Holding Up Somehow

Two new agreements governing international monetary exchange acquired their first patches and plugs last week, but they nonetheless held together. Following the shock of Britain's decision to set the pound afloat and thus allow traders to buy and sell sterling for any price that the market might bring, the Finance Ministers of London's prospective Common Market partners hustled into emergency session in Luxembourg. Struggling down disagreements, they made some decisions that calmed matters.

First, to preserve their own fragile unity, they reaffirmed that the value of Common Market currencies should stay fixed within very narrow margins and fluctuate only slightly in dealings among member countries. Beyond that, to preserve the Smithsonian agreement, which set the values of the major currencies in the non-Communist world last December, they agreed to buy up any dollars that flooded into their countries. Thus they headed off at least temporarily the possibility of still another dollar devaluation and protected the present values of other weak currencies. Still, there may well be new blowups ahead. A top officer of Zurich's Credit Suisse bank summed up the mood among Europe's moneymen: "We have some very hot days before us."

The mere appearance of faults in the system was enough to cause nervousness among millions of investors and tourists. The free market price of gold rose another $2.90, to $64.65 an ounce, as investors took their money out of weak currencies and bought the classic hard investment. On Wall Street, worries about the international money outlook, among other things, sent the Dow Jones average down 30 points in six trading days, though at week's end it recovered somewhat. In France, where distrust of currency is endemic, there was a flurry of investment in real estate and consumer goods. British tourists lost up to 10% of their buying power in foreign countries, nearly twice the official decline after the pound was floated. Because of the general uncertainty, Americans also had to accept discounts for their dollars in European restaurants, hotels and shops.

None of last week's steps eliminated the basic disparities between strong and weak currencies, notably the dollar. Speculators--and prudent businessmen --regularly shift their funds out of weak currencies and into strong ones (see box). The dollar is still quite weak, in part because the supply of U.S. money in foreign countries greatly exceeds demand. Until the supply can be brought down or controlled, the dollar's softness will be an unsettling force in the world.

From $50 billion to $70 billion are now sloshing around the world as a result of chronic U.S. balance of payments deficits. Since last August, when President Nixon froze U.S. gold reserves, foreigners have been barred from exchanging any of this paper for bullion. Washington's international red ink is still gushing; so far this year the U.S. deficit in trade alone is $2.7 billion --more than all of last year, when the nation posted its first trade deficit in the 20th century.

Europeans are understandably impatient for the U.S. to buy back its own currency somehow, if necessary by selling U.S. Government bonds abroad. For its part, the Nixon Administration is convinced that the U.S. is capable of running a healthy payments surplus --and thus of repatriating orphan dollars in the course of normal commerce --if only foreign nations would strip down some of their trade barriers against U.S. products. U.S. officials have thus sought to tie trade discussions to any negotiations on long-term monetary reform.

However, the Nixon Administration wants to hold off any real progress on monetary reform until after the presidential election and perhaps longer, depending on the U.S. balance of payment outlook. Many Europeans feel that they will be in a stronger bargaining position when the Common Market's monetary union, now just in its infancy, be comes more powerful. The danger in continuing to delay basic reforms is that both sides will keep on meeting each mini-crisis by tacking on still more restrictions on the international movement of capital, ultimately damaging world trade, tourism and investment. Last week West Germany, Switzerland and Japan imposed new restrictions on investments or bank deposits by foreigners in their countries, thus hoping to limit inflationary increases in their domestic money supplies. Should that pattern continue, by the time nations finally agree to start looking for lasting solutions, they may be facing each other across dangerously high barriers that retard economic freedom.

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