Floating Furor

Since early 1973, the world's major currencies have been "floating"--that is, how many U.S. dollars or Japanese yen a German mark, say, can buy has been determined by the forces of supply and demand in foreign exchange markets and not, as in the past, by government fiat. The system seemed to work well for a while. Now, however, a growing number of Europeans are concluding that floating rates have been a failure. The harshest critic has been France, which last week ceased to allow the franc to float freely against all other money. Instead, it will rejoin a European fixed-rate scheme known as the snake-that ties the values of seven currencies to each other.

Many policymakers and bankers in Europe are assailing floating rates partly on the argument that they have not, as promised, ended speculative swings in world currency markets. Instead, currency fluctuations have intensified (see chart) and losses as the result of miscalculations have grown larger. Banks such as Banque de Bruxelles, Lloyds, the Union Bank of Switzerland and the now defunct Franklin National in the U.S. lost heavily last year by guessing wrong about which way--or how far --rates would float. So did some corporations that have tried to hedge against fluctuations by contracting to buy and sell currencies at a future date: ITT lost $48 million in foreign exchange transactions in 1974. Moans one multinational executive: "All the Harvard Business School techniques are worthless when exchange rates can move by 20% in a matter of months."

Another criticism is that floating rates have not helped to solve international trade problems. Britain, for example, continues to run huge deficits despite a downward float of the pound. Its woes underscore perhaps the most basic charge against floating rates: that they encourage nations to spend more than they earn, in the false hope that a cheaper currency will correct major economic weaknesses by encouraging exports and holding down imports. In reality, says University of Chicago Economist Arthur Laffer, currency fluctuations "never solve fundamental problems."

Although floating rates have not lived up to expectations, they did help currency values adjust to the shock of quintupled oil prices in 1973 and early 1974. Partly for that reason, there is no agreement that others should now follow France's lead and shift back to fixed rates. Says Treasury Secretary William Simon: "The old system was abandoned | for one simple reason. It didn't work." Clearly, it did not work at all well during the late 1960s and early 1970s, when the industrialized nations I lurched from one chaotic monetary crisis to another. Members of the International Monetary Fund meeting in Washington next month are expected to study ways of refining the floating-rate system, but they are unlikely to decide to put the world back on strict fixed rates any time soon.

*The snake--so named because of the way its currencies wiggle together against outsiders' money --includes the Benelux and Scandinavian countries along with West Germany. France, a charter member when the snake was formed in 1972, dropped out early last year.

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