Fix It Before It's Broke

By Gordon M. Henry

Nearly everybody is fed up with the world's chaotic currency markets. Politicians, business executives and economists alike are unhappy with a system that allows the value of money to change wildly and freely from day to day. The arrangement has created instability in national economies, uncertainty for companies and increased tendencies toward trade protectionism. But nobody has come up with a better idea.

Last week, at a Washington conference billed as the U.S. Congressional Summit on Exchange Rates and the Dollar, some 400 international finance experts began talking about new ways of doing things. Sponsored by Presidential Hopefuls Jack Kemp, a Republican Representative from New York, and Bill Bradley, a Democratic Senator from New Jersey, the two-day conference attracted such luminaries as Jacques Attali, counselor to French President Franc,ois Mitterrand, New York Investment Banker Felix Rohatyn and Yusuke Kashiwagi, board chairman of the Bank of Tokyo. No agreements were reached, but a consensus emerged: more must be done to narrow currency fluctuations.

Many conference participants supported a proposal for so-called monetary target zones. This would mean that each country's currency would be allowed to rise and fall only within a predetermined range. If the dollar, yen or other money rose or fell too far, central banks would intervene in foreign-exchange markets and stabilize the rate. Some European currencies are already bound by such a regime: the European Monetary System.

The first Reagan Administration adamantly opposed attempts to set the value of the dollar. Then Treasury Secretary Donald Regan supported a hands-off policy that allowed market forces to determine exchange rates. But the staggering U.S. budget deficit and resulting high interest rates pushed the dollar steadily upward. By last March, the dollar was more than 80% stronger than in 1980. Foreign goods became cheap, and American products became dear. Result: a staggering trade deficit that led to strong protectionist sentiment on Capitol Hill. Even successful multinational corporations have been hurt by shifting currency rates. Complained Paul Orrefice, president of Dow Chemical: "Nothing hurts business like the uncertainty we confront on the foreign-exchange markets."

James Baker, who replaced Regan as Treasury Secretary in January, is not as devoted to freely floating exchange rates as his predecessor. The Administration took a step away from that system in September, when officials met with representatives of Britain, France, Japan and West Germany at New York City's Plaza Hotel. The group agreed that the dollar was too powerful and tacitly decided to depress its value by selling dollars and buying other currencies. Robert Hormats, former Assistant Secretary of State for Economic Affairs, believes that without saying so, the Treasury Department is eyeing a target zone for the dollar. Says he: "The U.S. changed its policy at the Plaza and didn't announce it formally."

No one expected solutions or even hard-and-fast recommendations from last week's meeting, nor should they have. Historically, major monetary reforms have been preceded by years of such brainstorming sessions. Nonetheless, the world's money system clearly seems headed toward more stable exchange rates. --By Gordon M. Henry. Reported by Christopher Redman/Washington

With reporting by Reported by Christopher Redman/Washington