Aquarius in the Foreign Exchanges

After years of teetering precariously from one crisis to another, the international monetary system has begun to display surprising strength and adaptability. Late in July, members of the International Monetary Fund agreed to create a new form of money, called Special Drawing Rights, that will help finance the-continued growth of world trade. In August, France devalued the franc without causing any real tremors. Last week the value of one of the world's most important currencies, the West German mark, was established not by government fiat but by the free market.

The results not only were successful for Germany but also moved the world a long step toward a much-needed reform of the monetary system. The reform should open the way for fewer wrenching devaluations of currencies and greater flexibility in the prices at which they are bought and sold.

No Way Out. The Germans did not intend anything quite so grand. They simply could not think of any other way to stave off a speculative crisis. Convinced that a new socialist government would raise the value of the mark, speculators clamored to buy German money. In just 90 minutes of trading on the morning after the election, $250 million poured into the Bundesbank from abroad. The outgoing Kiesinger government was in no position to stanch the flow by making the mark more expensive; that is the sort of basic decision traditionally left to the new government. Instead, the Bundesbank freed the mark to be traded at just about any price that buyers were willing to pay. The IMF cooperated by ignoring the rule that governments must maintain their currencies within a 1% margin above or below the fixed-exchange rates.

According to generally accepted financial theory, this should have been an invitation to disaster. The assumption behind the IMF fixed-exchange rules is that uncertainty about what a major currency is worth from day to day will paralyze world trade and investment. Instead, trading in German money was heavy but orderly, and the mark's price rose 6%, to about 2610. Britain's Exchequer Chancellor Roy Jenkins summed up the situation as "very calm, all very calm."

Shift to Realism. Moneymen seemed relieved that Germany would no longer try to keep the mark at the unrealistically low price that had allowed the country to pile up enormous trade surpluses to the detriment of the economies and currencies of other nations. As the mark rose, the French franc dipped, then climbed back at week's end. Traders saw new hope that the combination of the recent 12.5% French devaluation and an eventual German revaluation would add up to almost a 20% shift in the official values of the two currencies--making the difference in their formal exchange rates accurately reflect the gap in their real worth. The British pound, which used to sink on any hint of monetary uncertainty, rose last week. Britain's success in achieving a balance of payments surplus this year has strengthened a growing conviction that the pound might really be worth its $2.40 official value.

Whether the calm will last depends largely on how soon, and how much, the new German government will raise the mark's official value. If the Bonn government revalues the mark by less than 6%, many experts think that it will still be underpriced. On the other hand, a realistic mark revaluation would just about complete the needed realignment of the official values of key currencies that began with Britain's 1967 devaluation.

Band and Peg. The international monetary system is being strengthened in other ways. At their annual meeting last week in Washington, officials of the 113 IMF nations agreed to begin study of two plans for making currency exchange rates more flexible. One scheme, the "wider band," would allow the currencies to fluctuate more than 1% above or below official value, as the mark is doing now. The other idea, the "crawling peg," would provide for small but frequent revaluations.

The IMF nations also gave final approval to the size of the first batch of Special Drawing Rights that they will create: $9.5 billion over three years. This amount will be added to world reserves of gold, dollars and pounds, now $74 billion. The SDRs will be neither minted nor printed, but will be handled only as bookkeeping entries. They will give nations a new type of asset that can be deliberately created in whatever quantities are necessary to keep world trade moving briskly. The most obvious alternative for expanding world reserves would have been to increase the price of gold and thereby devalue the dollar. But hardly anyone seriously advocates a gold price rise any more.

It might be a little early to begin singing of the dawning of a financial Age of Aquarius, the zodiacal symbol of peace, harmony and understanding. Too many uncertainties remain. Moneymen, however, agree that prospects for a much-needed period of relative tranquillity in the international monetary system have not looked so bright for years.

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