Monetary Reform Is Hot, but It Will Cool Down
Milton Friedman, Nobel Prize-winning economist whose ideas have had a global effect, told a California audience a few nights ago that despite all the talk about the reform of the international monetary system, nobody should lose any sleep waiting for it to happen.
Friedman’s prophecy is worth keeping in mind during the next few weeks. The advisability of monetary reform, and the form that it might take, will be discussed at the meeting in Washington this week of finance ministers from 149 countries. It will be on the agenda at a meeting later this month of the Organization for Economic Cooperation and Development in Paris, and at the economic summit meeting in Tokyo in May.
There is widespread disenchantment with the present system of floating exchange rates, under which the relative value of the dollar and other major currencies are determined by market forces with comparatively little interference by governments. But getting international agreement on what should take its place is a formidable, perhaps impossible, task.
Monetary problems are much too abstract to attract the attention of average citizens. Yet all our livelihoods are fundamentally affected by the exchange value of the money in our pockets relative to the currencies of other nations.
Currency exchange rates affect--and are affected by--such factors as living costs, interest rates on the money that we borrow and save, the number and kinds of jobs that are available and the ability of U.S. business to compete on the world market.
The value of the dollar in recent years has been high--excessively so, in the opinion of most experts. The reasons include the attractiveness to foreign depositors of the high interest rates in this country, the financing requirements of the enormous U.S. federal budget deficit, the confidence of foreigners in the political stability of America, and sheer speculation by currency traders.
In any event the strong dollar helped make French wine, West German kitchen appliances and Japanese cars and video recorders a bargain for U.S. consumers. But it also drove up the prices of our manufactured goods and farm products in other countries, and deeply eroded the ability of U.S. producers to compete successfully in our own home market.
The result is a soaring trade deficit. Last year we imported a historically unprecedented $150 billion more in products than we managed to export. Entire American industries are on the ropes, and, despite an overall decline in unemployment, the general level of prosperity is being held down by the widespread layoffs of workers forced to take lower-paying jobs.
The strong dollar has been good for the Japanese and the Europeans. But they came to realize that the situation, if allowed to continue, would produce anti-import legislation by the U.S. Congress and undermine the ability of America to meet its security commitments to its allies. So in September they joined with the United States in a plan to bring down the value of the dollar relative to their currencies.
The plan worked better than they bargained for. The dollar’s exchange value in major currencies has fallen about 25%--to a postwar low in the case of Japan. Although it will be months before we feel the full benefit, prices on imported goods are on the rise and American exporters are feeling better.
A further fall in the dollar is necessary to deflate protectionist pressures in Congress, but our trading partners already are nervous over the prospective loss of business from what they see as a too-precipitous fall in the dollar. The Japanese have intervened to prevent the dollar from going lower.
Until recently the Reagan Administration, true to its faith in the magic of the marketplace, was satisfied with the floating system of exchange rates. But now it seems to be tilting toward the support of greater intervention to dampen the volatility of world money markets. For their own reasons, several other nations are, too.
A monetary conference held last month at Claremont Graduate School attracted some of the heavyweights in the small priesthood of world monetary experts--men like Friedman, Robert A. Mundell of Columbia, Ronald I. McKinnon of Stanford, John Williams of the Institute for International Economics, Richard N. Cooper of Harvard and Otmar Emminger, former president of the Deutsche Bundesbank.
They found it easy to agree that the present system is flawed--even Friedman accepted the need for some formal anchor on floating exchange rates--but were far apart on what to do about it.
A return to the postwar Bretton Woods system, under which all major currencies were pegged to the dollar and the dollar was convertible into gold, found little favor. But Mundell, some of whose ideas have had a profound effect on President Reagan’s economic policies, proposed going back to a gold standard. Others suggested that exchange values be set on the basis of what it would cost to buy a given basket of goods in various countries.
But the idea receiving the most serious attention was the proposal, similar to the plan favored by the French, to set “target zones” of currency exchange values, and then encourage countries to adopt policies that would keep the exchange rates within 10% of these targets.
Considering the far-reaching effects on jobs and prosperity, could Washington and Bonn and Tokyo really come to a meeting of the minds on the proper relationship of the mark and the yen to the dollar?
Also, any system of fixed exchange rates involves a certain surrender of sovereignty in each country’s management of its own economy. If target zones had been in effect since 1980, for example, the result would have been an acceleration of U.S. inflation instead of the leveling off that occurred.
Several of the experts at the Claremont conference concluded, like Friedman, that a reform of the monetary system is unlikely to happen as a result of a concrete, collective international decision. Instead, the present system will be altered by fits and starts as circumstances dictate.
Maybe that’s for the best.
