MONEY: Alternatives to Economic Nationalism

The lesson of the worst postwar money crisis is that the non-Communist world is running out of time in which to repair its financial system. The speculative explosion that tore through the banks and bourses two weeks ago demonstrated that permitting the system to lurch from one upheaval to another is no longer a workable policy. The world’s financial and political leaders have two choices. They can unite on basic updating and reform of the rules that have promoted the free exchange of goods, tourists and money across national borders. Or they can retreat to competing nationalistic policies. Almost surely, the latter course would take the world a long step back toward the prewar days of spreading trade barriers, tight investment restrictions, currency controls and general economic isolationism.

Last week the immediate crisis was not so much overcome as temporarily alleviated by a mélange of stopgap measures. After a round of emergency meetings, climaxed by a 20-hour marathon session of Common Market finance ministers in Brussels, European governments were unable to unite on the most urgent question: how to revise the exchange rates of currencies that were plainly undervalued. As an alternative to joint action, the dollar values of five important currencies were changed in three different ways.

Back-Door Devaluation. The West German mark and Dutch guilder were allowed to float—find their own value in free trading. By week’s end the mark had floated up 3.7%, to 28.3¢, and the guilder had risen 2.2%, to 28.2¢. Two other currencies were formally revalued: the Swiss franc went up 7%, to 24.46¢, and the Austrian schilling 5%, to 4.04¢. Belgium adopted a perplexing two-price system for its franc, maintaining the old value of 2.01¢ on export-import dealings and letting the rate float on investment and loan transactions; at week’s end the free rate had risen to 2.04¢. Since all five currencies are now worth more in U.S. money, the moves added up to a partial, back-door devaluation of the dollar.

A nervous, confused quiet returned to the exchange markets. Treasurers of multinational corporations and money speculators began searching for other currencies that might rise in value. They started buying the Japanese yen, the world’s most obviously undervalued money, which is likely to rise within several months. The speculation was mild only because Japan tightly controls the exchange of yen, leaving little available for purchase abroad. The price of gold, the traditional refuge for savers who distrust paper money, jumped in London to a 21-month high of $41.50 an ounce.

Groping Toward Reform. There were disquieting signs that the crisis had intensified pressures for a revival of economic nationalism and protectionism. In Tokyo, several Japanese bankers complacently observed that the yen’s relative immunity from speculative storms proved the value of strict exchange controls. In West Germany, businessmen were howling for more protection against imports. A rising price for the mark hurts the Germans’ competitive position because it tends to increase the price of their goods in export markets and lower the price of imports. Said Kurt Hansen, chairman of the Bayer chemical giant: “You can be sure that we will be very tough in our tariff negotiations.” U.S. Budget Boss George Shultz echoed the same thought. In all future trade negotiations, he said, the U.S. will be “a much tougher bargainer.”

There were also confused gropings toward more constructive international action. Not much is likely to be accomplished until the September general meeting of the 117-nation International Monetary Fund in Washington, but industrialists, moneymen and academic economists will be busy all summer debating reform proposals to be brought up then. Some of the most needed steps:

CONTROLS WILL HAVE TO BE PLACED ON THE EURODOLLAR MARKET. The $50 billion pool of Eurodollars has provided a needed currency for international investment, but it has also financed money speculation. At the height of this month’s crisis, financiers were recklessly borrowing Eurodollars to exchange into any currency that they thought might rise in value. Raymond Barre, a vice president of the Common Market, has proposed that the six member nations join in regulating Eurodollar interest rates and setting restrictions on the size and purpose of Eurodollar loans to companies in the Common Market. Ideally, such controls should be applied by an international body representing more countries than the Six.

CURRENCY EXCHANGE RATES WILL HAVE TO BE MADE MORE FLEXIBLE. Under IMF rules, every country must try to keep the trading price of its currency within 1% of its official value in dollars. But a 1% variation is too small to allow currency values to reflect differing national rates of inflation, economic growth and interest costs. IMF governors last week in effect allowed West Germany and The Netherlands to break the rules by floating the mark and guilder. The governors also debated granting broad permission to member nations to allow greater fluctuations in currency prices. France and Japan blocked the proposal, but it is sure to come up again because growing numbers of European financiers favor permitting at least a 3% up or down fluctuation. The IMF could also profitably adopt the idea of the “crawling peg”—small but regular increases or decreases in the official values of the currencies as financial conditions change.

THE U.S. WILL HAVE TO SHRINK ITS BALANCE OF PAYMENTS DEFICIT. The U.S. really brought on this month’s crisis by pumping out a flood of dollars around the world. The oversupply fanned doubts about the dollar’s value and started a stampede into other currencies. Europeans no longer trust Washington’s promises to get its balance of payments in order. French Economist Jacques Rueff noted sarcastically last week that a succession of U.S. Treasury Secretaries have pledged to wind down the deficit within two years. Impatient with words, European nations now appear to be trying to force action by using their surplus dollars to buy gold from the U.S. Treasury. So far this month, France, The Netherlands and Belgium have bought $422 million of gold from the U.S. The nation’s gold stock has slipped below $11 billion—which would buy back little more than half the dollars that now repose in West Germany alone.

Some automatic factors will help reduce the dollar drain soon. Inflation is subsiding in the U.S. but growing in Europe and Japan. That trend and last week’s currency changes should increase U.S. exports and hold down imports by making the prices of American goods look more attractive than before. Any lasting improvement in the balance of payments is unlikely until the U.S. finds ways of sharpening its competitive strength by checking the American wage spiral and spurring research and development (instead of stifling it in some areas). For financial as well as other reasons, the U.S. needs to trim its military and political commitments around the world. But any such cutback will oblige Europe and Japan to do more to defend themselves and aid the underdeveloped world.

Each of the needed steps will require a high degree of international cooperation. This will be painful for foreign nations that have jealously guarded their power to fix official values for their currencies, and for U.S. officials who have argued that Washington can manage the domestic economy and design its foreign policies without worrying too much about the effects on the international monetary system. All countries, however, have an interest in preserving a reasonably free and highly flexible system of converting one currency into another, and thus increasing the global circulation of goods, funds and travelers. That interest should override narrow nationalism.