A New Rival to the Dollar?

PAUSING recently to change some currency at Paris' Orly Airport, a traveling Texan flourished a $10 bill and exclaimed: "This is real money." For decades the Texan's braggadocio has been largely justified. The dollar is the only big-power currency that has escaped devaluation since World War II. The non-Communist world runs not on a gold standard but a dollar standard. Other countries value their own money in terms of dollars, keep much of their reserves in dollars, and often settle international accounts in dollars. Confidence in U.S. money allows American traders and travelers to spend freely all over the globe. It also gives the Federal Government a unique freedom of action in economics and world politics: Washington has been able to spend luxuriantly for military aid and foreign aid because foreigners absorbed all the dollars that flowed abroad.

The era of dollar supremacy may well be coming to an end. Behind closed doors, financiers are trying to figure out ways to reduce the power of the dollar. At last month's International Monetary Fund meeting, French Finance Minister Valery Giscard d'Estaing caustically compared the world's reliance on the inflation-eroded dollar to the act of setting a watch "by a clock that is out of order." Last week a committee headed by Luxembourg's Prime Minister, Pierre Werner, handed in a report suggesting how the Common Market countries can create a new "Eurocurrency" that would acquire some of the privileges and powers of the dollar.

Hollow Pledge. Yale's Robert Triffin, a leading monetary expert and a member of TIME'S board of economists, says that the Europeans have decided to challenge the dollar's dominance because "the present system makes them dollar satellites." Under IMF rules, foreign central banks have no practical alternative but to support the value of the dollar by absorbing any surplus dollars that are offered in their own market places.

If the Bank of France, for example, failed to do this, the resulting glut of dollars in the hands of French bankers and businessmen would cause the value of the dollar to fall in France and the value of French francs to soar. The franc would rise not only in comparison with the value of the dollar, but also in comparison with the currencies of all other countries. This would raise the export price of Citroens, Camembert and other French products, hurting sales abroad. At the same time, the price of foreign goods sold in France would fall and imports would expand. To avoid all that, the Bank of France buys up surplus dollars. But in order to make those purchases it must increase the supply of French francs in circulation. Thus, France and other foreign governments correctly complain that they are forced to adopt inflationary policies to cope with the dollar flow. That flow has been large and steadily growing. Partly to finance enormous American investment in overseas industry, the U.S. export of capital has risen from about $9 billion a year in the early 1960s to almost $12 billion now. The U.S. pledges to exchange these dollars for gold any time that foreign governments wish to swap. Today the pledge is hollow because the U.S. gold stock is down to $11.8 billion, while foreign central banks hold $15.3 billion in U.S. money. If the nation were confronted by a big demand for conversions to gold, says Triffin, "everybody knows that we would suspend the rules of the game."

European moneymen can stem the dollar flood, but only if they work together. The most immediate prospect is that Continental countries will jointly revalue their currencies upward. Triffin expects such a move within six months to two years. He predicts that the Swiss, Belgians and Dutch will mark up their currencies by 4% to 5%, with smaller increases by the West Germans, French and Italians, and perhaps by the Austrians. The Japanese will also be under strong pressure to revalue the yen.

Technically, revaluations would leave the dollar's value where it has been since 1934: at $35 per ounce of gold. Nevertheless, the change would amount to a backdoor devaluation of the dollar, making it less valuable for the purchase of foreign goods and forcing U.S. tourists and businessmen to spend more for the same amount of foreign travel or investment. Still, many an American manufacturer would welcome revaluations because they would raise the price of imports into the U.S. and help American firms fight foreign competition in domestic markets. Conversely, revaluations should lower the price of U.S. products sold abroad, stimulate American exports and help to reduce the nation's chronic balance-of-payments deficit.

Common Currency. If the Common Market countries want to go further and create a Eurocurrency to rival the dollar, they will gradually have to give up much of their individual autonomy. For example, they would have to harmonize their policies that affect both inflation and economic growth rates. Ultimately, they would have to adopt a common tax system and jointly set national budgets. Having done all that, the Common Market could expand its present customs union into a full economic and monetary confederation. Thereafter, member countries would no longer be able to finance government deficits (except with the consent of the confederation) in the old, easy way by expanding their money supply. Instead, deficits would have to be met by higher taxes or government borrowing from individuals.

The process would require ten years at best. The Werner report envisages proceeding by stages, beginning with an effort to narrow the allowable fluctuations in exchange rates of Common Market currencies from the present 1 1/2% to 1.2%. Nationalistic jealousies, or even a surge of inflation, could stall the effort. In their negotiations to enter the Common Market, however, Britain, Norway, Denmark and Ireland have accepted the concept of economic and monetary union. Europeans are increasingly convinced, says Triffin, that this may be the only way for them "to regain monetary sovereignty already lost to the U.S."

The non-Communist world may well evolve into two huge trading and currency areas, one based on Eurocurrency and the other based on the dollar. European countries then would be able to refuse unwanted dollars without suffering painful consequences, because the resulting changes in exchange values would not disturb their trade with one another.

The prospective dethronement of the dollar does not greatly disturb the Nixon Administration. A European currency would further Nixon's goal of persuading other countries to bear more responsibility for global stability, if only because the steps necessary to create that currency would greatly increase Europe's economic efficiency. Fundamentally, a smaller role for the dollar fits the realities of a world in which the U.S. is no longer as dominant as it once was. "I am convinced," says Triffin, "that the Europeans mean business about creating a regional reserve currency. This is the beginning of a real revolution in the international status of the dollar."

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