Changing the Rules

One month after the latest international monetary crisis, Cabinet officers, legislators and bankers on both sides of the Atlantic are intensely debating a lengthening list of ideas for changing the global financial system. The discussion will heat up this week, first at a meeting in Basel of central bankers from the world's ten leading industrial nations, then at a gathering in Luxembourg of European Common Market ministers. All participants recognize that the makeshift measures that allayed the most recent crisis are not enough. Unless more fundamental changes are begun, there will be a new upheaval --sooner rather than later.

The monetary system can move either toward greater rigidity, with spreading controls on the movement of capital, or toward greater flexibility, with more frequent shifts in the exchange rates of big-time currencies. Proposals are being made in both directions. Many of the discussions are as secret as sin, to prevent speculators from gaining fortunes after sniffing out future changes. As University of San Francisco Economist Frederick Breier says: "In the old days, two subjects were taboo: sex and exchange rates. The first taboo has been lifted, but the second should not be." Still, many details of the proposals have filtered out. A rundown on some of them, from most rigid to most flexible:

THE EUROCRATS' PLAN. The Commission of the European Common Market is plugging for its six member nations to put up barricades against foreign speculative money by adopting capital controls. A new report by the Commission, so far available only in French, proposes that foreigners should be charged for the privilege of depositing money in Common Market banks, instead of collecting interest on those deposits. The Commission also suggests a double standard for exchange rates, such as Belgium recently adopted, and West Germany is now considering for its superstrong mark. There would be one rate for "current" transactions (mostly export-import deals and tourist spending); another rate, presumably less favorable to foreigners, would cover loans, investments and other transactions. This would be financial isolationism with a vengeance, and the double-exchange-rate system sounds like an administrative monstrosity.

THE WIDER BAND. The mildest proposal put forward by advocates of flexibility is to scrap the International Monetary Fund requirement that nations must prevent the price of their currencies from varying more than 1% above or below their official dollar values. Germany and The Netherlands are already letting the mark and guilder float--that is, find their own values based on supply and demand. Robert Roosa, former U.S. Treasury Under Secretary, proposes that IMF members let their currencies fluctuate perhaps 2 1/2% above or below official value. Thus, small changes in the values of currencies could be made by the free market, and nations would not be forced into so many traumatic political decisions on formal devaluation or upward revaluation. Money speculation would also be riskier than it is now, because a speculator could lose up to 5% of the funds that he shifted into a currency that he thought would rise in price.

THE TRIFFIN PROPOSALS. Yale Professor Robert Triffin, a member of TIME'S Board of Economists, would change the feature of the monetary system that most infuriates Europeans. That feature is the ability of the U.S. to spill dollars abroad through balance of payments deficits in the knowledge that foreign governments must either buy up the surplus dollars or make painful upward revaluations of their own currencies. Triffin urges the Common Market countries and Britain to agree among themselves to set ceilings on the amounts of dollars that they will buy. If those ceilings were reached and surplus dollars were still drifting around Europe, the burden of adjustment would fall on the U.S. Washington would either have to buy back the unwanted dollars with gold or foreign-currency reserves or watch the value of the dollar fall in relation to European currencies.

For the longer term, Triffin suggests that the IMF establish a range of official reserves that each member country could hold. Nations with huge balance of payments surpluses, such as Germany and Japan, would not be able to go on piling up reserves. Once their hoards hit the top limit, they would have to stop selling their own currencies in exchange for dollars. Instead, they would have to let the value of their currencies rise by formal revaluation or through the operations of free trading. Deficit nations, such as the U.S., could not go on spending reserves in a battle to stave off devaluation. Once their reserves had fallen to the bottom limit, they would have to stay out of the exchange markets and let the value of their currencies fall.

THE FLOATING DOLLAR. Democratic Congressman Henry Reuss of Wisconsin two weeks ago introduced a "sense of Congress" resolution embodying the most radical ideas for reform. He would formally end the U.S. commitment to repurchase dollars from foreign central banks in exchange for gold at $35 an ounce. That would finally kill the hollow U.S. boast that the dollar is as good as gold. The U.S. does not have enough gold left to buy back much more than half the dollars held in West Germany alone. Once the dollar is freed from gold, Reuss would let it float until it finds its true value relative to other currencies. He seems to assume that the dollar's value would decline. His resolution would have the U.S. compensate foreign nations for losses in the value of the dollars that they hold in official reserves. Floating of the dollar, the currency that has served as the standard of value for all other non-Communist money, would represent the ultimate in flexibility. Opponents of the idea fear it also would bring chaos, with no one knowing from day to day what any nation's money was worth.

The Connolly Block. One major deterrent to greater flexibility is the position of the Nixon Administration. TIME Washington Correspondent Lawrence Malkin reports that Treasury Secretary John Connally has taken charge of U.S. monetary policy and turned it back toward notions of "defending the dollar" at all costs. The Government has shifted its attention from reforming the monetary system to attacking trade problems. Connally argues that foreign discrimination against U.S. exports prevents the U.S. from selling enough to the rest of the world to cover its military, tourist and investment expenditures overseas. It is this discrimination, he says, that perpetuates the nation's balance of payment deficits.

A further lowering of trade barriers is indeed necessary. But the Washington line has two deficiencies. Connally has made no hint of reciprocal U.S. trade concessions, and Europeans resentfully interpret his talk as a challenge to start a knock-down fight on trade. Though trade is important, monetary reform is, too. Even in an ideal world of unrestricted trade, the present monetary system is too rigid and dated to stand unchanged.

This file is automatically generated by a robot program, so reader's discretion is required.