A More Equal System

When Richard Nixon tried to answer the inevitable question about which nations had come out ahead in the great monetary realignment, he said that "the whole free world has won." To that diplomatic assessment, his canny Treasury Secretary John Connally added: "I think everyone gave something, some perhaps more than others." Though the sweeping new deal in money was sensible, stabilizing and basically fair, few could resist extending Connally's game of economic Animal Farm one step farther, searching for nations that had become just a bit more equal than others.

For the U.S., some of the benefits and sacrifices of the deal became evident last week. Officials of U.S. airlines, including Pan Am and TWA, said that North Atlantic air fares would rise in dollars by about the amount of U.S. devaluation (8.6%), thus wiping out the reduction in ticket prices that is scheduled to begin in February. U.S. tourists paid higher prices for goods throughout most of the world, including, of all places, the ber-yozka (hard-currency stores) of the Soviet Union, where the dollar fetches seven times its official rate ($1.11) on the black market.

The brighter side of the coin was that Presidential Assistant Peter G. Peterson predicted that devaluation's boost to U.S. exports will create at least 500,000 new jobs over the next two years, primarily in the steel, clothing and farm-related industries. Even Hollywood studio executives spliced themselves into the act, calculating that devaluation will bring higher revenues from cinema audiences abroad and repatriate some "runaway" productions that had shifted to foreign shores.

Tough Talk. Nixon and Connally won most of what the U.S. wanted on the money front. But there is a considerable question about whether the U.S. could have done just as well by offering to settle on about the same terms last August, thus avoiding all the tensing trade upsets and tough talk of the intervening months. To get what they did two weeks ago, Nixon and Connally had to agree to put off some demands for the reduction of foreign tariffs and quotas that restrict the sales of U.S. goods abroad. By agreeing to devalue the dollar before he won basic concessions on trade--aside from short-term liberalization by the Europeans for the benefit of vote-heavy U.S. farmers --Nixon gave up an important bargaining chip. The Administration's strategy now appears to be to warn the Europeans that unless they give in more on trade, Congress may not agree to devalue the dollar. The Europeans say that the matter is academic, since the value of the dollar is now being set not in Washington but in the world's money markets.

Trade negotiations are under way with the Japanese and the Europeans, and these talks are difficult. French President Pompidou declared last week that he will make no concessions that might weaken France's agricultural strength. "French farmers can count on my interest in them and my obstinacy," he said.

No Sympathy. The French were among those who ended up "more equal" in the monetary settlement, especially in prestige. The settlement followed the technical demand for an increase in the price of gold that had long been pressed by Charles de Gaulle. The large French gold reserves ($3.5 billion worth at latest count) thus increased in value by 8.6% though the gains are largely theoretical for the time being, since the U.S. has stopped trading in gold. France also kept its currently prosperous trading position. The franc was not required to revalue upward at all (though it rose against the dollar by the 8.6% amount of Washington's devaluation). More important, the West German mark was set at a value 5% higher than the franc, giving French exports a long-term price advantage over West Germany's.

The West Germans, however, wound up with an important short-term advantage. After the mark had started floating last May, it rose as much as 12% above the franc, which was purposely held fairly steady by Paris. Thus the narrower gap created by the new rates actually puts West German exporters in a better position vis-e-vis their French competitors than they have enjoyed in recent months.

The Japanese, who agreed to the largest revaluation (17% relative to the dollar), were fretful. But then they have a special problem. Said Finance Minister Mikio Mizuta: "We just couldn't find any sympathy for our argument that a 5% growth rate in Japan represents a serious recession."

The trade ministry predicted rather optimistically that the revaluation will have practically no effect on some major Japanese exports--including autos, ships, cameras, wristwatches and steel bearings--either because there are no suitable substitutes or because the Japanese prices will still be lower than competitors'. The export sales that are "considerably" threatened--or worse --says the ministry, include trucks, electric machinery, aluminum, toys, radios and tires. Even so, stock prices also rose on the Tokyo exchange, indicating that experts do not expect severe business reverses in Japan.

The Canadians claimed a victory by announcing that their dollar, alone among major currencies, will continue to float against the U.S. dollar. In the 19 months since Ottawa set its currency afloat, the Canadian dollar has risen about 8%, probably less than the rise that would have been required of Canada in a formal revaluation. As expected, a number of Latin American nations and others whose principal trade is with the U.S. followed Washington in devaluing, thereby keeping their currencies on a par with that of their biggest customer. The move should also increase the competitiveness of their exports in trade with Europe and Japan.

New System. At a time when economic power is becoming more important than political power in international relations, Western leaders should find in the latest settlement one all-important lesson--the need for preventing future crises by agreeing on basic monetary reforms. The real issue is a serious one: restructuring the Western world's monetary and trading system on the basis of the changing economic power relationships. This means coming to grips with a world in which the U.S. and its dollar are no longer dominant. But so far no one has come up with a new system that spreads the responsibility commensurate with the power, and this is what future negotiations must be about.

By coincidence, while the money deal was being made at the Smithsonian Institution in Washington, another conference was held at the Brookings Institution, half a mile away. There a group of twelve top economists --including Britain's Sir Alec Cairncross, Japan's Saburo Okita, and the U.S.'s Richard Cooper and C. Fred Bergsten--drafted a plan for a world monetary system that would accomplish precisely the goal that the Group of Ten rich nations agree is necessary but have done little to achieve. Central to the proposal is the creation of more IMF-managed reserves to replace gradually the dollars and gold bullion that are used by non-Communist nations to settle foreign debts. The group also recommended the elimination within ten years of tariffs and quotas on manufactured goods, the reduction of import quotas and subsidies on agricultural crops, and cooperation in regulating capital flows without the use of artificial investment subsidies or restrictions on foreign investment. "It is no longer feasible for the U.S. to assume predominant responsibility for making the system work," noted a report approved by the entire group. "This responsibility now must be distributed so as to more nearly reflect the diffusion of economic power that occurred over the past two decades."

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