What to Do About the Dollar

By George M. Taber

After long considering a strong dollar a national birthright, Americans lately have learned the humiliation of holding a currency that sinks, slumps and plummets almost every day. In the past year the dollar has declined 17% against the West German mark, 29% against the Japanese yen and 34% against the Swiss franc--and even 9% against the Indian rupee. The Carter Administration has responded with a Dr. Feelgood litany that the dollar's health is sound, and that it will recover from its indisposition if everyone will only wait long enough. But the world's money traders are not buying that happy talk and are now demanding fundamental shifts in U.S. dollar policy.

The value of the dollar determines much more than merely what the doctor in Houston must pay for his new Mercedes-Benz or the housewife in St. Paul for her Swiss chocolates. Prices of domestic goods go up because the competing imports are more expensive; the dollar's decline will add as much as 1.5% to the inflation rate this year. More important, a nation's currency is the symbol of its economic vitality and the instrument by which it exercises its world role. The fall of the once-mighty British pound from $4.03 to a low of $1.55 was both a contributor to and a measure of Britain's postwar decline. When Charles de Gaulle returned to power in 1958, one of his first acts was to restore the French franc to strength with a currency reform that devalued the franc, established an austerity program and even symbolically replaced the Monopoly-money ancien franc with a nouveau franc at a rate of 1 new for 100 old.

The fate of the dollar calls into question the way the whole world does business. The international monetary system is a precarious structure held together largely by paste, baling wire and confidence in the dollar, since it is the currency in which most international deals are made and which central banks keep in their vaults as reserves. During recent runs on the dollar, the first signs of financial panic could be seen. World money markets now resemble the urban ghettos of the 1960s, when a random traffic ticket or barroom scuffle could set off days of bloody rampages. The most implausible rumors out of Washington or the Middle East cause currency jitters and a dollar fall.

For no apparent reason, one Monday morning seven weeks ago, bankers, corporate treasurers and speculators suddenly wanted to sell dollars, causing a mindless two-day dollar run. Washington policymakers are still frightened by the episode because they have no idea why it started. While not predicting The Crash of 79, the dramatic title of a novel that foretold the collapse of Western civilization after a dollar disaster, Henry Kaufman, a partner in Wall Street's Salomon Bros., warns that the attack on the dollar "has placed the entire international monetary system in jeopardy."

The effects of a shaky centerpiece on the world economy are evident. Businessmen, who feel they cannot predict the value of their currency tomorrow morning much less a year from now, have grown overly cautious. Instead of marketing the new product that may (or may not) bring a profit in three or four years, they are gambling in the currency markets in hopes of making an overnight gain on a falling dollar or rising yen. That is one reason why business investment and economic growth in most Western industrial countries are running at only half the level of the 1960s.

Unreasonable exchange rates, which now mean a cup of coffee costing $2 in Geneva or a hotel room $100 a night in Tokyo, increase the danger of protectionist trade wars as everyone runs to shield his market against low-priced U.S. competition. The Tokyo Round of trade talks, which has been dragging on for four years, is in danger largely because of the dollar. Finally, global inflation is being fired anew. Uncertain what the value of a product will be even a few weeks from now, both exporters and importers raise prices a little more to ensure against a possible loss from a currency change.

Until very recently the Carter Administration had tried to find benefits in a weaker dollar, claiming that it would encourage American sales abroad; and a year ago, Treasury Secretary W. Michael Blumenthal was arguing that the dollar was too expensive, and tried to talk its value down. Fortunately that view has been forcefully dismissed. Says Federal Reserve Chairman G. William Miller: "Any idea that it is in the interest of the U.S. to have a weak dollar, to have a lower dollar, is false prophecy. It is just not right."

A new American policy to lift the dollar will have to overcome that past mistake because worldly bankers and investors are very skeptical about the commitment of the Administration, and they have adopted a "show me" attitude. Quipped one top banker at the annual meeting of the International Monetary Fund in Washington last week: "He who talketh down the dollar cannot talk it back up." Of course, the stability of the American economy and the world financial system demands a decisive policy that goes much beyond talk. It should be a threefold strategy, of immediate steps to stem the dollar's decline, medium-term measures to correct the dollar's underlying weakness, and long-term reform that would stabilize the American currency inside a more certain monetary system. In sum, the U.S. can come to the aid of its currency if it takes a mix of actions:

SUPPORT THE DOLLAR. Everyone from Swiss gnomes to Brooklyn cabbies agrees that the dollar is grossly undervalued. It can buy much more at home than abroad. Says Yale Economist Robert Triffin: "I used to buy all my suits in Europe because they cost half as much as in America. Now the situation is exactly reversed, and I buy my clothes in the U.S."

To prevent a further fall in the value of the greenback, the U.S. Government, in close cooperation with leading foreign central banks, should step in and buy large quantities of dollars on world markets. This would require assembling a vast war chest of funds to show currency speculators that Washington has the money to back up that policy. Two fast and impressive steps would be increasing sales from the nation's $60 billion gold reserves, as former Federal Reserve Chairman Arthur Burns suggests, and enlarging the so-called swap network of dollar defense funds from $25 billion to $100 billion, as Senator Jacob Javits proposes.

Critics of intervention argue that there is $400 billion to $600 billion in surplus dollars floating around foreign money markets --nobody knows the exact total--and Washington could not begin to buy them all. But if the U.S. expressed willingness and made funds available to buy huge amounts, speculators would conclude that the price would stay up, and so they would not sell their dollars. In short, a war chest to defend the dollar, coupled with a strong determination to use it if necessary, would act much like a nuclear deterrent: the more impressive it is, the less likely it will ever need to be used.

FIGHT INFLATION. An immediate dollar-support program will only buy time while the Administration takes the more fundamental action necessary to correct the dollar's underlying weakness. The most important step would be a tough, credible anti-inflation program. Inflation, of course, debauches a currency by reducing its purchasing power. As long as the West German inflation rate is under 3% while the American rate is more than 8%, the dollar will continue to depreciate, and the mark will rise. An austerity program that brings American inflation down toward the German level is an inescapable move to support the dollar.

President Carter is working on a Stage Two anti-inflation program that is expected to include voluntary wage and price guidelines. They can only supplement firm fiscal and monetary policies, which are still the surest way to slow inflation. The fiscal 1979 federal deficit is expected to be some $39 billion, and final planning will soon start on the 1980 budget. All effort should be made to keep that deficit well below $30 billion, for a larger figure would be a clear sign that the Administration does not take the inflation struggle seriously. The Federal Reserve must also continue its increasingly tight money policy, even though interest rates are starting to hit double digits.

DEVELOP AND CONSERVE ENERGY. Since the quintupling of oil prices by the OPEC cartel five years ago, the U.S. has spent $153.5 billion on oil imports, greatly swelling the world glut of dollars and reducing their value. Last week's Senate passage of the natural gas compromise was a small move in the right direction of reducing oil imports and increasing domestic energy production. Much more is needed. Congress is sure to kill Carter's proposal for a crude-oil equalization tax that would have raised U.S. oil prices to the world level and discouraged consumption. As a temporary substitute, the President should use his executive power to place an import tax or quota on oil imports. Beginning next May, the President will also have authority to deregulate oil prices. He should announce now that he will start moving then to increase prices; that will both slow imports and speed the search for more domestic oil and gas.

EXPAND EXPORTS. The U.S. must again become a nation of traders in order to close the trade deficit that this year will approach $33 billion. The President's new export policy does not adequately cope with the myriad Government barriers that block sales abroad. Some $10 billion in exports is being lost annually because of a variety of Government measures, including blocking exports to some countries in order to further human rights policy. American businessmen, most of whom have treated exports as a minor sidelight, must also become more aware of new sales opportunities after the sharp decline in the dollar. Exports amount to a rather meager 6.4% of the gross national product; Federal Reserve Chairman Miller urges a drive to raise

SHOW ECONOMIC LEADERSHIP. By dumping dollars, foreigners have been voting no confidence in America's economic leadership. The long congressional battle over energy, after which Carter won only part of his program, and the conflicting policy signals on the dollar and inflation have moved many foreigners to conclude that U.S. economic policy is out of control.

There have been serious conflicts and infighting among the President's economic advisers. Instead of one clear voice speaking with authority, the Administration has sounded like a Greek chorus. Treasury Secretary Blumenthal, Anti-Inflation Coordinator Robert Strauss, Domestic Adviser Stuart Eizenstat and a host of other instant experts freely toss out ideas, and the conclusion is confusion. Nobody knows who speaks for the President. The Treasury Secretary, who is traditionally the chief economic spokesman, has been contradicted and undercut repeatedly by the White House, and his effectiveness has been seriously impaired. Said one European minister at the IMF meeting: "This Administration should either express confidence in this Secretary of the Treasury or get a new one." The credibility of the Carter Administration to world moneymen will remain in doubt until there is one coherent authoritative voice on economic matters.

REFORM THE MONETARY SYSTEM. Beyond these short-and medium-term measures, there is need for long-range changes in the world's money system. Since early 1973 the system has been based on floating rates: a currency's value is set by supply and demand on money markets. This replaced the old system in which rates were firmly fixed in relation to gold and the dollar. The earlier structure had served fairly well for almost three decades but then had broken down because exchange rates could be changed only abruptly, sharply and in a crisis atmosphere. Yet now with floating rates, the world endures a permanent crisis and fundamental economic instability, as currencies gyrate madly in response to today's headline or rumor. Says former Federal Reserve Chairman William McChesney Martin: "The floating-rate system is not serving the world well, buffeted as it is by structural imbalance, inflation, widespread lack of confidence and, as a result, excessive fluctuations in exchange rates."

In search of greater stability, many countries are beginning to turn away from floating rates. The Europeans are moving to set up among themselves rates that would diverge very little because central bankers would manage them. On the other side, the U.S. has steadfastly argued that only floating rates can avoid the old rigidity and periodic crises. But Princeton Economist Peter B. Kenen asks, "Can the U.S. be content with a monetary system in which we have no role except to complain that there is too much management of currency values, or would we be better off to participate in the management?"

The U.S. should join the trend toward more managed exchange rates, something of a compromise between fixed and floating rates. World central banks would have to cooperate closely, buying and selling currencies in order to keep the rates within certain ranges. Former Under Secretary of the Treasury Robert V. Roosa says that a first step toward this arrangement would be to set up "reasonable ranges of value for the three key currencies -- the dollar, mark and yen." Other currencies would quickly fall into line behind the big three. The IMF could monitor national economic activity and recommend when currency values should be increased or decreased and by how much. Last April the IMF set up a "surveillance system" that could perform this function. Though some American officials have opposed such an idea because it would limit national economic independence, the U.S. should strongly support it as a major step toward greater stability in exchange rates.

Since the shocks of the early 1970s, the world's economies have lived in a period of tension and trauma. Oil price increases, world recession, rampant inflation, low growth and severe balance of trade problems have left leaders in the chancelleries and the counting houses doubting the present and fearing the future. But nothing has been worse in a period of crumbling foundations than the decline of the dollar, which is the talisman of an uncertain world. A first move toward a more secure economic future would be to re-establish the stability of the dollar inside a more managed and predictable international money system.

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