Hard U.S. Line for the Summit

A world monetary system based on floating exchange rates, so dear to the hearts of the Ford Administration's top economic and monetary officials, is giving them fits. Instead of smoothing adjustments in currency values, on occasion the market-based system is making them more erratic, and that is not the way it was supposed to work. Concerned by this unexpected twist, and by the fundamental international economic problems that lie behind it, U.S. officials decided it was time for a rerun of last fall's six-nation summit meeting at Chateau de Rambouillet.

Next weekend in Puerto Rico, the heads of state of six other major industrial nations -an insistent Canada was invited along with Germany, France, Britain, Italy and Japan -will gather at President Ford's request. The potential domestic political benefit of summitry in his struggle for the Republican presidential nomination has hardly escaped Ford. That, and the Italian elections, probably account for the timing. Whatever the motivation, there is no shortage of real-life problems crying for attention: the economic woes of Britain and Italy and their sagging currencies, the fragmented approach of the industrial nations to their economic negotiations with the developing world and, above all, how to manage the worldwide recovery in order to avoid a new surge of inflation.

Need For Cooperation. No ringing declarations, no grand schemes for promoting international economic stability will probably emerge from the meeting. As after Rambouillet, the communique will undoubtedly stress the need for cooperation among the nations and promise that it will be forthcoming. But the major American purpose at the economic summit will be to set some hard terms for that cooperation.

U.S. officials are worried that the industrial world may be about to divide itself essentially into two groups: the U.S., Germany, Switzerland and perhaps Japan, with strong, healthy economies characterized by relatively low inflation and currencies rising in value, and the Italys and Britains of the world, with their high inflation, weak economies, and depreciating currencies that worsen inflation by making imports more costly. In fact, the most recent forecasts by the staff of the Organization for Economic Cooperation and Development in Paris suggest that such a division may be coming. The Administration would like to head it off by encouraging the nations with more serious inflation problems to adopt the policies necessary to slow down soaring prices.

At Puerto Rico, Ford will be using a carrot and stick. The carrot will be the promise of the sort of support that led the U.S. to make available $2 billion of the $5.3 billion line of credit extended to Britain this month to help prop up the sagging pound, which has so far been successful. The stick will be the clear understanding that such financial support will be forthcoming for governments only on condition that they act swiftly to put their domestic economic houses in order.

"The industrial nations are moving from recession to recovery and on to expansion," says Gerald Parsky, Treasury Assistant Secretary for International Affairs. "We have got to prevent re-igniting inflation in the process. Recovery without inflation can only come if we increase our cooperative efforts." But Parsky warns, "Policy in one country cannot serve as policy in another country." Translation: In the U.S. view, the strong nations must not extend financial assistance to weaker ones that do not have the political will necessary to bring inflation under control.

The summit meeting, and these issues, were very much on the minds of the 200 or so public and private bankers from the U.S. and 21 other nations who convened last week in San Francisco for the annual meeting of the American Bankers Association's International Monetary Conference. No one seemed to expect much from the summit, but most thought it a good idea. Everyone seemed to have the same thing on his mind: Inflation is the long-run danger. "You can't escape the reality of an interdependent world through floating exchange rates," said Paul Volcker, president of the New York Federal Reserve Bank. Reasonable monetary stability is possible only with basic stability in domestic economic policies, he said, "and control of inflation is the sine qua non."

Inflationary Pressures. Just what are the prospects for containing inflation on a worldwide basis, whatever carrots and sticks may be used? Few of the bankers were optimistic. Franz Ulrich, chairman of the Deutsche Bank A.G. of Duesseldorf, pointed to a 16% rise in world commodity prices from last year's lows as a portent of things to come. Irving Friedman, Senior Vice President of Citibank, argued that modern inflation has been high and persistent because of fundamental changes in societies around the world, which have increased the demand for goods and services far beyond the ability of the world economy to supply. Governments, Friedman said, have tried to accommodate that demand and in the process have generated further inflation.

Alexandre Lanfalussy, economic adviser for the Bank for International Settlements, sounded only a slightly more optimistic note. "There is a growing awareness that inflation is unacceptable," and that a wide range of policies is needed to deal with it, Lanfalussy said. "The main problem will be a political one: Is there a sufficient social consensus in our democratic society to carry out these policies without major political upheaval?"

The Puerto Rico summit meeting will give no definitive answer to Lanfalussy's question, but it could provide a small push in the right direction.

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