The Exaggerated Fuss over U.S. Dollar Devaluation

EVERYONE agrees that the once-almighty dollar is overvalued in relation to major European currencies and the Japanese yen. But how can it be cut down to size? European governments insist that the U.S. devalue the dollar by raising the official $35-per-oz. price of gold. The U.S., just as adamant, is opposed to such a move. It demands that the Japanese and Europeans revalue--that is, make their currencies costlier in terms of the dollar.

It is an Alice-in-Wonderland dispute. What would be the difference between a currency realignment accomplished by 1) foreign revaluations alone or 2) U.S. devaluation combined with inevitable foreign revaluations? "Economically, it doesn't matter two hoots," says Yale's Robert Triffin. Either way, the end result would be the same: the dollar would buy fewer yen, marks, guilders and other strong currencies. Theoretically, it is true, U.S. devaluation would also make the dollar worth less in terms of Brazilian cruzeiros, Chilean escudos, Indonesian rupiahs and 100-odd other weak or minor currencies. Most of the weak-currency nations, however, probably would devalue simultaneously or soon after the dollar went down; those that did not would see the prices of U.S. products drop in their lands, which would help to spur American exports.

What, then, is all the fuss about? Europeans want dollar devaluation for two reasons. First, it would cushion the shock of currency adjustments by making the gold in their official reserves worth more, even as their dollar holdings lose part of their value. Among the main gainers would be France and Switzerland, which try to keep more than 60% of their reserves in gold. More important, dollar devaluation would constitute a symbolic recognition by Washington that the dollar's troubles are largely the result of U.S. inflation and balance of payments deficits, rather than somehow the fault of the strong-currency nations.

The U.S. has long objected that a gold price increase would reward speculators, provide a bonanza for South Africa and Russia, the main gold producers, and punish friendly nations that have held their reserves in dollars, trusting U.S. vows never to devalue. But a price boost of the size now being talked about--as little as 5%, to $36.75 per oz.--would be a bitter joke to speculators, who could have gained far more in interest alone by investing in something other than gold. A $36.75 official quote also would be well below the prices that South Africa and Russia can get now on Europe's free gold markets; last week's gold price on London's free market was $42.50 an ounce. And some dollar holders that the U.S. has feared to "punish," notably West Germany and Japan, are now among the nations pressing for devaluation.

A much stronger objection is that an official price increase would tend to give gold a continued undeserved prominence in world finance. Most economists--and the Nixon Administration--believe that the role of gold should be reduced, or even eliminated, in any long-range overhaul of the international monetary system. Still, there are ways of managing a gold price boost so that it would be what Economist Arthur Okun calls "severance pay" for cutting the monetary tie to gold. The U.S. could couple an increase with a formal announcement that the Treasury would no longer buy or sell any gold; that would make the increase only a bookkeeping entry for the U.S., although the Europeans could still claim victory. Negotiations could then proceed to construction of a new system in which gold would be phased out. There are indications that the Europeans would accept such an approach. For example, Italian Treasury Minister Mario Ferrari-Aggradi recently suggested that dollar devaluation be part of a package deal that would include unspecified moves to diminish the international roles of both gold and dollars, and to increase the importance of Special Drawing Rights, which are a deliberately created form of international reserves.

Treasury Secretary John Connally is believed to be less stubbornly opposed to a gold price increase than his official statements indicate, and the Federal Reserve recognizes that the price eventually may have to be changed. Opposition is waning even in Congress, which would have to give final approval. Wisconsin Democratic Representative Henry S. Reuss, whose mastery of the complexities of world finance has won increasing respect from congressional leaders, once threatened impeachment of any President who proposed a large unilateral increase in the gold price. Last week he suggested that the Administration agree to a "modest" increase, combined with foreign revaluations. The chances of such a deal would improve further if the U.S. could also win trade concessions from the Europeans and Japanese. President Nixon could then argue, correctly, that the gold raise was a minor part of a grand design for a better, fairer world monetary system and elimination of the U.S. balance of payments deficit. Presented with that bargain, many other Congressmen who have insisted that the U.S. must never, never devalue probably would agree with Reuss that "now is no time for false pride."

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