The Forthcoming Devaluation of the Dollar

THE world money crisis has often been compared to high-stakes poker --a game in which Richard Nixon is coolly expert. According to one theory, he and Treasury Secretary John Connally have been waiting for other nations to play their cards before showing the U.S.'s hand. Under pressure at home and from abroad, they decided last week that the psychological moment had finally arrived. As a result, serious bargaining began over a sweeping new set of values for the dollar and other currencies.

The dealing took place in a meeting of the Group of Ten rich industrial nations, held at Rome's Palazzo Corsini, principally in a conference room decorated with Renaissance paintings of voluptuous nudes. At midweek the Finance Ministers and central bankers of the Ten shooed their aides out of the room and began talking numbers--just how many pounds, francs, marks, yen and lire a dollar should be able to buy. They did not fully agree, and they did not even begin to settle some basic controversies over tariff, farm, investment and defense policies (see box next page). But then progress on the money front vastly increased the chance that the currency crisis will end with a realistic rejiggering of exchange rates rather than a devastating trade war.

Saying the Unmentionable. The breakthrough came when the U.S. at last brought itself to offer two indispensable concessions. First, American officials pledged explicitly to drop the 10% import surcharge as part of a money bargain. Then Connally began talking about the previously unmentionable: outright devaluation of the once almighty dollar. For their part, moneymen from Europe and Japan started discussing just how much they would let their currencies rise against the dollar.

Dollar devaluation seems inevitable. It will not affect the domestic purchasing power of the dollar. But Americans will pay more for Volkswagens, Sony TVs, Givenchy dresses, Swiss watches and all other imports because the prices set for those goods in marks, yen and French and Swiss francs will be higher in terms of dollars. Similarly, the American travelers' dollars will buy less abroad, so the cost of tourism will rise. On the other hand, the foreign-money prices of American coal, computers, jet planes and other exports will drop. Eventually, the U.S. hopes, its exports will rise enough, and imports will be held back enough, to bring the nation's foreign payments into balance.

The dollar dilemma has been the world's primary economic problem since President Nixon on Aug. 15 declared that the U.S. would no longer redeem foreign-held dollars with gold. In the frenetic currency trading that followed, the mark has floated up 12.2% in value against the dollar from its last official rate, the yen 11.6%, the British pound 4.1%. The U.S. seeks to push some foreign-currency values up even more, and make the new rates official; it originally aimed for foreign revaluations averaging 12% to 15%. The Europeans and Japanese have demanded that the U.S. formally devalue the dollar as part of any deal. Although there is little difference between the end results of foreign revaluations and dollar devaluation (TIME, Oct. 4), devaluation would constitute a symbolic humbling of the U.S. currency that Washington has long and fiercely resisted.

The Devaluation Rally. That resistance began to erode before the Rome meeting. Foreign Policy Adviser Henry Kissinger warned Nixon that the protracted financial impasse would hurt U.S. political relations with important allies. Federal Reserve Chairman Arthur Burns returned from a Wall Street visit last month with word that U.S. financial leaders were deeply worried that a prolonged monetary uncertainty would damage world business and that they ardently desired a quick settlement. The stock market underscored that point last week by staging an explosive "dollar-devaluation rally." The Dow Jones industrial average rose 43 points,to a Friday close of 860.

In Congress the once overpowering opposition to devaluation has all but vanished. Republican Senator Jacob Javits and Democratic Representative Henry Reuss have introduced a bill empowering Nixon to devalue the dollar as much as 10% by raising the official price of gold. Says Reuss: "If the President asked us for it tomorrow, we would pass it by the middle of next week. We would need only one day of hearings."

Stunned Silence. These shifts in opinion set the stage for a moment of supreme irony in Rome: the U.S. wound up suggesting a bigger dollar devaluation than many Europeans had asked for or even wanted. Although he was retreating from positions that he had previously stated with what Europeans considered offensive arrogance, Connally retained the air of a man in charge. Sitting at the head of the table as chairman of the meeting, he told his foreign colleagues that he had full power to negotiate currency values, and asked if they did too. Some did not; French Finance Minister Valery Giscard d'Estaing had to telephone President Georges Pompidou in Paris at least twice to confer about the changing situation.

Connally lowered the U.S. ante right at the start. The American delegation opened by asking for an average 11 % revaluation of foreign currencies against the dollar, and offering to drop the import surcharge in return. By some calculations, that would produce a $9 billion swing from deficit toward surplus in the U.S. trade balance, rather than the $13 billion switch that Connally had once labeled a non-negotiable demand. An official U.S. paper also stated a "presumption that there would be no change in the value of gold." In the oblique language of financial diplomacy, that statement meant the opposite of what it sounded like. The paper's statement that the U.S. merely presumed there would be no devaluation--not that it would insist there be none--was a hint that the U.S. was ready to talk devaluation.

Connally went on to become far more explicit. At one closed session, he drawled: "O.K., what would you say if we went down by 10%?" For long minutes, the Europeans and Japanese sat in stunned silence. A U.S. devaluation of that size would push up the dollar price of several currencies much more than their governments had contemplated. The Europeans feared that would bring in a flood of imports from the U.S., wiping out jobs in their countries. The U.S. has no chance of getting a 10% devaluation generally accepted, but the offer was an effective bargaining tactic that put the Europeans and Japanese on the defensive. They concluded that they would have to refigure how large a U.S. devaluation they could swallow, and what changes they would make in their own currencies.

Even Unhappiness. The Europeans have been divided. Germany is willing to see the price of the mark rise 12% from its last official level relative to the dollar, but it has two other goals. One is to force the Japanese yen up by a higher percentage in order to reduce the price advantage that Japanese goods hold over German merchandise in export markets. The Germans also want to push the French franc up as much as possible in order to minimize any French advantage over Germany in trade within Europe.

The French are in an embarrassing position. They have loudly insisted on dollar devaluation for two reasons: an increase in the gold price would raise the value of France's $3.5 billion official gold stock, and would please the nation's legion of gold hoarders, who possess many votes. The French, however, do not want too big a U.S. devaluation; they indicate that 7% to 8% is the most they could take. A U.S. devaluation means an equivalent rise in the value of the franc, and the French want to limit that rise. They are reaping trade gains now by maintaining a relatively cheap currency. Besides, the more the dollar is devalued, the less the German mark will have to be revalued upward. And the French want to see the mark go up officially so that they will hold a trading edge over Germany.

Resolving such differences will take some time and a willingness on all sides to make possibly painful compromises. Said one U.S. delegate at Rome: "You have to spread the unhappiness evenly." The specifics of a historic currency realignment remain to be hammered out in another Group of Ten conference in Washington at the end of next week, and probably also in a long series of talks between heads of government. Over the next five weeks, Nixon will be meeting separately with Canada's Trudeau, France's Pompidou, Britain's Heath, Germany's Brandt and Japan's Sato. Last week Pompidou and Brandt met in Paris to work out plans for discussing issues with the President "in a coordinated manner."

At minimum, however, last week's Rome meeting sketched the rough outlines of a final settlement: it will surely include, in addition to dollar devaluation, the dropping of the surcharge and some other currency shifts. The situation was summarized by Wilhelm Hankel, an exceptionally shaggy expert at the German Economics Ministry who has let his black hair grow over his ears and vowed not to cut it until an official value is fixed for the floating Deutsche Mark. "The scenario is known," says Hankel. "It only remains for the actors to play their roles."

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