMITTEE ON INTERNATIONAL FINANCE

COMMITTEE ON BANKING AND CURRENCY

JULY 9, AND AUGUST 13, 1974

Printed for the use of the

U.S. GOVERNMENT PRINTING OFFICE

Digitized for FRASER

W R I G H T PATMAN, Texas, Chairman

SUBCOMMITTEE ON INTERNATIONAL FINANCE

HENRY B. GONZALEZ, Texas, Chairman

Digitized for FRASER

Bennett, Hon. Jack F., Under Secretary of the Treasury 5

Board of Governors of the Federal Reserve System, statement presented

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Digitized for FRASER

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STATEMENT OF HON. JACK F. B E N N E T T , UNDER SECRETARY

M r . B E N N E T T . M r . Chairman and members of the subcommittee, I

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t h a t the oath w h i c h Secretary Simon w i l l administer to me today w i l l

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as a counterproductive measure. Moreover, even apart f r o m the p o l i t i -

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temporarily invest i f they are to sell their o i l at the most r e w a r d i n g

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provide 4- to 7-year credit assistance t o a i d nations i n adjusting to

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STATEMENT OF JAMES P. GRANT, PRESIDENT, OVERSEAS

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supply f r o m the U n i t e d States and elsewhere. T h e I n d i a n wheat crop

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Digitized for FRASER

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Statement of James P . Grant*

The International Petrodollar Crisis .

M r . Chairman and Members of the Committee:

I welcome this opportunity to testify at your Invitation before the

House Banking and Currency Subcommittee on International Finance on the

consequences and Implications of the International petrodollar crisis that

developing countries and for U.S. policies. My comments might be sum-

marized briefly as follows:

F i r s t , any meaningful assessments must take Into account the fact

as a result of major short-term factors such as drought and w a r , they

nevertheless are primarily a consequence of the unparalleled economic

physical system and of relatively inflexible political and economic structures.

modity suppliers and creating a new International economic and political

order; It requires the development of new International systems, structures,

Digitized for FRASER

Second, better means must be found for recycling funds in adequate

jured industrial and developing nations.

a. For those currently able to pay commercial rates, such

greatly expanded version of the "oil facility" recently established by the

I M F to assist hard-hit countries meet financial difficulties resulting

to enable the hard-hit countries to increase their earnings f r o m the

b. The most severely affected developing countries require