A New Way to Reform

To heads of governments, currency devaluation is a devilish thing, to be resisted to the bitter end. It not only dam ages national pride but also depletes the pocketbooks of voters by forcing them to pay more for imported goods and foreign travel. Despite those draw backs, policymakers are becoming in creasingly interested in a scheme for making devaluations--and upward revaluations--fairly common.

The plan has the particularly unattractive name of "crawling peg," but it has a notably attractive list of advocates. It was popularized largely by Princeton Economist Fritz Machlup, and lately has been advocated, in one form or another, by German Economics Minister Karl Schiller, French Finance Minister Valery Giscard d'Estaing and Hendrik Houtthaker, a member of the U.S. Council of Economic Advisers. Last week Guido Carli, governor of the Bank of Italy, also offered a crawling-peg plan.

Step by Step. The 25-year-old system that the crawling peg would change is based on fixed exchange rates, under which currencies are valued in relation to the dollar and may range up or down by no more than 1% in foreign-exchange trading. Under the simplest form of crawling peg, if a currency were to sell for some months at the bottom of its 1% range, then its official value would automatically move down. On the other hand, if heavy demand were to make a currency sell persistently at the top of its range, its official value would be automatically raised.

If this system were already in effect, the disparity between the undervalued Deutsche Mark and the overvalued French franc, the most chronic source of monetary crisis, might well be reduced. The mark probably would have moved up in several steps from its present value of 25-c-, to 26-c- or 27-c-, and the franc would have gradually declined from 20-c- to around 18-c- or 19-c-. The Dutch guilder and Italian lira probably would have moved up too, while the British pound almost certainly would be worth less than its present $2.40. The U.S. dollar would not have changed because it is the standard against which the other currencies are measured.

Closer to Reality. There are many varieties of crawling-peg plans. Some would adjust exchange rates annually, some quarterly, some monthly. Other versions would make adjustments optional and not automatic--that is, at the discretion of each government. All advocates agree that it is essential to make the parity changes frequent but small--perhaps 1% to 2% yearly. Sup porters believe that, under such a system, the value of a country's currency would reflect the realities of its balance of payments position and the amount of its inflation. The crawling peg would also avoid sharp devaluations and revaluations. It would thus discourage currency speculation because the gains that could be achieved from parity changes would be too small to bother about.

Opposition is formidable. Common Market officials fear that frequent changes in the value of the Market's six currencies would wreck their system of uniform farm prices. Some German and Swiss bankers argue that the crawling peg would depress international trade and investment by creating uncertainty as to what any currency would be worth in the future. Supporters reply that under the present system, threats of large devaluations or revaluations create even greater uncertainty--and that all too many governments depress trade by imposing controls on the movement of goods and capital in order to preserve unrealistic exchange rates.

The Road Ahead. At its September meeting in Washington, the International Monetary Fund is expected to appoint a committee to study the many peg plans. IMF Executive Director Pierre-Paul Schweitzer has invited official discussion of the peg and a companion plan for greater exchange-rate flexibility, the "wider band." Under this plan, currencies would be allowed to swing 2% to 3% above or below their official parity. A wider band would give the crawling peg more room in which to crawl, and would lessen the frequency with which central banks have to intervene in world money markets to support or hold down a currency's price.

France's Giscard d'Estaing believes that a peg system could be operating a year or two after a decision to go ahead. Other economists recall that Special Drawing Rights--so-called "paper gold"--took five years to move from the status of a radical academic idea to a reform that the 111 IMF nations are actually about to institute. However long reform may take, more and more moneymen regard the crawling peg as an idea whose time has come.

This file is automatically generated by a robot program, so reader's discretion is required.