AWelcome U.S. Initiative

MONEYMEN have never been short of ideas for a new global financial system to replace the old one that creaked to a breakdown last year. But the world has been drifting toward division into hostile monetary blocs for lack of political leadership to start the hard job of building a flexible system that would better encourage international trade, investment and tourism. Last week that initiative finally came--happily from the U.S. The Nixon Administration is in a strong position to push bargaining along because America is at last shrinking its gigantic balance of payments deficit (see chart).

President Nixon appeared before central bankers and finance ministers of 124 countries gathered in Washington for the annual meeting of the International Monetary Fund, and he promised that the U.S. would put forward proposals for monetary reform. The next day Treasury Secretary George Shultz outlined in surprising detail a system in which the dollar would lose its once almighty role as the world's basic trading and reserve currency.

In the Shultz prospectus, the dollar would be largely replaced as a reserve money by Special Drawing Rights, the so-called S.D.R.s or "paper gold" issued by the IMF. The values of all currencies, including the dollar, would bob up and down frequently by means of small devaluations and revaluations. Countries that ran persistent balance of payments surpluses, as well as those that suffered endless deficits, would be subject to international pressure to get back into equilibrium.

Every one of these suggestions had been heard before from academic economists--but now Shultz was putting the prestige of the U.S. Government behind them. West German Finance Minister Helmut Schmidt acclaimed the proposals as "the coherent platform we have so long waited for."

Shultz's new world would be one of greater uncertainty for traders and the money speculators, who range from small-time investors to the treasurers of multinational corporations. In fact, the Secretary told newsmen that one of his aims is to "throw all sorts of curve balls, spitballs and sinkers at the speculators." But Shultz's world would also be a place in which changes in currency exchange rates would occur in small steps in accordance with internationally agreed-upon rules rather than through a series of wrenching crises.

To begin making the dollar just another currency, Shultz would have every country quote the official price of its money not in dollars, as is done now, but in S.D.R.s. That technical change would enable the dollar's price to swing as widely as any other money in trading on exchange markets. At present, for formidably complex reasons, the number of Italian lire that is required to buy a German mark can shift up or down by as much as 41% , but the dollar's price in marks, lire or any other money can change no more than 21% without formal revaluation or devaluation. The Treasury Secretary would also eventually replace dollars with S.D.R.s as the money that other nations use to settle international debts and hold in their monetary reserves. The shift would not be mandatory; nations that wanted to go on keeping their reserves mostly in dollars could do so. But Shultz urged "careful study" of a special issue of S.D.R.s to buy up any of the $60 billion poured out by past U.S. balance of payments deficits that other countries want to get rid of. In effect, the IMF would purchase unwanted dollars from central banks with S.D.R.s created specifically for that purpose. No one is sure what the IMF might then do with the dollars.

Releasing the world from overdependence upon the dollar is only half the problem. The other part is writing what Nixon called better "laws of the house" to govern future changes in formal currency values. That task presents a special dilemma. The rules will have to be definite enough so that they cannot be easily evaded, but the right of every nation to fix an official value for its money is a precious attribute of sovereignty that no country will readily surrender. Shultz's solution is to define conditions under which a strengthened IMF could demand that a nation change its financial policies but give the affected country a wide range of choices as to just what changes to make.

A country like Japan, for instance, which piled up huge reserves by running enormous surpluses in world trade, could be warned by the IMF to stop. The country could then get rid of its excess money by increasing foreign aid to less-developed lands or by opening its markets to more imports. Alternatively, it could increase the value of its currency, preferably through small but frequent changes. A country in persistent deficit, like the U.S., could curb its foreign spending, raise interest rates to keep more money at home or devalue its money with no financial or political stigma attached. Or a country could let its currency "float"--that is, fix no official value but let supply and demand determine the price. If an errant nation refused to do anything at all, the IMF could impose penalties. It could decline to lend reserves to the deficit nation, in effect cutting off that country's credit. In order to punish a country with too much surplus, the IMF could permit other nations to clamp special tariffs on exports from the offender.

Had this policy ruled during the past decade, the Japanese yen probably would have been revalued several times, and the dollar devalued equally often. Those moves might have avoided the crisis that forced dollar devaluation and yen revaluation last winter after damaging relations between the two countries.

Much important detail remains to be filled in to finish this grand design. The precise place of gold in the system is still a question. (Shultz said only that the metal should play a "diminishing role.") Great mechanical problems will have to be solved before the Nixon Administration's ideas can be put into effect. Quoting the prices of currencies in S.D.R.s, for instance, now looks like an exercise in fantasy. S.D.R.s cannot be used to buy or sell any other money because they are never minted or printed; they exist only as bookkeeping entries in each nation's account with the IMF.

Sun No More. A more fundamental question is whether the dollar really can be treated no differently from the franc, mark, yen or lira. The dollar can no longer be the sun around which the entire monetary system revolves because the U.S. has lost the overwhelming financial dominance that it enjoyed in the 1940s, when the old system was created. But the American economy is still strong enough to make the dollar at least first among equals.

At minimum, though, Shultz has freed U.S. policy from the aggressively nationalistic line pursued by his predecessor John Connally. Connally adamantly refused to pledge that the U.S. would make the dollar convertible again --that is, buy back new dollars that other nations acquire in dealings with the U.S. and wish to exchange for gold, S.D.R.s or other assets. Shultz confided to reporters last week that his speech-writers tried several circumlocutions to hint--without quite saying it--that the U.S. would restore convertibility once its international payments came back into balance. Instead, the Secretary decided simply to make the flat promise that Connally never would.

Negotiations will now proceed in the IMF's Committee of Twenty, a group of officials of the developing nations and the rich, non-Communist countries. The aim is to produce principles for a monetary system that the IMF could formally adopt at its annual meeting in Nairobi a year from now. Secretary Shultz has outlined a balanced and flexible system that holds real promise for bringing the world out of its monetary muddle.

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