Drop in Dollar Must Stop, Volcker Says

Federal Reserve Chairman Paul Volcker, breaking ranks with the Reagan Administration, said today that he believes the dollar has declined sufficiently and that other policy changes are needed to take care of America’s trade problems.

Volcker’s comments put the head of the central bank in disagreement with Treasury Secretary James A. Baker III, who threatened to push the value of the dollar lower unless America’s trading partners do more to stimulate their own economies.

But Volcker, testifying before a House Ways and Means trade subcommittee, said he believes the sharp drop in the dollar over the last 18 months has pushed the dollar low enough and that further declines could threaten to renew inflation in this country.

“I don’t want an overly depressed dollar either,” Volcker said. “At this point, I am not sure any further adjustment (in the dollar) is necessary. I would put the emphasis on other policies.”

‘Consume Less’

Volcker said the United States must begin to depress domestic demand, through such possible changes in fiscal policy as reducing the huge budget deficit, while pushing for higher sales of American goods overseas.

“What we are going to have to do is consume less and export more,” he said.

Volcker said Americans have been living in a “false paradise” in recent years as the country has lived beyond its means and depended on large foreign borrowing to support its standard of living. He said this imbalance will have to end as America faces painful adjustments needed to reduce its trade deficit.

“We have been lucky to get by for five years, but we aren’t going to get by much longer,” he said.

Crucial Meetings Near

Volcker’s disagreement with Baker on the value of the dollar comes on the eve of crucial meetings this week between the United States, Japan, West Germany, Britain and France. The finance ministers and central bank leaders of the five countries are scheduled to meet Friday and Saturday in Washington before the opening session of the World Bank and International Monetary Fund.

Baker’s comments last week were interpreted as an effort to bring pressure on Japan and West Germany to slash their interest rates to stimulate domestic growth and provide larger markets for American goods or face further declines in the dollar.

The comments sparked a two-day slide in the dollar on foreign exchange markets.