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POLICY: Nixon’s Other Crisis: The Shrinking Dollar

19 minute read

Throughout the U.S. economy’s ups and downs of the past four years, President Nixon has never managed to rid it of the debilitating fever of inflation. Prices kept rising rapidly through the 1970 recession, in defiance of all economic nostrums. The increases subsided in part because of the wage-price freeze and Phase II controls, but in the five months of voluntaristic Phase III the economy’s inflationary temperature has climbed to its highest point in two decades. The situation has helped create near chaos in stock and dollar-exchange markets.

Millions of consumers, stunned by higher prices, go about their daily shopping chores with a sinking feeling and fret over the erosion of their earnings and savings. Along with Watergate—and partially because of the scandal’s enervating effect on Government—the state of the U.S. economy has become Nixon’s other crisis. Last week the signs multiplied that the President was about to strike back with yet another major anti-inflation program that would add up to a de facto Phase IV.

At midweek the President’s three top economic advisers, Treasury Secretary George Shultz, Council of Economic Advisers Chairman Herbert Stein and Federal Reserve Chairman Arthur Burns, rushed home from an international bankers’ meeting in Paris. Nixon’s new domestic policy chief, Melvin Laird, told newsmen that he would recommend tighter economic controls.

The President himself told a Cabinet meeting late in the week that inflation “is the major problem this country faces,” and on Friday, during a commencement address at Florida Technological University, he dropped a heavy hint that a new policy was being readied. After talking again about how grave a problem inflation is, he said: “We have the means to deal with it.”

What the new program might consist of was not clear—if indeed Nixon had decided (he warned the Cabinet not to guess “as to what I’m going to do”). But the President’s options seemed to fall into three main categories:

1. Impose, once again, a wage-price freeze. Rumors of a new 90-day—or possibly only 45-day—freeze were circulating widely. The attractions were obvious. The freeze that began on Aug. 15, 1971 as Phase I was highly popular and did break inflationary momentum. Moreover, ordering one now would steal a march on congressional Democrats, who were loudly threatening to write a freeze into law. But some of the President’s closest advisers, notably Shultz and Stein, who cherish an almost mystical devotion to the free market, seemed strongly opposed; they swallowed one freeze, but might not stomach another.

2. Move back toward a controls policy more closely resembling Phase II —which went into effect on Nov. 14, 1971—than Phase III. The key would be making controls mandatory rather than voluntary. Under the mandatory controls of Phase II, a businessman who raised prices beyond Government-set limits broke the law and subjected himself to penalties: fines or orders to make refunds to his customers. During Phase III, a businessman who raises prices beyond guidelines has been guilty of nothing worse than a bad guess, and subject to no more severe punishment than being told by the Cost of Living Council to reduce or cancel the increase. Even that threat has been strictly theoretical: the COLC has not yet disciplined even one company for violating Phase III price guidelines.

3. Order a package of miscellaneous measures. The President could, for example, reimpose mandatory controls on selected industries, or order the COLC to draw up industry-by-industry guidelines specifying what increases in profits would rule out further price boosts.

A Commerce Department official speculates that the COLC could also order price rollbacks by companies that have posted especially rapid profit increases so far this year. Still other possible moves being considered include a freeze on its price of retail gasoline and extending controls to food products at the farm level. Finally, the President also could—at the cost of violating an all-but-sacred campaign pledge—try to raise taxes in order to siphon some money out of an economy that seems to be in a runaway inflationary boom.

Too “Preoccupied.” The one choice that could fairly be called, in what has become a famous word, inoperative would be to do nothing. If the long roll of publicity drums heralding a new anti-inflation policy were to be followed by silence, Nixon would risk disastrous repercussions on stock prices at home and the value of the dollar abroad. He would reinforce a spreading impression round the world that the Watergate scandal has so immobilized him as to make economic policy an affair of drift, indecision and inattention. Watergate, indeed, is becoming a major economic as well as political force.

It would be wrong to blame all or even most of the nation’s economic woes on the scandal; inflation undoubtedly would be soaring, the dollar sinking and the stock market slumping if Watergate meant no more than just a fancy apartment-office complex. But the scandal has fostered a belief that nothing has really been done about any of these problems—and foreigners have been spurning dollars and investors selling stocks in response.

“Watergate has cast doubt on Nixon’s ability to conduct a policy that would help improve the U.S. balance of payments deficit,” says Dr. Hans Mast, economic adviser to Credit Suisse, a major Swiss bank, in partial explanation of foreign distrust of the dollar.

Robert Kern, vice president of San Francisco’s jeans-making Levi Strauss & Co., laments: “The nation is floundering around like a ship without a rudder because of Watergate. Everyone is looking for some leadership and direction.” Robert Gutenstein, an analyst at the Manhattan investment house of Kalb Voorhis & Co., reports “fears that Nixon is so busy covering himself that he is not managing the economy.”

Unhappily, such fears have been at least partly justified, or were until the past few days. The President’s economic advisers have held an inordinate number of meetings with Nixon lately, and even early last week some were depressed by a feeling that they could not get his attention. One recently complained that the President seemed “obviously weary” and too “preoccupied” to pay much heed. Even at week’s end, though Nixon seemed to have realized the need for action, there remained a question of whether he would back any new policy with the personal push required to give it credibility.

Pondering his course over a weekend at Key Biscayne, the President had no lack of unwelcome, even frightening developments to consider. The Government had just announced that wholesale prices in May rose a staggering 2.1%, the second time this year they have rocketed upward in a single month at a rate of more than 25% when projected over the course of a whole year. The biggest increases were in farm prices for grains and meat; the index for farm products, processed foods and feed rose at an unbelievable annual rate of more than 62%. But food was not the only villain: prices of industrial commodities shot up at an annual rate of 15.4%. In the past, Administration officials have contended that such huge leaps in a single month were likely to prove one-shot affairs, but that argument is no longer even faintly comforting. Since January, the Wholesale Price Index has risen 22.8%. The entire bulge has not yet shown up in supermarkets or other retail stores, but it soon will.

On foreign money exchanges, the price of the dollar early in the week fell to postwar lows against some other currencies, including the German mark, Swiss franc and Japanese yen. Just since the start of the year, the dollar has lost a stunning 15% of its value or even more in terms of some major foreign currencies (see chart above ). Although much of this decline was caused by the second formal devaluation in February, enough has occurred in recent weeks of free trading to lead French President Georges Pompidou to describe that drop, accurately, as constituting in effect “a third devaluation of the dollar.” Though money trading is actually a ruthlessly non-nationalistic affair, it seemed that everyone from oil sheiks to Swiss bankers to Japanese businessmen had agreed to gang up on the dollar and hack away at its value. On Wall Street, the barometric Dow Jones industrial average sank on Monday to 886, down 16% from its historic high five months ago.

Foretaste. Both the dollar and the Dow rallied at midweek; in fact, the stock average rose 34 points by week’s end and closed at 920. But the recoveries intensified rather than relieved the pressure on Nixon because both reflected the rumor/hope/belief that he would at last do something. Indeed, the mere fact that the Administration had made no announcement by week’s end sent the dollar on another downhill slide Friday. John Philipsborn, vice president of Chase Manhattan’s European headquarters, promptly remarked that the apparent decision to hold off action after hinting that it was imminent seemed “more harmful than if the Government had done nothing at all.” That was an ominous foretaste of the emotions that Nixon will stir if this week he dashes the hopes for action that he has aroused.

Though the economy’s troubles may seem disparate, they are linked by a central theme. It is a cheapening of the dollar — at the supermarket counter; on Wall Street, where a dollar invested in almost any stock in January is worth much less today; and in for eign countries, where a dol lar buys progressively fewer marks, francs or guilders. The core problem is inflation, which both directly worsens the lives of most U.S. citizens and intensifies the malaise on Wall Street and in the curren cy markets.

Inflation is most visible — and pain ful — in food prices, where it also has been in part preordained. As an election-year ploy aimed at winning the farm vote, the Administration deliberately pumped up farm prices during 1972 by spreading around a record amount of federal cash in subsidy and price-support payments. The President did little to repair the resulting wreck age at the grocery counter when he imposed ceilings on retail meat prices in March in response to the approaching nationwide meat boycott. He merely kept meat prices at record levels. Prices for other food products, including grains, milk and fresh vegetables, have continued to soar. The Administration early this year moved to increase farm production—and thus bring down prices—by freeing for planting much land that had been idled under price-support programs, but the move came pitifully late.

Meanwhile, the Administration compounded its error by replacing the tough Phase II controls on nonfood prices with the flabby voluntarism of Phase III. Coming just as food prices were starting to explode, Phase III fostered a spirit of anything goes among some businessmen. C. Jackson Grayson Jr., the activist price czar of Phase II who has returned to his old job as dean of the Southern Methodist University business school, observes: “No one wants to get caught with his prices down. The attitude of many businessmen is that Td better get mine while I can.'” Even George Shultz, a prime architect of Phase III, conceded that the controls that were retained need to be enforced “more flamboyantly.”

Since they have not been so far, inflation is no longer just a food phenomenon. Robert Nathan, a member of TIME’S Board of Economists, points out that during the 14 months of Phase II, wholesale prices of industrial commodities (structural steel, lumber studs, man-made fibers) rose at an annual rate of 3.5%; but during the first four months of Phase III, they shot up at a yearly rate of almost 15%. Rising retail prices have kept most Americans from enjoying a rip-roaring 1973 boom that is raising national production to undreamed of heights: incomes are rising, but prices are going up even faster. In April, for the first time in two years, the average U.S. worker’s spendable earnings actually declined from a year earlier. In the face of all this, union members have been accepting wage settlements that so far have averaged close to a very reasonable 5.5%. But no one can guarantee that labor will not soon demand fat pay increases that would force prices up still more rapidly.

Wall Street is in a similar ban-the-boom mood. Corporate profits are expected to rise 23% this year above those in 1972. That anticipation would normally set brokerage houses afire with buy orders, but stock prices have sagged even more than the Dow Jones industrial average of 30 blue chips indicates; it is no trick to find lesser-known stocks whose value has been cut in half so far this year. One result is that tens of millions of Americans, whether they know it or not, face the prospect of retirement benefits less generous than they had hoped for, because the stocks that their pension funds invest in have gone down. The dive has mystified even top corporate executives. Robert Oster, senior vice president of California’s Bank of America, the nation’s largest, reports that on a recent nationwide tour he kept hearing the same refrain from corporate clients: “How the hell can we be that low on the market when our company is in such great shape?”

At least part of the mystery is bound up with inflation.

Inflation was once thought to be good for the stock market: after all, the very word meant rising prices, presumably for stocks as well as other things.

But market averages today are not much higher than they were in the late 1960s, while the consumer price index has gone up by a third.

Among the reasons: inflation has become synonymous with tight money and high interest rates. Indeed, last week major banks raised their prime rate (to 7½%) for the fourth time in eight weeks, making the cost of big-business borrowing more expensive than at any time since September 1970. The Federal Reserve then lifted the discount rate (the interest rate it charges member institutions) half a point, to 6½%, its highest level in more than 50 years.

High interest rates and decreased availability of loan money make it more difficult for would-be investors to buy stock, and tend to drain money out of the stock market into bonds and savings accounts, where interest yields are high. Further, every inflation brings with it the threat of a subsequent recession caused by Government efforts to restrain an inflationary boom—a distressing thought to stock investors.

The root cause of the dollar’s decline abroad is the simple fact that there are too many dollars—some $80 billion —ricocheting round the world. They have accumulated abroad because the U.S. during the past 20 years has spent overseas—in purchases of foreign goods, military expenditures and business investments—far more than it has taken in from foreign countries. An oversupply of dollars, like an oversupply of potatoes, tends to drive down the price. That tendency has been given free rein since March by a change in the way that the international monetary system operates. Previously, foreign countries had been required to maintain set exchange rates between their currencies and the dollar—meaning that if no one else would buy dollars, government banks had to purchase them to support the price. Now nearly all major currencies are “floating,” or free to sell at any price set by supply and demand, against the dollar.

For the dollar, the float has been more like a submersion, with disastrous results for tourists and Americans living abroad. Last week a U.S. visitor to Paris trying to buy a box of candy with greenbacks was excitedly ushered to a nearby bank by the candy dealer, who insisted that the American exchange his dollars for francs before making the purchase—apparently out of genuine concern that the dollar’s price in francs would drop by the minute. A G.I. stationed in West Germany moaned that he could not even accurately budget big outlays like his monthly rent, since the portion of his dollar paycheck needed to cover his mark rental bill has expanded painfully in every recent month.

A good many Americans appear to distrust their own currency, and fear that foreigners will not accept it. The U.S. offices of Perera Co. Inc., money dealers, are thronged with tourists seeking to buy foreign money, or traveler’s checks denominated in ten foreign currencies, before they go overseas. They worry that if they take dollars, the price in foreign money will sink farther before they reach their destinations. Nicholas Deak, head of Deak & Co. Inc., which owns the Perera offices, wonders how Perera’s staff will get through the summer. “They are already exhausted, and the peak tourist season has not yet started,” he says. Gold, the traditional refuge of people who suspect any paper money, soared at one point last week to an unheard-of $ 127 an ounce in London, about triple its official price in dealings between governments.

Mad Scramble. Foreign reluctance to accept greenbacks has motivations beyond the oversupply of dollars. One is an unsophisticated—or perhaps starkly honest—view of Watergate, which amounts to a feeling that the scandal shows that the U.S. Government is in trouble, and that its currency is not to be respected. “As Watergate drags on and more revelations threaten the President’s integrity, the more the dollar is likely to come under pressure,” warns a Frankfurt money dealer. “That in turn will cause a mad scramble to unload vast amounts of dollars.” Foreign sensitivity has reached such a pitch that the dollar recently sold off on reports of the death of Wilbur Mills, the Arkansas Democrat who heads the House Ways and Means Committee and is widely regarded as a symbol of fiscal integrity. Foreigners confused Wilbur, who is very much alive, with Representative William Mills, a Maryland Republican who died last month as an apparent suicide.

Once again, though, U.S. inflation enters the picture. Logically, the dollar now appears undervalued to many financial experts in the U.S. and abroad. But the more American prices go up, the greater the loss of faith in the dollar and the quicker dollars flow out of the U.S. into stronger currencies, worsening the U.S. balance of payments. To some extent, the concern of overseas countries may represent a holier-than-thou attitude; Europe and Japan suffer roaring inflations of their own. Yet the U.S., after posting one of the lowest inflation rates of any industrialized country during 1972, has made the unhappy switch to catching up with many of its trade partners.

Thus all the aspects of the U.S. economic malaise interact in circular fashion to intensify one another. Rapid U.S.

inflation makes the dollar look weaker than ever to foreigners, and they mark its price down against their own currencies. The dollar’s slide then worsens the American inflation by increasing the price of imported goods and materials —for instance oil from the Arab states of the Middle East. The fewer Saudi Arabian riyals an American dollar equals, the higher the price of Arab oil in the U.S. Prices of American stocks slip because of worries about inflation and the declining dollar—the latter one of the prime sources of Wall Street’s recent frets. The stock market slide makes foreigners still more suspicious of the American economy and more prone than ever to sell dollars. And so it goes.

In any attempt to break through this cycle, Nixon faced trouble within his own Administration. New Republican John Connally has been bitterly announcing to friends that he is ready to leave his job as a White House consultant after only about a month and go back to Texas. As Secretary of the Treasury in 1971, Connally helped mightily to sell Nixon on the original wage-price freeze, and seemed on the verge of persuading him to move once again. But his vaulting ambition has been disappointed by the fact that he has not been given a more impressive Administration title, easy access to the President and a staff of his own. Oddly, his chief opponent, Free Marketeer Shultz, was also said to be looking around for a graceful way to exit. Besides the potential professional humiliation of having his beloved Phase III repudiated, Shultz has been almost as distressed as Connally by the President’s lack of attention to economic affairs. Connally’s political chores would probably be taken over by Melvin Laird, who became well grounded on economic policy in the House. Shultz, who has served as a top Nixon aide ever since the President took office, would be much harder to replace. Conceivably, he might be succeeded by his Deputy at the Treasury, William E.

Simon, who has become an increasingly forceful personality in the department.

Almost no one who followed Shultz, however, would quickly acquire his clout as the Administration’s chief economic spokesman.

Making News. The very interrelatedness of Nixon’s economic problems presented the President with an unparalleled opportunity. Any bold action that he might take against inflation would give the stock market a further lift, and almost surely firm up the dollar as well. Foreign moneymen evinced an almost pathetically eager desire to see the U.S. do something, anything, to combat inflation.

Moreover, Nixon can hardly fail to realize that a sudden new initiative on any front—especially inflation, his and the nation’s most pressing worry —would be guaranteed to make news and give the nation the feeling that he is once more coping with the country’s problems rather than his own. In his April 30 TV speech, the President expressed an impatience to leave the Watergate mess behind and get on with the “larger duties of this office.” Last week there was no more monumental decision facing him than how to deal with the sapping of economic strength caused by the inflation fever.

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