Business: Strategy for the Dollar

Trying to head off protectionist cries and worries about will

The low estate of America’s dollar in world markets distresses nobody so much as Economist Robert Triffin, who expressed some far-reaching opinions about it in a talk with TIME Senior Editor Marshall Loeb. His report:

Robert Triffin is a little man, a bantam really, but he is a giant in international finance. He looks out on the world with sad, soulful eyes, and while he often does not like what he sees, he usually has ideas for setting matters right. Among many other things, he is now propagating a plan for getting some green back into America’s fading dollar.

For almost 40 years, this wise economist has been summoned by leaders of the chancelleries and the countinghouses for advice on money policies. He conceived the European Payments Union, which did so much to revive the Continent’s economies from the ruins of World War II. Two decades ago, he warned that the monetary system was barreling toward calamity because the U.S. was pouring out so many dollars. Now back in his native Belgium, where he is advising the European Community while on sabbatical from Yale University this year, he watches forlornly as the dollar crashes to record lows relative to the German mark and the Swiss franc.

Perhaps only someone who has been raised in Europe can understand the psychological impact of the dollar’s fall. People in foreign countries often equate a country’s political might and will with the strength of its money. Every time the dollar declines, concern rises abroad about America’s power and capacity for leadership, and worries grow about the future of the West’s free economies. It troubles Triffin that Washington’s policymakers, many of them his friends and former students, do not seem to recognize these dangers. Their dollar-defending moves have been weak and tentative, and their rather cavalier philosophy seems to be: Let the dollar fall—that will help America’s trade balance.

In fact, the drop aggravates America’s inflation. Not only do imports cost more, but U.S. exporters also collect more dollars for their products abroad, and so they sometimes conclude that they can increase their prices at home too. As more American goods flood Europe, Triffin hears the cries rising for protectionism. Americans often overlook the fact that the U.S. enjoyed a $7 billion surplus in trade with Western Europe last year. Because the dollar has become grossly undervalued, many American goods are “cheap” in world markets, and the U.S. is often looked upon abroad with the same suspicion that Japan is viewed in the U.S.

The weak dollar also threatens a flight of capital from the U.S., just when America needs more investment to create jobs, dig for oil and develop all those costly alternative sources of energy. Sure, Europeans and Japanese and Latin Americans have been putting much of their surplus cash into land and factories in the U.S., which they figure is immune to the socialism that infects many of their own countries. But they would invest much more—particularly in the U.S. stock market, which is undervalued and could use the lift from abroad—if the dollar showed signs of recovery. So long as it falls, Europeans stand to lose on their American investments.

Like most moneymen abroad, Triffin argues that the U.S. should use foreign currencies to buy up many more dollars in world markets than it has done so far. The Treasury does not have enough foreign funds to do this, so Triffin urges an expansion of the old idea of currency swaps.

Washington, he counsels, should borrow large new sums, both from foreign governments and private lenders abroad. The amounts should run to many billions, “greater than what we think will be the likely needs.” These bold borrowings should be concentrated in German marks, Swiss francs and other surging currencies. In fact, he also urges the U.S. to float Treasury bonds abroad, selling them to banks, mutual funds and other investors in exchange for strong foreign money. The Treasury would guarantee to repay these loans in the same foreign currencies, so that the creditors would risk no loss even if the dollar fell still further.

But to prevent just that, the U.S. would use the new borrowings to buy its own money. This would give the dollar at least a temporary lift and allow the U.S. time to reduce its budget and trade deficits and to enact a policy for developing and conserving energy—all of which will be necessary to restore America’s currency to its old eminence.

Europeans are so eager for America to defend the dollar, Triffin argues, that they would willingly make the additional loans. Indeed, he believes that in return for propping the dollar, America could extract a quid pro quo, notably persuading the reluctant West Germans and Japanese to expand their economies in order to enhance world recovery. “It is in the interest of all governments to intervene to lift the dollar,” Triffin says persuasively. “The problem simply cannot be left to the tender mercies of the speculators.”