Mr. Dollar Goes Abroad

Money

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In Washington late this month, 2,000 men from 102 countries will gather to discuss what is probably the world's most fascinating, most widely, talked about--and most misunderstood--subject: money. Ever since the ancient Lydians set up the first effective monetary system, money has been at the heart of men's lives and business, the fuel of their ambitions, the symbol of wealth and power in almost every society. It has not only made possible but helped to create the vast and complicated structure of modern civilization. Adam Smith called it "the great instrument of commerce," but few who have tried to define it over the years did better than the poet Bion 2,100 years ago: "Money is the sinews of affairs."

As they prepare for their annual meeting in Washington, the men who make up the powerful International Monetary Fund--which aims to stimulate world financial cooperation and prevent monetary crises--are aware that those sinews are more sorely strained than at any time in the postwar period. Perhaps more than ever before, money has become a subject of worldwide concern, debate, even bitterness. Reason: the free world faces the grave possibility of a shortage of money to use in financing its rapidly growing international trade and investment, partly because it has leaned too heavily on a couple of powerful currencies. The result is the loudest clamor in 20 years for a reform and updating of the world's monetary system--that motley of treaties and gentlemanly agreements through which the major nations have agreed to finance their commerce with one another.

Bickering & Complaining. No one need look far to see that the world's money system is not working smoothly. The affluent nations of the West are bickering with each other over the system's inadequacies and how they should be corrected; the poor nations are complaining that the system works to their disadvantage. Britain's money problems--the pound has faced crisis after crisis--have forced the country into a recession. Charles de Gaulle has hit at the U.S. by exchanging for gold the dollars that France has acquired, thus helping to force the world's richest nation to cut back its spending abroad to stem the outflow of dollars. Such terms as gold outflow and balance of payments have become a part of daily language, a subject for the editorialists and cartoonists; Al Capp's current Li'I Abner strip is based on a scheme to solve the U.S. balance-of-payments problem.

One basic trouble is that the world has no truly international currency to bankroll its expanding volume of commerce. In order to support most trade and investment, it uses several substitutes: gold and two so-called "reserve" currencies, U.S. dollars and British pounds. But world trade is growing so fast that the reserves cannot keep up with it: since 1959, free world reserves have expanded only from $57 billion to $68 billion, while exports have risen from $101 billion to $156 billion.

Reserve Primacy. In the rising chorus of voices for reform--joined last week by the IMF and Federal Reserve Board Chairman William McChesney Martin Jr.--the strongest and most influential belongs to the chief financial strategist of the monetary world's most powerful member: Henry Hamill Fowler, 57, the 58th Secretary of the U.S. Treasury. "Improvement of the monetary system," says "Joe"* Fowler, "is the major task facing the finance ministers of the free world." Two months ago, Fowler called on financial leaders to convene--at a time to be negotiated--the greatest monetary meeting of the postwar era. Last week, in his first journey abroad as Treasury Secretary, he jetted through the major capitals of Europe in an effort to push that meeting and to sell the idea of reform to the men who manage Europe's money. Accompanied by a distinguished delegation that included Under Secretary of State George Ball and Under Secretary of the Treasury Fred Deming, Fowler hoped to determine what practical steps can be taken next toward the goal of changing the monetary system.

As the director and defender of the powerful dollar--"Mr. Dollar" himself--Fowler assumes a certain primacy among the West's clubby and powerful group of money managers. The U.S., after all, holds 33% of the free world's gold, accounts for 15% of its international trade and produces almost half of its industrial goods. Nonetheless, Europe's conservative finance ministers and central bankers felt that Fowler's proposal for a reform conference was rather brash for a newcomer--particularly one who had not consulted them in advance. They waited with considerable curiosity to meet this newest member of their club.

The man they met last week is a courtly but outgoing Virginian who acts, talks and looks quite a bit like a country lawyer. Unlike his sophisticated predecessor, Douglas Dillon, who was highly regarded in Europe, Fowler speaks no foreign language and is not notably experienced in the arcane affairs of international finance. In a job whose occupants in past years have often been men of wealth, he is of modest middle-class means. His surprise appointment April 1 was a disappointment to many financiers in the U.S. and abroad who had hoped for a man more in the Dillon mold. What they failed to see--and what they are learning fast--is that Joe Fowler has much of that deceptive country-boy shrewdness that marks his good friend, Lyndon Johnson.

Fowler is an adept negotiator who prepares for every task with compulsive thoroughness. He can be simultaneously friendly and cautious, has a disarming sense of humor. He also possesses a broad, basic background in all areas of the U.S. economy, and a political instinct that has been finely honed during a Washington career of some 32 years, roughly half in Government and half in law practice. He has countless friends in Congress and the business establishment, and he has the ear of Lyndon Johnson, who can hardly find enough adjectives to express his admiration: "He's prudent, careful, able, loyal. He's a leader of men."

Toward a Detente. Fowler's first stop last week was Paris, where he got a predictably cool reception. Though France was the first to press hard for monetary reform, it is in no rush for it right now, disagrees with the U.S. on how it should be achieved and what nations should carry it out. France's elegant, ambitious Finance Minister Valery Giscard d'Estaing pointedly did not meet Fowler at Orly Airport, and the talks got off to a slow start. After two days of discussion and some gastronomic milestones in Giscard's private dining room, however, the air warmed considerably.

Fowler assured Giscard that Washington will not rush into a hastily prepared monetary conference, and that the U.S. is flexible and open to negotiation about most of its monetary positions. "I came here not to arrange a conference," said Fowler, "but to start discussions that might lead to one." Giscard d'Estaing had thawed so noticeably at the end that he went so far as to violate De Gaulle's French-officials-speak-French policy by rising to toast Fowler in English. The talks clearly produced a detente in the strained Franco-American monetary relations, and they gave the French a new respect for Fowler as an articulate and careful negotiator.

Flying on to Rome in a two-prop U.S. Air Force Convair T-29, Fowler met with Italian Prime Minister Aldo Moro, Governor of the Bank of Italy Guido Carli, and Treasury Minister Emilio Colombo. The Italians have been more sympathetic than most Europeans to the U.S. call for reform, and this time the meetings were cordial from the beginning. "We have given our fullest support" to the idea of an international conference, said Minister Colombo as he and Fowler left the meeting. For the first time, Fowler indicated that the U.S. has a time table for reform: talks to begin later this month at the IMF meeting and to end no more than six months later, then an international concord on reform by late 1966.

In Bonn, Fowler found the West Germans more receptive to his call for a monetary summit meeting than the French, but somewhat less so than the Italians. The Germans are not so much worried about the possibility of a money shortage as they are about the inroads of U.S.-owned firms, would like to put limits on the amount of dollars that U.S. businessmen could spend abroad. As Fowler at week's end prepared to move on for talks in Sweden, Britain and The Netherlands, however, he was heartened and surprised by the extraordinarily warm tribute of Bundesbank President Karl Blessing: "Mr. Fowler, we want you to know that you are among friends."

Changing Economy. There is every indication that the Europeans were impressed by the man who has taken on the Treasury secretaryship at a crucial point in U.S. economic history. The office of Treasury Secretary, obviously one of Washington's most important jobs, has been held by a distinguished line of men that began with Alexander Hamilton. In Room 3330 of the Treasury's grey granite Greek-revival building, the office of the Secretary, are made decisions that stretch across the fields of defense, foreign policy, trade and aid, and that affect the pocketbooks of all Americans.

Hardly any decision is taken by the Government without first weighing its impact on the U.S. economy and consulting with the Treasury Secretary. Fowler's Treasury collects $100 billion a year in taxes and pays it all out again with more than 300 million checks. It stores $51 billion in cash and securities in 15 vaults beneath Fowler's office, and each week routinely refinances $2.2 billion of the federal debt. The Treasury mints and prints the nation's money, has 88,000 employees, directs the Coast Guard, and, next to the FBI, runs the biggest law-enforcement enterprise: the Internal Revenue Service sleuths, the Narcotics Bureau, the Customs Bureau and the Secret Service.

What makes Fowler's tenure particularly challenging is the important changes that are sweeping over the U.S. economy. International monetary policy has become an overriding consideration in Washington's deliberations, and the loss of U.S. gold to other nations continues to influence many decisions. Furthermore, the Government is involving itself more and more in the U.S. economy. Lyndon Johnson realizes that he needs good times to finance his Great Society programs, and he intends to keep the economy in its present high gear by selectively increasing Government spending, reducing taxes and applying wage and price guidelines. Fowler's influence and power are all the greater because Johnson is no economic theorist; he knows what he wants, but he does not know exactly how to get it done. For that he depends on the economic team headed by Fowler.

Fowler is one of the best-liked men in Washington. Businessmen know him well from his past work as Treasury Under Secretary (1961-64) and from his private law practice, in which his many blue-chip clients included the Automobile Manufacturers Association, Olin Mathieson and Corning Glass. Most Congressmen are impressed by his long experience in many phases of Government. As Johnson's chief economic monetary spokesman, Fowler confers with the President at least half a dozen times a week, often pops into the White House to sip root beer and chat about business. He has already established himself as the leader of the President's "quadriad" of four top economic policymakers, who are charged with keeping the U.S. economy brisk and rising.

Prayer from the Pastor. The manager of the U.S.'s international monetary policy is a Norfolk & Western Railway engineer's son who earned a doctorate in law at Yale ('33) and was an editor of the Law Review. Joe Fowler hitched on to the New Deal as a Tennessee Valley Authority attorney, quit the Government in 1946 to head his own Washington law firm, then was called back temporarily in 1951 to work in the Office of Defense Mobilization, of which he became boss the following year. In 1961, when Republican Douglas Dillon needed a savvy Under Secretary to help steer legislation through the Democratic Congress, he recommended Fowler to President Kennedy. Before accepting the job, devout Episcopalian Fowler asked his minister, the Rev. William Sydnor, to "pray for God's guidance" for him. The answer was yes.

In early 1964, Fowler returned to private law to earn some money, went on to organize the star-spangled Businessmen for Tax Reduction, which saved the tax-cut bill by selling the idea of deliberately incurring a budget deficit; he also headed Businessmen for Johnson and Humphrey. Whenever Johnson ran into Fowler after the election, the President asked if he had made enough money to return to Government. When American Electric Power Co. President Donald Cook turned down his bid for the Treasury, Johnson turned almost automatically to Fowler. Summoning him to the Oval Room, Johnson said: "I have not come to ask, I have come to tell, and I want you to do the same thing. Would you mind going home for lunch and telling Trudye you are going to be named Secretary of the Treasury?" Fowler protested that he and his wife planned to leave for Europe in a few days. Replied the President: "Don't bother me with details."

Now Fowler leaves his Federal-period (1809) red brick house in Alexandria, Va., at 8 a.m. in his air-conditioned black Cadillac, often gets on the radio-telephone to the Treasury switchboard during the 20-minute drive. He almost always lunches in his office, which overlooks the White House south lawn. Over his desk on a typical day pass a CIA report, a survey on an Asian development bank, a balance-of-payments prophecy, a study on nuclear policy, a request for a Coast Guard cutter in the South China Sea. When he breaks for the day at 8:30 p.m., he lugs home a briefcase full of staff papers that he works on until midnight--or much later. Fowler is so busy that he and his wife rarely entertain any more, and he has limited himself to a single cocktail a day to keep in working shape.

As Treasury Secretary for only five months, Fowler has already made his weight felt in Washington. He eased through Congress an increase in the federal debt ceiling, from $324 billion to $328 billion. He cut the silver content of the nation's coins for the first time in more than a century. Just before leaving for Paris, he advised the President about the economic implications of the steel negotiations, sent him a sheaf of memos to keep him busy in Fowler's absence.

Stability & Security. No task that Fowler takes on is more important than his assignment to protect and defend the position of the dollar. All the talk of reform, all the plans and schemes inevitably raise a basic but difficult question for the U.S.: Should the dollar continue to be almighty?

The U.S. never consciously sought its present fiscal preeminence, but will not lightly surrender the role and responsibility that it has acquired. The dollar has been dominant in the world monetary system for decades. The postwar pattern was set when a conference of political and economic leaders from the Allied powers, meeting at Bretton Woods, N.H., decided that postwar commerce should continue to be financed by gold, pounds and dollars. Because the pound had been battered by the war and gold was in short supply, the dollar became the most fluid unit for international exchange, and the U.S. Treasury became a commercial bank to a capital-starved world. Through foreign aid, loans, investments and gifts, the U.S. has poured out a net of $97 billion during the past two decades.

The dollar has become the world's most powerful and mobile currency, freely crossing borders and financing most of the postwar expansion of global trade. Despite the U.S.'s recent monetary problems, it remains the most highly prized currency, backed by the huge productive power of the U.S. economy and the integrity of one of the world's oldest governments. The dollar is literally as good as gold because the U.S. stands ready to redeem it for gold. It has held its value better than the currency of any other major nation in recent years. Though some Americans complain about the decline of its worth resulting from inflation, the dollar has 87% as much purchasing power today as a decade ago, while Britain's pound has only 80% as much, Japan's yen 72% and France's franc 64% .

The free world's monetary system, though overly dependent on the dollar, has worked remarkably well. It has not only given the world enough capital and confidence to prevent the deflations that plagued nations during the 1930s, but has also vastly expanded world trade and travel, knit together the free economies, and greatly enhanced the wealth of nations. It has brought some advantages to the U.S. as well. By pumping out its dollars, U.S. business has earned substantial profit, and the U.S. Government has earned prestige.

Because of its stability, security and superior buying power, the dollar is eagerly sought by foreigners. Last week the Federal Reserve's Martin called "a fact of financial life" the habit foreign nations have of supporting their faltering currencies with dollars. Shopkeepers in many parts of the world give generous discounts to tourists who pay in dollars. Millionaires in Latin America and other developing areas convert their own currencies into dollars--paying a high premium for the privilege--and often deposit the dollars in U.S. banks.

Unfriendly Attack. There is, inevitably, a reverse side to the coin. This vast outflow of dollars--for aid, military assistance, business investment, tourist spending--has for 14 years exceeded the money flowing into the U.S. from its foreign transactions. Result: a chronic deficit in the U.S. balance of payments. What makes the payments deficit so serious is that each deficit dollar is like a check written against the gold supply of the U.S. Treasury, which is pledged to exchange foreign-held dollars for gold upon demand. Largely as a result of its payments deficit, the U.S. has suffered a steady loss of gold to nations holding dollars.

Because foreign central banks have built up--and cashed in--tremendous stocks of dollars, Fort Knox's bullion hoard, which backs the value of the dollar, has plunged in the past seven years from $21 billion to $13.9 billion. Foreigners now hold $27.7 billion in dollars--almost twice the value of the U.S. gold supply--and they can demand gold for them at any time. Though it is highly unlikely that they would ever cash in enough to break Fort Knox or force the U.S. to devalue the dollar, the mere fact that they have the power to do so is a bludgeon and a bother to the U.S.

The most unfriendly attack on the dollar has been pressed by France's Charles de Gaulle, who seeks through economic mischief to gain his own political ends and lessen the U.S.'s influence abroad. In the past year, De Gaulle and Giscard d'Estaing have pushed to upgrade the trading power of gold (of which France has plenty), cashing in $800 million worth of dollars for U.S. bullion. Imitating the French, West Germany, Spain, The Netherlands, Belgium, and Switzerland have also traded in many millions of dollars for Fort Knox's gold.

"Good & Encouraging." To protect the dollar and to bring some discipline to its payments situation, the U.S. has had to adopt some unpleasant moves this year. It has trimmed foreign aid to the lowest point ever, $3.38 billion, cut overseas military spending almost everywhere except in Viet Nam, and pared the value of goods that U.S. tourists can bring back home duty-free. More important, the Government has placed a tax on loans to foreigners by U.S. banks and has asked businessmen to "voluntarily" clamp down on their overseas investments. The drive has been brought home dramatically--and somewhat amusingly--by the President's insistence that U.S. wines rather than foreign ones be served at the White House and at all U.S. embassies, and by the use of Goldfinger posters to point up the balance-of-payments problem. The Government has also tried to get more tourists to see the U.S. first, but that drive has been a flop: tourist travel abroad is up 20% this year.

Nonetheless, the measures have begun to work. Last month Fowler announced "good and encouraging" results: U.S. payments ran a surplus of $132 million in this year's second quarter--its first black ink since 1957.

Though gold continues to drain off as foreigners cash in their accumulated dollars, the Government last week reported that the July loss of $80 million was the lowest all year. This interim success has deeply impressed skeptical European bankers, who doubt that their own businessmen would put patriotism over profits. Of course, the Government has such great powers over private business that it would take a brave businessman indeed not to "volunteer" to help. Though Fowler warns that the gains may be only temporary and that further tightening of discipline is necessary, he believes that the U.S. is on its way to solving its payments problem. Says he: "The U.S. economy and its agent, the dollar, are overwhelmingly strong at home and abroad."

Eloquent Reason. As a result of this, Fowler last week brought a new message to Europe: the dollar crisis is over. Since Fowler feels that it is only a matter of time before the U.S. permanently solves its balance-of-payments problem, he believes that the free world should get ready right now for the inevitable result of that solution: a drying up of the amount of dollars in the world and a consequent lessening of the amount of money available to finance trade. As Fowler sees it, this is the most eloquent reason for pressing for a revised money system. Said he last week: "The preparatory talks for a monetary conference are the same sort of contingency planning we have to make to defend the access roads to Berlin. If you wait to do this until these roads are cut off, it is too late."

While the U.S. is improving its position, the troubles of its closest monetary ally, Britain, are continuing. Though Britain's primary problem is that of living beyond its means, the British plight has been aggravated by the country's position as a reserve nation whose currency is subject to all sorts of alarums. Britain's reserves of gold and hard money have been dropping almost steadily for 31 years, are now down to $2.6 billion. In the clubs and pubs of London's City and other European money markets, talk persists despite all denials that Britain may be forced to devalue.

That drastic action, which would help Britain's trade deficit but do nothing to solve its gut problem of low productivity and high prices, is a constant source of worry to Lyndon Johnson and Joe Fowler. They fear that British devaluation would upset world money markets, force some other nations into devaluation to remain competitive, and price U.S. exporters out of markets where they compete head on against the British, notably in Latin America. For economic, political and sentimental reasons, the U.S. will do everything it can to bail out Britain.

Les Anglos. Just about all the world's money managers agree that the present monetary system has become outmoded, outdated and eminently unfair. When it comes to deciding just what should be done to change it, though, there is widespread confusion and sharp disharmony. All the major money powers have their own ideas for tinkering and tampering with the system, but the nations are broadly divided into two camps: Europe's Continentals on one side and les Anglos, as De Gaulle calls the U.S. and Britain, on the other.

The U.S. wants a change in the system not only because it fears that a payments equilibrium would retard international trade by drying up dollars, but because the U.S. has been gravely penalized for serving as banker to the world. Most nations get into balance-of-payments problems because they run a trade deficit; the U.S., on the contrary, exports far more than it imports. It has got into its payments difficulty because it pumps out so many dollars in ways that help the rest of the free world: foreign aid, tourism and lending to capital-starved nations. Now the U.S. wants some of the newly rich Continental nations to carry more of the burden of financing world trade.

The Continentals, on the other hand, complain that the U.S. dollar--and, to a lesser extent, the British pound--have too much power in the world economy. Germany, the Benelux countries and several other nations of the Continent do not go along completely with Charles de Gaulle--who has retreated from his earlier bid to restore the gold standard--but they are moved by a rising tide of economic nationalism, want to upgrade the status and powers of their own currencies at the expense of the dollar.

The Continental moneymen also complain that the current system too easily allows acquisitive U.S. companies to buy up European industries and to inflate economies with dollars over which the moneymen have no control. If the U.S. wants to take over more of Europe's companies, they argue, it should be forced to dig more deeply into its gold stock instead of paying off in dollars, which are often not cashed in but float through Europe's banking system in the form of Eurodollars.

New Money. Bankers and economists from the Rhine to the Potomac are chewing over basic reforms of the money system. Separate and secret working groups have been set up by the IMF, the U.S. Treasury, the Common Market and the Organization for Economic Cooperation and Development. Lyndon Johnson recently named a blue-ribbon monetary-reform committee that includes former Treasury Secretary Dillon, Bankers David Rockefeller and Andre Meyer. The monetary debate has brought forth basic plans for reform from such eminent economists as Yale's Robert Triffin and Britain's Prime Minister Harold Wilson (both of whom propose to turn the IMF into a supercharged world central bank with powers to create its own money), and France's Jacques Rueff (who wants a return to the gold standard but is now almost alone in his stand).

The idea of creating an international money has become one of the most widely discussed ideas for reform. The industrial powers would contribute their own kroner, francs, marks and yen to some kind of international agency that would then print, issue and regulate the new money for use in international trade and finance (it would not be used by citizens of individual countries). Several powerful forces have adopted this idea in various forms. The Common Market is discussing ways to generate its own six-nation currency for international trade, and France has been pushing to create a ten-nation "cru" (composite reserve unit).

The U.S. basically favors reforming the monetary system by increasing the amount that each industrial nation would contribute to the IMF and broadening the IMF's lending powers, thus insuring an increased supply of money and credit. It has been against many of the details of both the Triffin plan and the French cru because both would completely displace the dollar in international trade, but it is now coming around to the idea of an international currency. Fowler insists that any new currency must supplement--and not supplant--the dollar and the pound. The dollar must maintain its position as the world's most important currency, cannot be devalued, must keep its role as a currency used in reserves. In his talks with Giscard d'Estaing, Fowler said that the U.S. might now favor a new international currency--but only after Giscard agreed to negotiations at this month's IMF meeting for reform.

Rewards & Burdens. A big question, of course, is just who would control any new currency. The U.S. would like any monetary reform to be in the hands of the IMF, in which its influence is dominant. France and its Continental allies want to work any reform through the Group of Ten's powerful industrial nations, in which the U.S. has membership but the Continentals collectively have the greatest voice. The Continentals would thus like to keep reform a club affair not involving the underdeveloped nations. Fowler indicated last week that the U.S. may be warming to the idea of reform through the Group of Ten--but it would still prefer the IMF. In a book published this week, Monetary Reform for the World Economy, former Under Secretary of the Treasury Robert Roosa speaks up for new money to be created within the IMF--a position that European moneymen believe may reflect just what the U.S. wants.

Taken together, the best features of these plans would repair the inadequacies of the current system. The money drought would be alleviated for developing nations, which would be able to borrow more readily from the international treasury. Nations suffering from temporary financial embarrassment, such as Britain, would be able to borrow fairly easily instead of devaluing. The Continental countries, by contributing their own currencies to the new reserve fund, would share in both the rewards and burdens of serving as banker to the world. And the increased supply of reserves would ease the pressure on the dollar because 1) the U.S. could easily borrow the new reserve units when it needed to tide over balance-of-payments debts, and 2) foreign dollar holders could exchange their excess dollars for the new reserve units instead of for U.S. gold.

No Roses. Cautious Joe Fowler favors evolutionary change, working through existing machinery rather than rushing to embrace radical ideas. "There are plenty of reform plans floating around," he says. "The problem is to find an acceptable one. I don't expect that my path will be strewn with roses." Negotiations toward any change will be hard, and agreement will be long in coming, but Fowler's trip to Europe has already heightened a new spirit of compromise and led to a general agreement among the money managers that they must begin serious, continuing talks now. Fowler's friendly persuasion has also made it certain that plans for reform will be on the top of the IMF's agenda.

When reform comes, perhaps within two years, one inevitable consequence will be less dependence on the dollar and more reliance on other forms of finance--a development the U.S. would welcome. The dollar will no longer be almighty in the sense that it is called upon to do the whole world's work. But neither Fowler nor anyone else in the Administration intends to concede an inch (or a penny) when it comes to the dollar's basic value and its power to move freely around the globe. The dollar will remain the world's most potent money, as befits the currency of the world's most powerful country. If anyone wants to call that being almighty, then that is all right with Joe Fowler.

*When he was a teen-ager in Roanoke, Va., Fowler got the nickname from a Greek immigrant restaurant owner who had trouble with any Anglo-Saxon name except that one. The handle stuck.

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