At Last, A Hint of Reform

JOHN B. CONNALLY has won a reputation of being, in his own words, "a sort of bullyboy on the manicured playing fields of international finance." That puts it mildly. The Treasury Secretary's frequent advice in White House strategy sessions on how to deal with an adversary is "Let's kick him in the nuts." But the wavy-haired Texan also knows how to turn thoughtful money diplomat when he cannot avoid it, and last week he veered again in that direction.

Speaking in Manhattan to the Council on Foreign Relations, he announced that the U.S. is about to start talks leading toward long-term reform of the international monetary system and a new role for the dollar in global finance. He signaled that an urgent message has finally gotten through to the Nixon Administration. The message: the dollar is still in deep trouble abroad.

Yo-Yo Going Down. American tourists who thought that the December devaluation had stabilized the dollar rate have been startled to find it bouncing up and down like a yo-yo--but mostly down. "They come into the hotel and walk over to the board that lists exchange rates, shake their heads and mumble," says a Paris Hilton executive.

European nations and Japan will no longer buy up unlimited amounts of dollars in order to keep the price of greenbacks from falling through the floor set by last December's devaluation. French Finance Minister Valery Giscard d'Estaing bluntly told a recent Versailles meeting of the heads of 100 multinational corporations that "the era of massive dollar purchases by European central banks is over." Instead, major nations have started imposing capital controls that amount to the posting of a huge DOLLARS KEEP OUT sign. Some examples: The Netherlands government has banned payment of interest on foreign dollar deposits in Dutch banks; Japan forbids manufacturers to accept large advance dollar payments for exports without specific permission from the Finance Ministry. A further spread of such controls could lead to serious blockages of international trade, lending and investment.

Taking Stock. Dollars are distrusted because foreigners already have so many that they cannot use. Foreign central banks have more than $50 billion in dollar holdings--money that the U.S. poured abroad in past years to invest in European companies, to finance the Viet Nam War and to extend foreign aid. Since the U.S. stopped selling gold for dollars last August, the banks cannot do much more than sit on their inconvertible dollars. They cannot be used to repay loans from the International Monetary Fund, such as a $1 billion British debt that falls due in June, because the IMF is stuffed with almost as many dollars as it can legally hold. Nor can they be readily sold for other currencies, since hardly anyone wants to buy dollars.

The devaluation agreement pledged the U.S. to enter into talks on reform of the whole monetary system, partly to make it less dependent upon the dollar as a key currency, and also to work toward making the dollar convertible into something or other. Chicago Banker Gaylord Freeman has proposed that the Treasury buy up stocks in U.S. corporations and sell them to foreign central banks for unwanted dollars. Connally, however, had been totally silent until last week, preferring to wait for an improvement in the U.S. payments balance that would permit Washington to negotiate from strength.

As the U.S. position continued instead to weaken, the official attitude began to change. Two weeks ago, Federal Reserve Chairman Arthur Burns told other central bankers that the board would let U.S. short-term interest rates rise--a move that should help stanch the flow of dollars abroad in search of a higher return. Then, at midweek, Connally declared in Manhattan that he was dispatching Treasury Under Secretary Paul Volcker to confer with foreign officials about first steps toward long-run monetary reform.

That is barely the beginning of a beginning. The eventual aim of a reform must be to replace the dollar with some other form of money as the world's principal trading and reserve currency. The new substitute will probably be a vastly increased supply of IMF Special Drawing Rights. This historic switch will reduce the political-economic power of the U.S. by making it tougher for it to finance military operations and factory building abroad. Volcker's first job will only be to talk about the proper forum for negotiations. Connally has had enough of the European-dominated Group of Ten rich industrial nations, with which he has had four abrasive meetings. He seems to be thinking of a group of 20 countries that would include developing Asian, African and Latin American nations. Actual bargaining may take two or three years.

Different Hat. Still, Connally seems to have created the sense of U.S. movement necessary to calm the currency markets and placate foreign officials. French President Georges Pompidou late last week uncharacteristically declared himself "optimistic" about Washington's current line. Maintaining that feeling of momentum through the difficult reform negotiations ahead will be a constant problem, and more gestures of U.S. concern will undoubtedly be needed. One of the first should be some concrete move to help the British repay their IMF loan. The U.S. could do so by borrowing foreign currencies from the IMF and selling them to London in return for some of the dollars that no one wants.

Connally may well be in charge of the negotiations for reform all the way through. He complained last week that responsibility for the nation's foreign economic policy is scattered throughout many Government bodies, and he is obviously seeking to gather all the decision-making power into his Treasury office. He is particularly annoyed at the diffusion of power over trade policy, which he wants reformed in parallel negotiations. There are rumors that he will become Secretary of State if President Nixon is reelected. Such a switch probably would only mean that Connally would decide foreign economic policy while wearing a different hat.

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