The Advantages of the Unthinkable

THE greatest immediate result of the currency realignment will be to restore stability to world finance and end the danger of a global donnybrook in trade. Since President Nixon in August canceled the U.S. commitment to exchange dollars for gold, the values of several major currencies have been fluctuating, and uncertainty about where they would come to rest has held back world commerce. There was always a threat that in order to protect their own trade positions nations would erect beggar-thy-neighbor barriers against each other's goods and money.

Now the U.S. is in the position of a company that reduces its prices. It will have to produce more goods and services to earn a given amount of foreign currency. There will be little change in the purchasing power of U.S. money for U.S.-made goods, but there will be painful consequences for Americans who work or travel abroad. The dollar devaluation, for instance, generally will have the same effect as a substantial salary cut for overseas employees of U.S. corporations who are paid in dollars; the specific effect will be magnified or reduced by changes in the values of other currencies. Still, the consequences of the currency changes will in the main be highly beneficial for Americans. Devaluation should increase sales and profits of many U.S. companies and create more jobs in industries concerned with foreign trade. The prospects: U.S. EXPORTS will drop in price around the world. The Boeing Co. figures that devaluations and revaluations could knock the equivalent of $2.5 million off the $25 million cost of a 747 jumbo jet to some foreign airlines. F.S. Holway, president of the Coal Exporters Association of the U.S., calculates that an 8% devaluation would have the same effect as a price cut from $14 to $13 a ton on coking coal sold to Japanese steel mills. The actual effect would be even greater, since the yen will go up a total of 17% against the dollar. American farmers stand to reap some of the biggest gains. For example, about half the Midwest soybean crop and 85% of the winter wheat grown in Washington State is sold to foreigners. Farmers look forward to still richer sales abroad now that they can drop their foreign-currency prices.

U.S. IMPORTS of Volkswagens, Yamaha motorcycles, French wines, British woolens and many other goods will cost more. The effect of the currency shifts will be offset somewhat by removal of the import surcharge, and some importers may try to keep dollar prices down in an effort to hold markets. A trade specialist of the Union Bank of Switzerland, however, estimates that "even with the surcharge removed, Swiss watches will be 15% more expensive in America." Certainly not all U.S. consumers will switch to American-made products. Fanciers of Scotch whisky, for instance, are unlikely to opt for bourbon or rye, no matter what happens to the price. Still, higher prices for imports should create more sales and job opportunities in the U.S. industries that compete against them--notably in autos, steel and textiles.

THE BALANCE OF PAYMENTS should swing away from the rising deficits that the U.S. has run in the past 20 years. Nixon's Council of Economic Advisers calculates very roughly that each percentage point by which foreign currencies rise against the dollar will expand exports and hold down imports enough to produce an $800 million swing in the trade balance and to create 30,000 to 70,000 U.S. jobs over a two-or three-year period. On that basis, last weekend's agreement eventually would cut $8 billion a year off the payments deficit and create 300,000 to 700,000 new jobs. The seasonally adjusted deficit in just the first nine months of 1971 was $23.4 billion.

These trade effects will take about two years to show up because buying patterns do not change overnight. But the balance of payments will also get a quicker, though temporary stimulus through a reversal of the hemorrhage of American short-term capital overseas. Yale Professor Robert Triffin reckons that $28 billion of capital flowed out of the U.S. in the first nine months of 1971 because "with everybody being told that the dollar would go down in terms of foreign currency, every treasurer of a corporation felt that he had to put his working balances into other currencies." After devaluation, these "gnomes of Manhattan" can be expected to take their profits by buying back their dollars at a cheaper rate than that at which they sold them. Triffin estimates that the return flow of dollars might cause a balance of payments surplus totaling $5 billion to $10 billion in next year's first quarter--a figure every bit as distorted as the 1971 capital flight, but nonetheless welcome.

TOURISM will become more expensive for Americans; Europe on $5 a day will become something more like France on $5.40 a day or Germany on $5.65 a day. Whether this will reduce the number of tourists is questionable; airlines agreed last week to reduce their fares across the North Atlantic, and the Olympic Games in Munich will draw many tourists to Europe next year.

Travel men speculate, however, that many tourists will seek out the less expensive hotels and restaurants abroad. Some will turn toward countries like Portugal and Spain, which have generally low prices, or the Latin American countries, which will probably devalue also; others may decide to See America First. Foreign tourists will find the U.S. less expensive to visit--opening many new business opportunities for U.S. hotel owners, travel guide publishers and touring agencies.

MULTINATIONAL CORPORATIONS will benefit from the currency realignment. The dollar value of their earnings in pounds, marks, francs and lire will rise automatically by the extent to which the dollar depreciates against foreign money. More important, the multinationals would have been Foreign Target No. 1 in any world money and trade war. The averting of that war lessens the threat that restrictions will be placed on their operations and investments.

On the other hand, several factors are reducing the incentive for the multinationals to expand outside the U.S. While the American economy now is at last speeding up (see BUSINESS), growth is slowing in most European countries and Japan. The slowdown could be aggravated by new difficulties that some of these countries will have selling their goods abroad against American competition. Devaluation also may increase the number of dollars that multinationals must spend to buy, build or expand foreign factories. Adding up the pluses and minuses, Wall Street analysts think that the multinationals will invest a greater share of their money in U.S. operations, giving the American economy a welcome lift.

THE STOCK MARKET began celebrating on the first rumors of devaluation; the Dow Jones industrial average has risen sharply since Thanksgiving. Wall Streeters were registering their relief that the international money crisis appeared to be on the way to solution. The market stands to get a more direct boost from devaluation in 1972. William Wolman, vice president of Argus Research in New York, forecasts a record increase of almost $3 billion in foreign purchases of U.S. securities next year. After devaluation, foreign investors' money will buy not only more 747 jets and American coal, but also more U.S. stock.

Winners and Losers. The effects of devaluation and realignment will be even more pronounced in foreign countries that are more heavily dependent than the U.S. on international trade. Those effects will vary widely according to the amount by which different foreign currencies go up against the dollar, and against each other. Canada, which expects to come out of the reshuffle with a dollar priced slightly below the U.S. dollar, will be helped far more by removal of the U.S. surcharge than it will be hurt by American devaluation. France will have to surrender some of the export advantage it has gained over Germany, because the realignment will close part of the gap that yawned between the franc and the mark during the months of currency fluctuation. For both countries, the franc-mark relationship is vastly more important than the price of either currency in dollars.

Poised for Flight. The new pattern of currency values looks realistic, but businessmen and money traders will not put their full trust in it for some time. Meanwhile, warns Triffin, tens of billions of dollars of capital will remain poised for instant flight abroad. That could happen if Phase II fails to bring inflation under control, or if the U.S., in an attempt to stimulate its economy, allows interest rates to drop far below those in Europe. A new capital flight could quickly bring the dollar's new price under suspicion because the U.S. would still be pouring out dollars--and without the support of the myth that the dollar could never be devalued. Devaluation was inevitable, but it will succeed only if the U.S. stops inflation and reinvigorates its economy. On such considerations the value of any nation's money must finally depend.

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