Changing the World's Money

The international monetary system is in ruins, and it will be necessary to reconstruct it.

--French President Georges Pompidou at his press conference last week

Not since John Maynard Keynes, Dean Acheson, Henry Morgenthau and politico-economic experts from 45 other countries huddled in the little New Hampshire resort town of Bretton Woods in 1944 has there been a monetary meeting like the one convening in Washington this week. John Connally, the tough but still charming Texan, will be there as the chief attraction, if one can put it that way. So will assorted treasury chiefs, finance ministers and central bankers--France's Valery Giscard d'Estaing, Germany's Karl Schiller, Italy's Guido Carli. Like their predecessors at Bretton Woods, these men face the necessity of crafting a new system to finance global trade, tourism and investment. They surely will not finish that herculean job by the time the annual meeting of the 118-country International Monetary Fund ends Friday. The question is whether they will even begin, or whether they will instead turn the world even closer toward a potentially ruinous trade war.

The IMF delegates cannot merely patch up the Bretton Woods system of fixed prices for every currency, based on a fixed relationship between the dollar and gold. President Nixon shattered that illusion on Aug. 15, when he announced that the U.S. would stop selling gold to redeem foreign-held dollars. The "Nixon Shock" has already moved moneymen into discussions that would have sounded like sheer fantasy a few months ago. American officials who once proclaimed the majesty of the dollar now cheer declines in its price on newly freed money markets, because they hold the potential for helping the U.S. balance of payments. Meanwhile, Europeans are reluctantly breaking loose from their mystical attachment to gold and discussing ways to reduce its role in a new system.

Like Atlas. Yet the IMF meeting could easily be dominated, not by discussion of the shape of a new system, but by foreign complaints against the 10% surcharge that Washington slapped on U.S. imports in August. If so, the momentum toward basic financial reform might well be lost, and foreign countries would be tempted to retaliate against U.S. goods and investments. That would not only create an impossible climate for monetary bargaining, but would threaten the world prosperity that depends largely on relatively free circulation of goods, money and travelers across national borders.

For Treasury Secretary Connally, the meeting will be a sort of High Noon --and how he performs will more than anything else determine which way the confrontation goes. Connally so far has been uncompromising. Two weeks ago, at a London meeting of the Group of Ten rich industrialized countries, he refused even to spell out Washington's conditions for ending the surcharge, implying that it was up to other nations to put together a package of currency revaluations and trade concessions that might satisfy the U.S. Indeed, he has infuriated Europeans by remarking gratuitously that the U.S. "like Atlas, has been holding up the world for the past 25 years."

For Donkeys Only. That Texas-style rhetoric is beginning to draw equally sharp responses from Europeans. France's Pompidou said last week: "I do not believe that the U.S. is disposed to negotiate in a useful manner at the IMF meeting." The surcharge, he said scornfully, is a "big stick" that "could eventually be transformed into a carrot--if only one were willing to play the role of the donkey. That is not our intention." Canadian officials, who initially expressed sympathy with Nixon's goals, are also fuming. Trade Minister Jean-Luc Pepin figures that if the surtax stays in effect for one year, it will wipe out 90,000 Canadian jobs by reducing exports to the U.S.; Prime Minister Pierre Trudeau charged bitterly on TV last week that Americans "don't know much or care much about Canada."

Fortunately, such words have not yet been matched by retaliatory action --but the possibilities are chilling (see box).

The German government, for example, could quietly advise major companies and universities that it expects them to buy German-made rather than U.S. machinery. Members of TIME's Board of Economists are particularly worried about possible reprisals against the U.S. companies that have poured more than $75 billion into building plants overseas. An obvious target is the profits that these companies send back to the U.S.--$6.2 billion last year. New controls on repatriation of these profits would cut deeply into the earnings of such major U.S. companies as DuPont, H.J. Heinz, General Motors and ITT. There are signs that these dangers are being appreciated in Washington. A secret meeting of Administration aides in the office of Peter Peterson, presidential assistant for international economic affairs, last week buzzed with criticism of Connally's tough line. The State Department has been upset by Connally's maneuvers and has urged him to be more diplomatic.

Treasury officials are still afraid that, as one puts it, "the minute we say what we might want, the Europeans will say they want something else." In fact, though, if Connally is prepared to announce a prompt date and sensible conditions for ending the surcharge, he will find other nations willing to bargain on the upward revaluation of their currencies against the dollar, which is a key U.S. aim. Washington seeks about a 12% to 15% average increase in the number of dollars that major foreign currencies will buy, in order to make U.S. goods cheaper for foreigners to purchase, and foreign products costlier in the U.S. Much of that adjustment already has occurred in the free money trading that followed Nixon's August moves. By the end of last week, the German mark had floated up 9% from its last official value, the Japanese yen 7.4%, the Dutch guilder 6.9%, the British pound 3.5%.

The formal acceptance of these new values, if combined with about a 5% to 8% devaluation of the dollar in terms of gold, would go far toward meeting Washington's immediate goal. On the foreign side, Pompidou flatly opposes revaluation of the franc, but many other governments recognize that official exchange-rate readjustments are necessary in order to correct the obvious overvaluation of the dollar. "We all know what needs to be done," says The Netherlands' Jelle Zijlstra, chairman of the Bank for International Settlements. Japanese delegates, for instance, are reluctantly prepared to offer an 8% revaluation of the yen, and are resigned to the idea that the yen eventually may have to go up 12 1/2%.

Butter Money. A general currency realignment would be only the indispensable first step toward long-term monetary reform. Economists everywhere are offering plans for more fundamental change--some of them rather fanciful. Japan's Nobutane Kiuchi would risk reviving memories of the Axis by having Japan and Germany agree to a new fixed rate for converting yen into marks, and inviting other countries to tie their currency values to this rate. Britain's Nicholas Kaldor suggests a new international money convertible not into dollars or gold but into a series of commodities, including wheat, butter, sugar and rubber. Even the Italian Communist Party, taking an unexpectedly sympathetic interest in capitalist economics, is calling for a vaguely defined new kind of world money.

These plans at least point to the chief weakness of the Bretton Woods system: its overwhelming dependence on the dollar. Under the old system, the dollar was supposed to be freely convertible into gold. Other nations came to use dollars to pay their trade bills and to hold dollars in the reserves that back the values of their own currencies. That dollar dominance has been weakened by years of American balance of payments deficits and gold losses, and lately by rapid U.S. inflation.

Economists throughout the world are in surprisingly broad agreement on what should be the basic elements of a new system. Its key features, as summarized last week by Yale's Robert Triffin:

> Greater flexibility of exchange rates. At present, every IMF nation is supposed to keep the price of its currency from varying more than 1% above or below the official rate. Each government is obliged to buy or sell enough of its own money to prevent any wider swings. At a minimum, the "band" of fluctuation should be widened to 2 1/2% or 3% either way. That would give the money markets greater leeway to adjust currency values so that they could more accurately reflect changes in the world economy without precipitating a devaluation or revaluation crisis. Many economists also go further to advocate some semiautomatic way of triggering devaluations or revaluations, in order to prevent a government from defending a clearly unrealistic currency price at the risk of disrupting the economies of its trading partners. Triffin's idea: the IMF should define for each member country a "normal" level of reserves. A nation that accumulated reserves 50% higher than "normal" would have to consult with IMF officers about how to change its economic policies in order to stop the accumulation; if the consultations failed, it would have to increase the price of its money. Similarly, a nation whose reserves fell 50% below normal would have to devalue, if it could not agree with the IMF on how to stop the reserve losses.

>Gradual substitution of some new form of international money for both gold and dollars. Individuals would never see this money, which would not take the form of bills or coin. It would be only a bookkeeping entry. The U.S., say, would pay a debt to Japan by having its account at the IMF debited, and the Japanese account credited, by an appropriate number of units of the new money. Although various plans are circulating for an entirely new form of money, to be called "bancors" or "bancalls," most economists favor much greater use of the already existing Special Drawing Rights (S.D.R.s). These have been created by the IMF on the books of the member nations, though not yet in amounts large enough to have much effect.

How to manage a shift to S.D.R.s as the world's major international currency? Triffin would begin by in effect turning into S.D.R.s most of the dollars that Americans may spend in the future to buy imported TV sets, fly on foreign airlines or build plants overseas. Nations that receive the dollars would turn most of them over to the IMF in exchange for S.D.R.s, keeping only small "working balances" of new dollars in their treasuries. That would leave the problem of phasing out the roughly $90 billion of gold and dollars already stashed away in national reserves or circulating outside the U.S. Lawrence Krause of the Brookings Institution suggests that the IMF tempt the nations now holding these assets to turn them in gradually for S.D.R.s, too, by offering to pay interest on the deposits of gold and old dollars that it receives.

World Central Bank. Even to negotiate such a system would take years, and there are huge practical and political difficulties. Most important, all the major proposals for basic reform of the monetary system call for nations to surrender an unprecedented degree of money sovereignty to the IMF, which would have to be turned into a true world central bank. Keynes wanted to do that when the IMF was created at Bretton Woods, but nationalists shot down his idea, and their objections are still strong.

The main thing now, though, is to end the immediate monetary crisis and start negotiations for fundamental reform--which can be done only if the U.S. shows some give on the surcharge. The salutary shock effects of Nixon's moves have by now had their maximum impact, and it is urgent to get at least the outlines of an agreement soon. Otherwise, the momentum for reform that has been built up will dissipate, and the world will lose its best chance so far to get a more rational financial system.

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