Devaluation Jitters

The U.S. has been troubled for so long by inflation and balance of payments deficits that European money markets respond with knee-jerk nervousness to almost any news about the dollar. Thus, last week, the latest word from Washington sent money speculators scurrying to the major exchanges. Cause of all the excitement was a report issued by the Congressional subcommittee on international exchange and payments. Committee Chairman Henry Reuss of Wisconsin and his colleagues suggested that the U.S. dollar should be devalued --preferably by an upward revision in the price of strong currencies like the West German Deutsche Mark. Short of that, they would settle for unilateral action on Washington's part.

Reuss has voiced such recommendations repeatedly over the past few months and his report was quickly disavowed by the Nixon Administration, which has always refused even to consider devaluation. Even so, it convinced many money men that such a move might be secretly under consideration in Washington. Only two years ago, after all, President Georges Pompidou chose the depths of the August business doldrums to lower the value of the franc by 12 1/2%. Now, profit-seekers rushed to the Continent's central banks to exchange their greenbacks for currencies that would presumably rise if the dollar were devalued. The price of the dollar was forced down in France, West Germany, Switzerland, Italy and Britain. Other speculators traded hectically for gold, counting on an increase in its price if the dollar were devalued. At one point, the price of gold on the free markets rose to a new three-year high.

Wider Bands. To stem the dollar inflows, Switzerland's central bank ordered an emergency ten-day delay in the delivery of francs purchased with dollars. The hope is that speculators will be unwilling to tie up their money for that long. French and Belgian central bankers have recently ordered commercial members to turn down foreign deposits that appeared to be speculative --a job requiring detective work that is much easier to perform in the clubby world of European bankers than it would be in the U.S. The move could lead to a much wider "two-tier" exchange system, with separate rules for speculative and ordinary money flows.

Such measures may be effective for the short term, but inevitably they will also block the flow of some long-term capital investment. Moreover, they do nothing to solve the basic problem: the dollar's increasingly obvious overvaluation. The U.S. recently took one step toward reform by proposing a widening of the bands within which the currencies of nations belonging to the International Monetary Fund are allowed to fluctuate. If the U.S. proposal is accepted by I.M.F. directors at their annual meeting in September, the limits would be expanded from 1% to 3%, permitting an effective devaluation of the dollar by as much as 6%.

Just how long that move might halt the increasingly frequent runs on the dollar is uncertain. But it may be the only major reform possible in the immediate future. European nations are not anxious to lose export sales, as they would if they raised the value of their own currencies. In the U.S., the President cannot reasonably be expected to declare any kind of dollar devaluation until after the 1972 election.

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