Away from Freedom

The monetary crisis that erupted last week was not the worst on record, but it was surely one of the most disturbing. It exposed the U.S. dollar as still alarmingly weak--at a time when it might logically be expected to gain strength. It also showed that the whole world monetary system is still ominously unstable, for all the progress supposedly being made toward reform. Worst of all, the crisis seemed to be the first in a new series of financial storms of the type that nations try to quiet by curbing the freedom of money movement from one country to another.

The dollar might be figured to be strong because inflation lately has been lower in the U.S. than in most other industrial countries. But the U.S. continues to buy much more abroad than it sells. Foreign moneymen have been especially distressed by news that the U.S. trade deficit rose to $6.4 billion last year, about triple the 1971 figure, despite the late-1971 devaluation of the dollar. Past U.S. spending for foreign aid, military outlays, tourism and investment has spilled out abroad a pool of about $60 billion that sloshes repeatedly from country to country. Holders of those dollars are nervous enough about their value that almost any news can set them to switching their money around.

The latest trouble began building in late January with a minor event: Italy set new exchange rules for the lira. Fearing that the value of their money would drop, many Italians sold lire for dollars, then exchanged the dollars for Swiss francs. The inflow of dollars panicked Swiss authorities, who stopped buying up the greenbacks; the dollar's price in Swiss francs dropped 7%. That did it. Bankers, Arab oil sheiks and treasurers of multinational corporations feared that the U.S. currency would fall against the German mark and the Japanese yen as well; they unloaded their dollars in staggering quantities. The West German Bundesbank had to buy more than $6 billion in six days to keep the price from falling below the floor of 3.15 marks set by international agreement. The Bank of Japan was forced to swallow more than $1 billion.

By week's end the probable resolution of the crisis was still not clear. Another round of anxious international consultations got under way.

The White House sent former Commerce Secretary Peter Peterson on a trip to Europe to convey U.S. concern about the money storm. The German and Japanese governments were struggling hard to keep the prices of their currencies from rising, because that would hurt exporters, who supply many jobs. But the Bundesbank cannot keep buying dollars at the present pace very long. If the speculative storm does not subside soon, the Germans may have to float or revalue their mark upward for the third time in 40 months.

Robert Triffin, an international financial expert and a member of TIME's Board of Economists, foresees a whole round of currency changes occurring at any time from the next few days to eight months from now. He predicts an increase of roughly 10% in the value of the Japanese yen, a 5% to 10% upward revaluation of the mark, other revaluations for the Dutch guilder, Austrian schilling and Belgian franc. Because the dollar then would be worth less against these currencies, the result would be a further devaluation of the dollar averaging about 5%.

Worst Aspect. Devaluation of the dollar would not necessarily be bad for the U.S. Prices of such items as Lowenbrau beer and Sony TVs would rise, but American exports would become cheaper for foreigners to buy. Trouble is, new currency changes might not be enough to defer further crises, because revaluations and devaluations can take a long time to make their effects felt. Many U.S. exports are high-technology products--computers and jetliners, for example--that do not always realize a quick increase in sales when the price comes down. Many U.S. imports, such as inexpensive radios, have little domestic competition and do not suffer a swift sales slide when prices rise. Thus, it is easy to foresee a sequence in which new currency realignments would disappoint dollar holders by not changing the basic situation quickly enough. Triffin gloomily foresees a period of "two or three dollar crises a year."

The worst aspect of repeated crises is that each one seems to end with a little --or sometimes a lot--less freedom for the international movement of capital and goods. Foreign countries are erecting an elaborate network of controls to keep out unwanted dollars. Germany has announced an especially tough set of rules sharply restricting the ability of Germans to borrow money abroad and of foreign countries to invest in Germany. Though such controls are supposed to be temporary, there is a natural tendency to extend and tighten them with each monetary crisis. Former German Economics and Finance

Minister Karl Schiller warns that the eventual result could be a border search of travelers' wallets and briefcases for forbidden dollars. In the U.S., Nixon Administration officials are discussing imposing a special surcharge on imports if the American trade balance does not improve soon. The surcharge would be keyed to the size of the U.S. deficit in trade with each country, making it highest on Japanese goods.

In an effort to break the cycle of crises and controls, Treasury Secretary George Shultz last fall put forward a comprehensive reform plan. The dollar would gradually be replaced as the world's chief reserve currency by Special Drawing Rights issued by the International Monetary Fund. Among other things, that might enable the fund to buy up for SDRs the $60 billion or so of foreign-held dollars that are moving around and causing trouble. In addition, countries like Japan, which run persistent surpluses in dealings with the rest of the world, and those that run steady deficits, like the U.S., would be obliged to move toward a balance by changing either their trade practices or the value of their currency.

Shultz's plan is now being discussed by a committee of 20 nations, but full agreement is felt to be about two years away. Faster progress must be made. Otherwise, the new financial system that nations are groping toward could turn out to be a system of capital and trade restrictions splitting the world into economically isolationist compartments.

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