A Call for Help

Should the U.S., West Germany and Japan do more to help the global economy snap back faster from the recession? Emphatically yes, says H. Johannes Witteveen, the Dutch economist who is managing director of the International Monetary Fund. At the IMF's annual meeting of finance ministers in Washington last week, Witteveen suggested that the three leading industrial powers were all but dutybound to pursue more stimulative economic policies in order to "lead the world to recovery." Witteveen's argument drew prompt rebuttals from all three nations. Said U.S. Treasury Secretary William Simon: "We believe we have taken adequate measures to protect our economy."

Stirring Plea. The case for greater stimulation in the Big Three economies is straightforward. These countries, the argument goes, have healthy trade surpluses and are entering a period of recovery while other nations are still mired in recession. The weaker countries could solve their unemployment and inflation problems much more quickly if they could earn more through increased exports of goods and raw materials to the U.S., West Germany and Japan; thus those countries should be willing to stir up their domestic economies through more aggressive fiscal and monetary measures. Not until the weaker countries begin to prosper again through trade, the argument continues, will the Big Three be able to count on them as a rich market for their own goods.

The three economic powers reject this argument for one reason: inflation has again become a serious concern in these nations, and greater stimulation would increase the danger. While the U.S. worries about a return of double-digit inflation (see box), prices are rising at an 11.7% pace in Japan and at a 6% rate in West Germany, where inflation is a national phobia. Symptomatically, West Germany's Social Democratic government recently announced a $2.3 billion spending program to combat rising unemployment, but coupled it with long-term austerity measures to limit the inflationary impact.

Pleas for increased stimulus probably are aimed more at Japan and West Germany than at the U.S. They are more dependent than the U.S. on earnings from foreign sales, and are traditionally inclined to sit back in times of recession and wait for their export markets to bounce back and spur their own recoveries. Yet policymakers in each of the Big Three countries protest that overstimulation will send prices skyrocketing again. They argue that it was an erosion of buying power caused by inflation that brought on the recession in the first place. But others remain unpersuaded. Although French President Giscard d'Estaing worries about his country's 10% inflation rate, he is also weary of waiting for recovery in the U.S. and West Germany to revive France's economy; last week he announced a "powerful" $7 billion spending program aimed at quickly reversing a long decline that has cut production by 11% and left 1 million unemployed.

Price Lid. Although the IMF finance ministers were unable to agree on recovery strategy last week, they did produce an accord on one once-divisive issue: the future of gold. The ministers voted to further reduce the role of the yellow metal in monetary affairs by abolishing the "official" gold price of $42.22 per oz. and eliminating the requirement that gold be used in transactions among IMF countries. The ministers also decided to sell one-sixth of the fund's 150 million oz. gold stockpile on the free market to raise loan money for developing nations. One result: enough bullion may be sold in the future to keep an informal lid on the price -a grim prospect for gold bugs. News of the agreement sent gold tumbling by more than $11 per oz. on the London exchange to a twelve-month low of $148.

The gold decision was a triumph for Washington, which has long argued that the metal was an inadequate vehicle for expanding world trade and should be phased out of the monetary system. Yet the accord cannot be ratified unless and until there is agreemment on the sticky issue of currency exchange rates. Although France disagrees, the U.S. favors allowing those rates to float in foreign exchange markets -as they have since 1973 -on the grounds that the resulting fluctuations help avoid monetary crises. The ministers hope to resolve the issue at another IMF meeting in January.

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