Testing the Float

Unable to agree quickly on any other way to soothe gyrating exchange markets, the world's moneymen last March stumbled grudgingly into a different kind of international monetary system. In it, most major currencies are "floating"--that is, selling not at rates fixed in U.S. dollars but at prices set by supply and demand.* Last week that makeshift system was put to its first serious test, and it performed adequately. What could have become a first-class crisis was defused without anybody having to do anything in particular.

The noncrisis began with a run on gold. The flurry was fueled by rumors of a West German mark revaluation and fears that the Watergate uproar had left the U.S. with a paralyzed Government unable to stabilize the inflation-weakened value of the dollar. Within two days after bullion markets opened, the price of gold shot from about $96 per oz. to about $109 in Zurich, $110 in London and an astonishing $124 in Paris. The rise was accompanied by a decline in the price of the dollar. For example, the greenback dropped about 2-c- against the British pound, which rose to $2.57.

Rich Quick. But then a measure of calm returned. Gold eased back and closed the week at around $105 per oz., and the dollar regained some of its strength against other currencies. Some financial experts saw the outcome as the result of normal profit taking by instantly rich gold speculators, and of a spreading belief that after two devaluations since late 1971, the dollar is actually undervalued. Other moneymen, however, thought that the floating system had worked exactly as it was supposed to.

The price of other currencies rose to the point at which buying back dollars looked attractive to speculators--and this happened without the usual panoply of emergency huddles among finance ministers and frenzied attempts by central banks to buy up dollars in order to prop their price.

There is no guarantee that the peace will persist. At week's end, the dollar declined slightly again, and a new gold rush could start at any time. Industrial demand for the metal is rising faster than supply. Existing stocks are so small --according to one estimate, the entire trading supply would fit nicely on the stage of Radio City Music Hall--that speculators can drive the price up or down almost at will. And there is always the danger that in the ensuing monetary turmoil, some government will conclude that its currency is floating to an unrealistically high or low level and allow its central bank to intervene to try to fix the price. In that case, the whole jerry-built system could come apart, and deliberate crafting of a new international monetary system designed to be permanent would become a more urgent world priority than ever. For the moment, though, currency values have proved able to float relatively smoothly on stormy seas.

* Among them: the British pound, Italian lira and Japanese yen, which float independently, and the German mark, Dutch guilder and French and Belgian francs, which are supposed to rise and fall in unison against the dollar.

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