The Dollar: A Power Play Unfolds

DURING the last quarter-century of worldwide turbulence, businessmen, traders and travelers have come to rely on a seemingly immutable fact of life. The U.S. dollar has remained the one major currency with an unquestioned and stable international value. Last week all that changed--perhaps forever.

With shocking swiftness, President Nixon's dollar defense measures knocked the pins out from under the non-Communist world's monetary system. Foreign government leaders, many of whom were on vacation, went scrambling to salvage some order out of the enveloping chaos. Canadian Prime Minister Pierre Trudeau broke off a holiday cruise off Yugoslavia and returned to Ottawa to assess the impact of the Nixon moves. On the French Riviera, French Prime Minister Georges Pompidou cut short his vacation to hurry back to Paris for emergency meetings. In Tokyo, hasty phone calls summoned traveling Japanese Cabinet members back to the job.

The frenetic activity was set off by Nixon's radical moves to sever the dollar from gold and levy a 10% surtax on imports. The former started a worldwide monetary crisis, and the latter threatened to bring forth retaliatory tariffs from all of America's trading partners. With the dollar dethroned as the world's dominant currency, everybody was looking for something that could replace it.

Constellation of Currencies. Washington cut the dollar's tie to gold by serving notice that it will no longer cash in foreign-held dollars for gold bullion held at Fort Knox. Ever since 1944, when the present monetary system was devised at Bretton Woods, N.H., the dollar has had a special and internationally unique relationship to gold. Technically, gold is the asset by which nations pay their debts to one another. But practically, under the rules of the 118-nation International Monetary Fund, which evolved from the Bretton Woods conference, dollars are actually the medium of exchange through which nations settle those debts. The system was made possible by a promise from the U.S. Treasury to redeem dollars for gold at $35 an ounce. Because of that promise, IMF member nations had been assured that whenever they wanted gold in exchange for the dollars that they held as payment of debts, all they had to do was ask the Treasury Department in Washington.

U.S. gold reserves have dwindled steadily as a result of the nation's balance of payments deficits in seven out of the last ten years. When Nixon got a look at the figures for the first six months of this year, he knew that drastic action was necessary. Last week the Department of Commerce released those figures: the U.S. ran a record first-half deficit of $11.6 billion. At that rate, the deficit would be $23 billion by year's end.

Foreigners held three times as many dollars as the U.S. was capable of redeeming in gold, and they were demanding more and more gold because they were losing confidence in the U.S.'s will or ability to whip its economy into order. To prevent a run on Fort Knox, the President thus declared that the nation would no longer exchange dollars for gold.

That meant that the dollar was no longer as good as gold. Thus foreigners had to sell their dollars in money markets for whatever they could get. Since a surfeit of dollars was sloshing around the world already, they could not expect to get much. In effect the dollar had been devalued.

The move will help the U.S. increase its exports, since American-produced computers, heavy machinery, jet planes, farm goods and other items will now be cheaper overseas. Over the long haul, the dollar devaluation will benefit countries from which the U.S. buys goods because Americans will have to pay more dollars for the things they import. In the short run, however, countries such as Germany and Japan, which now hold $27 billion as part of their national reserves, will take a beating. The value of their dollar assets is expected to shrink, perhaps by as much as 12% to 15%, as the prices of their own currencies rise. The only way foreign holders of dollars will be able to get full value for them is by spending them for American goods or services, or investing in U.S. securities.

Economic Imperialism. In one sense the monetary crisis was clearly the most pressing problem. But the 10% surtax on U.S. imports foreshadowed potentially far more dangerous consequences. Protective tariffs in the early 1930s divided the world into trade blocs that brought international commerce almost to a standstill and gave a major impetus to the growth of economic imperialism in Europe and the Far East. For the past 25 years, the U.S. has championed free trade and economic internationalism. Observed the London Daily Telegraph: "The danger of Mr. Nixon's approach to the dollar's longstanding problems is that it is self-evidently protectionist and as such invites retaliation."

The surtax breaks both the letter and the spirit of the international General Agreement on Tariffs and Trade. As a result, the U.S. now finds itself defending actions of a sort that it has criticized others for in the past. The 55-member GATT council is scheduled to meet in an emergency session this week to deal with the potentially explosive situation.

To justify the surtax, the U.S. has cited GATT Article 12, which allows temporary restrictions in case of severe balance of payments deficits. But the provision permits only quotas, not surtaxes. Thus, the U.S. is relying largely on a precedent set by Britain in 1964 when it posted a 15% import surtax (later reduced to 10%) and kept it for two years.

The surtax will have an impact throughout Europe. The effect will be especially pronounced in West Germany, whose floating Deutsche Mark has risen by 7% since May in relation to the dollar. Though only 9% of all West German exported goods go to the U.S., they tend to be concentrated in key industries--autos, machine tools and chemicals. The surtax will have an even more damaging effect in Japan, which sends 30% of its exports to the U.S. These may be cut by as much as $1.4 billion, out of a total of $7.2 billion. Last week a near panic swept through the Japanese financial world. The Tokyo Stock Exchange average plunged a full 20% before a minor technical rally brought it up again at week's end. Said Hideo Shi-nojima, president of Mitsubishi Chemical Co.: "We had not expected such a drastic measure as the 10% surtax. In effect it means the yen has already been revalued so far as Japan's trade with the U.S. is concerned."

If this trade is badly impeded, more people than the Japanese will be hurt. Australia sells about $700 million worth of iron ore and wool to Japan's export-oriented factories. Australians stand to suffer if the Japanese are forced to reduce their shipments of steel, autos and textiles to the U.S. The maritime nations--Norway in particular--will also lose. Norwegian shipowners hold close to $4 billion in long-term international shipping contracts, with the prices fixed in dollars. If the dollar is devalued by, say, 10%, they could lose as much as $400 million.

"Not Again." The Japanese found more to complain about than just the surtax. In July, the government of Prime Minister Eisaku Sato was stunned when the Administration gave the Japanese leader only three minutes' advance notice of President Nixon's Peking announcement. Last week, because of a foul-up in finding an interpreter, Washington allowed Sato only a ten-minute warning of its latest bombshell. After Secretary of State William Rogers broke the news to him by phone, the shaken Prime Minister simply shook his head and muttered: "Not again."

A major purpose of the surtax is to force the Japanese to increase the value of the yen. The exchange rate of 360 yen to the dollar, set when the Japanese economy was struggling to recover from war and inflation, does not reflect Japan's startling economic growth since then. As a result, Japanese businessmen are now able to sell exports to the U.S. at extremely low prices. Confirming their worst fears, Under Secretary of the Treasury Paul A. Volcker has hinted that the surtax might be lifted gradually as governments revalued their currencies upward against the dollar. Caught between the surcharge and revaluation, a weary Sato sent a mission to Washington to learn the terms under which the surcharge might be lifted. But by week's end, seeing that no other government had taken the initiative in revaluing, the Japanese settled back to wait and see.

Political Squabbling. If the surcharge is to be removed, hard bargaining will be necessary for all the U.S.'s major trading partners. For one thing, the U.S. is asking that the countries benefiting from American military protection assume more defense costs. The Administration also wants its allies to give American exports the same access to foreign markets that the U.S. traditionally gives to foreign imports. This demand is aimed directly at the Japanese. Extremely tight restrictions on imports and foreign investment make it almost impossible for American businessmen to sell their goods or set up their factories in Japan.

What the world now faces is a suspenseful period in which some major currencies will bob up and down and trade may be temporarily impeded because of confusion over what different monies are really worth. At week's end Europe's official currency exchanges remained closed, though most are scheduled to reopen this week. In West Germany, The Netherlands and some other countries, the dollar was floating against local currencies. It was worth whatever buyers were willing to pay for it from minute to minute. France decided to adopt a two-tier system. The French Central Bank will continue to give the official rate of 5.6 francs to the dollar to exporters, importers and other businessmen for legitimate commercial deals. But it will give a lower, floating rate, based on supply and demand, to tourists, investors and speculators.

To find a way out of this mess, bankers and finance ministers will hold a series of meetings at which the drink of the day will not be champagne but Alka-Seltzer. The Common Market's finance ministers will huddle in Brussels on

Sept. 13, or perhaps sooner, in an attempt to devise a coordinated strategy for revaluation. An initial meeting last week broke up in bitter squabbling between the representatives of France and Germany. Europe's ministers are gloomy, expecting that no one will want to agree to basic changes until the IMF holds its annual conference in late September in Washington. That meeting will be the most important in the IMF's stormy history. Last week IMF officials openly criticized President Nixon's refusal to devalue the dollar directly by raising the price of gold rather than indirectly by relying on other countries to move the value of their own currencies upward. The IMF and its member nations must come up with a way to "set up an urgently needed new monetary system."

The gold-exchange idea that was devised at Bretton Woods has been so badly shaken that it cannot survive. Says Robert Triffin, a leading international money expert and a member of TIME's Board of Economists: "Perhaps the best thing about the Nixon economic package is that it has at last brought into the open the need for reform. Finally the world has been forced to look the problem in the face, instead of trying to patch up the system." Local Supremacy. In the chancelleries and the countinghouses, there is much talk of bringing more flexibility to the system. One way would be to introduce--in the jargon of the moneymen--"wider bands" for currencies. Instead of being able to move up or down only 1% from their officially stated values, currencies would be able to fluctuate within the range of, say, 2% or 4%. In that way, they could temporarily rise or fall in value without forcing nations to make wrenching official revaluations or devaluations.

Nations also need a new medium of exchange to replace the dollar as the world's central reserve currency. Says Triffin: "The world is now moving toward a new system in which neither the dollar nor gold will play the key roles that they have in the past. In the long run, the dollar will be supreme in its trading area, which includes Latin America and Canada, and European currencies will be supreme in the Common Market."

Another Keynes. Economists and finance ministers are also discussing a system by which all industrial nations would contribute some of their own currencies and gold to the IMF, which would then create and administer a sort of "supermoney." It would not take the form of paper bills but, like the IMF's current Special Drawing Rights, would simply be a bookkeeping supplement to the existing gold supply.

The supermoney would expand automatically as the world's need for trading currency expands--something neither gold nor S.D.R.s now do. And because the supermoney would be backed by many nations, it could not be undermined by the economic policies of any one nation. For years the strength of the dollar has been steadily undermined by the U.S.'s inflationary policies.

It is clear that the dollar has ceased to be the most prized currency, and that the world is at a monetary turning point. At Bretton Woods in 1944, the prescient John Maynard Keynes proposed the creation of an international body that would issue and regulate an international money--something like a world central bank dispensing super-money. Economists are saying wistfully that the world needs another Keynes. Until he comes along, the original Keynesian idea is as good as any on which to build.

Internationalism or Isolationism

The hidden danger in the latest world monetary crisis is that if it is not resolved quickly and well, the world could tumble into a period of economic isolationism.

The now-shaky monetary system has served nations well for most of the past quarter-century, spurring the movement toward internationalism in economic affairs. It has led to a huge growth in world trade, to the free exchange of currencies and to the rapid expansion of multinational corporations.

As a result, people in many countries can easily buy Volvos, Nikons and Lowenbrau, invest in the stocks of Sony and Unilever, travel and change their money with ease. American corporations have set up plants abroad; Ford, Pepsi

Co., Du Pont, IBM, General Foods and thousands of other U.S. companies decorate foreign landscapes, creating jobs and contributing to the host country's prosperity.

Foreigners' Pique. Now all three of those major postwar developments--free trade, free exchange of currency, free investment--are threatened by a strong rise of economic nationalism. The present crisis endangers the free exchange of money and goods, and casts a shadow on the unimpeded flow of people and ideas.

Free trade is also threatened by the greatest surge of protectionism in the U.S. since the Smoot-Hawley tariff bill of 1930; last week, for example, the traditionally free-trading United Auto Workers Union announced that it was in the process of seriously reconsidering its position. Meanwhile, the growth of multinational corporations is threatened by foreigners' fears of "the American challenge" and their pique at President Nixon's unilateral actions last week.

Thus it becomes all the more important for nations to solve the current crisis quickly. The basic aim is not to figure out ingenious new ways to put more restrictions on the flow of goods and money but to reduce or remove altogether the obstacles to free trade that now exist.

Gnomes of Manhattan. There is an opportunity for sensible compromise, for example, by allowing the Japanese to sell more textiles or steel to the U.S., provided that they dismantle many of their trade barriers and permit American manufacturers to build plants and sell products in Japan. In the tough bargaining that lies ahead, there is equal opportunity for the U.S. to persuade the Europeans to eliminate some of their stiff trade restrictions by offering in return to remove some of its own. Among the candidates for repeal that are most unpopular with trading partners of the U.S. are the so-called "Ship America" act and the many similar expressions of the "Buy American" mentality.

Some sensible regulations will have to be devised to limit the completely free movement of capital across borders. As matters stand, the treasurers of multinational corporations--the gnomes of Manhattan--can and do send billions of dollars leaping across frontiers in a matter of hours.

In such transactions the receiver country becomes inundated with unwanted dollars, which aggravates its inflation and creates the kind of crises that broke out last May and this month. The time has come to conceive of international machinery for wisely regulating the money flow in order to prevent sudden, sharp disruptions.

In struggling toward some new mechanisms, however, the U.S. and its allies above all need to avoid sacrificing the freedoms that they have won over the past 25 years or so. The hard re-examination of the monetary and trade systems caused by the new Nixon plan will prove disastrous if it feeds the forces of isolationism. The crisis of the dollar is real and disturbing, but it also offers a fresh opportunity to promote international cooperation.

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