Steadying the Dollar
The six-nation meeting of finance ministers in Paris last weekend did not, from the American point of view, do everything that it could have to stabilize the dollar and encourage the kind of economic activity that would help reduce the U.S. trade deficit. Within the parameters of political reality, however, the gathering produced much greater progress than the skeptics expected.
The United States and its major trading partners agreed in the fall of 1985 to encourage a fall in the exchange value of the dollar in order to increase the competitiveness of American goods in the world market.
The value of the dollar relative to other major currencies has in fact fallen 30% to 40% in the last two years. So far, however, the U.S. balance of trade has not improved to the extent expected. But the change has pinched economic growth in Japan and West Germany. Washington has pressured Tokyo and Bonn to take steps to energize their economies in order to increase the demand for U.S. goods. The Japanese and the West Germans, for reasons of their own, have resisted the advice.
Until recently the U.S. Treasury kept on the pressure by seeming to be content to allow the dollar to drift still lower. Some members of Congress think that this policy should be continued in order to improve further the competitiveness of U.S. products. But wiser heads have warned that, below a certain level, a falling dollar is dangerous for the United States because it would feed inflation, make Japanese banks nervous about continuing to finance the huge U.S. budget deficit and feed political resentments to the detriment of overall allied relationships.
Against this background, the United States and its major trading partners took some modest but important steps over the weekend. Although the details are secret, Treasury Secretary James A. Baker III apparently agreed to join international efforts to prop up the dollar when it falls below certain levels. The West Germans agreed to expand their planned tax cut, although not until 1988, and the Japanese telegraphed a willingness to speed their economic-reform program if need be.
Some outside experts question whether the participating governments will be able to stop the slide of the dollar; the amount of currency trading by private interests simply dwarfs the monetary war chests available to governments. It is also a foregone conclusion that, unless the United States gets its budget deficit in hand, no amount of international cooperation is going to do much for the U.S. trade deficit.
Still, one has only to contemplate what might have happened in the absence of any cooperation at all to appreciate the importance of the Paris meeting. It’s a major step in the right direction.
