Defending the Dollar

"The need for responsible fiscal action on both taxes and expenditures has been compelling for months, but in the last few days, in the light of the British action, it has become absolutely imperative." Thus last week did President Johnson react to Britain's 14.3% devaluation of the pound.

Britain's move posed an immediate challenge to the stability of the dollar and the ability of the U.S. Government to defend it. It also gave Lyndon Johnson a new rationale to exert extra pressure for his proposed surcharge on income taxes. He lost no time trying, but he quickly discovered that what may strike him as imperative may strike Congress in quite a different way.

Only hours after the British decision to devalue was made known, Treasury Secretary Henry Fowler personally called on House Ways and Means Committee Chairman Wilbur Mills. The Administration, said Fowler, wanted to present a new proposal to Mills's committee concerning reductions in federal spending. What Fowler did not say, but plainly implied, was that those cutbacks represented the price that the President is now willing to pay to get his tax boost.

Arctic Frost. A few months earlier Mills might have welcomed the call from Fowler. Now he received it with arctic coolness; in fact, he had not met with both Fowler and the President since August. Mills has been insisting that a tax increase has to be matched by a decrease in expenditures. The Administration resisted, fearing that a cut of the magnitude demanded by Mills would gut federal welfare programs. One list of economies that was proposed would have eliminated vaccinations for children, and another would have slashed the school lunch and milk programs--proposals the Administration well knew would be unacceptable to Congress. "They haven't wanted to cut," complained a Ways and Means member. "They just want to show that it's impossible to cut."

When Lyndon Johnson's tax bill was voted on by the committee in October, it was shelved by an overwhelming 20-to-5 margin: Mills pronounced it "dead," resurrectible only if the President would make some reasonable proposals to reduce spending. Fortnight ago, in his celebrated "new style" press conference, the President said that Mills and others who had helped to pigeonhole the tax measure would "live to regret the day."

Dollar for Dollar. At Fowler's request, Mills scheduled a committee meeting with top Administration officials. But he immediately departed for an unhurried fence-mending trip to Arkansas, setting the date for the conference a leisurely ten days later, and then delaying it by still another day.* When the committee finally does convene this week, the Administration is expected to offer what White House Press Secretary George Christian described as a dollar for dollar deal. That is, for every dollar brought in by a surcharge on personal and corporate income taxes, the Administration would agree to cut $1 in Government spending.

Based on a surcharge of just under 10%, the additional tax revenues would total $7 billion. Spending, however, would actually be trimmed by closer to $4 billion, since the Administration contends that it has already cut $3 billion from earlier requests. The retrenchments, said Budget Director Charles Schultze, would be evenly divided between domestic programs and non-Viet Nam defense spending.

Though Fowler described a tax increase as "the single most important step" that the U.S. could take to maintain confidence in the dollar, Mills and many of his fellow Congressmen are loath to oblige him for the simple reason that their constituents, oblivious to the greater long-range danger of inflation, overwhelmingly oppose the prospect of a tax hike. Despite Senate Majority Leader Mike Mansfield's argument that Congress should stay in session until some action has been taken, Mills maintained: "The time the Administration has already waited in this regard makes action this year impossible."

Peeling Off the Cover. Action was being taken on other fronts. The Federal Reserve Board boosted the discount rate from 4% to 41%, largely to prevent U.S. funds from rushing to London to take advantage of the new 8% interest rate there. Major U.S. banks soon followed by raising their prime rates--the minimum interest rate charged to borrowers with the highest credit ratings--from 51% to 6%.

In the face of a speculative run on gold in Europe (see BUSINESS), the Federal Reserve Board may peel off the 25% "gold cover" that is now used to back up the dollar. The cover ties up $10 billion of the $13 billion in U.S. gold reserves, and its removal would ensure that the Fort Knox stockpile would not be depleted too rapidly. Because any increase in the current $35 per oz. price of gold would amount to devaluation of the dollar, the U.S. repeatedly reaffirmed its determination to hold the price steady--"down to the last bar of gold," said Federal Reserve Chairman William McChesney Martin. Said a Treasury aide: "We have to make it perfectly clear that we have the gold to meet any speculative move against the dollar."

Another move could be the imposition of stringent wage and price controls to check inflation and steady the dollar. Mansfield went so far as to urge the President to revive "Regulation W"--a severe limitation that restricted installment credit to $1,500 per person during World War II, and was reimposed with a $5,000 ceiling during the Korean War. But Fowler insisted that any such move "is not in the cards."

More for the Money. Since devaluation of foreign currencies is certain to put new strains on the already grave U.S. balance-of-payments problem, a sharp rise in U.S. exports would also help combat its effects; indeed, Fowler said the President plans to launch a drive in January to increase exports. Whether it will improve matters much is something else. The U.S. has long enjoyed a huge trade surplus, but its international accounts are in the red because billions of dollars go abroad annually in the pockets of tourists, in private investment, and in support of commitments ranging from aid for India to the war in Viet Nam.

In the past decade, U.S. gold reserves have dwindled by $10 billion, and devaluation abroad is likely to accelerate the outflow. For one thing, it will make some foreign imports cheaper for Americans while U.S. exports will be more expensive for the 23 nations whose currencies have been devalued. For another, it will certainly encourage more U.S. tourists to head abroad to take advantage of bargain prices in countries that have adopted minipounds or minipesetas. "Now Britain and Ireland give you more for your money," trumpeted Pan American World Airways in newspaper ads 36 hours after sterling was devalued. "Things that used to cost the equivalent of $1 now cost you only 86-c-."

Dwindling Reserves. Though tourists and stay-at-home bargain hunters may well save some money on things like British Jaguars and Irish linens, devaluation is likely to prove a severe drain on Lyndon Johnson's dwindling political reserves. If the President makes substantial spending cuts, he stands to lose votes among those directly affected. If he gets his tax increase, he stands to annoy everybody--and the closer to Election Day 1968 the increase is enacted, the more annoyance he is likely to arouse. Nevertheless, nearly all his economic aides--and many businessmen--consider the tax increase essential in order to avoid an inflationary burst that could destroy the dollar's viability in world trade and its purchasing power at home. Judging from the mood of Congress, he is not likely to get the increase without taking a fiscally responsible ax to some current federal spending.

* Mills may well be irked with the President for another reason as well. Last fall, when Johnson requested his help in passing a bill to suspend a 7% investment credit, Mills asked for a favor in return. "I want you to issue a proclamation proclaiming 'Duck Day' in Stuttgart, Arkansas," he drawled. At first speechless, Johnson finally replied incredulously: "You want me to proclaim 'Duck Day'?' "Yes," insisted Mills. "In Stuttgart, Arkansas." The President said he would. The investment credit was suspended, thanks to Mills's help. But somehow, Duck Day in Stuttgart never got proclaimed.

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