Beyond the Dollar

Because the fortunes of the free world's industrial nations are so intertwined, troubles tend to spread--like a run in a woman's stocking. Part of Wall Street's recent skittishness has been laid to concern about some weak spots that have appeared in the world economy. Many stock markets abroad have suffered bad falls of late: last week stock prices in Tokyo sank to a five-year low (then rallied 3%), and the French Government, in an unprecedented move, admitted that it had intervened to support the price of some shares on the Bourse. There are certainly some bothersome problems in a few of the free world's economies. Yet the dominant theme of the industrial nations is expansion, and the problems that do exist have largely been caused by efforts to keep that expansion from running away.

The situation by countries and areas:

sb BRITAIN. The country is living beyond its means in an expansive but troubled economy. Consumers spend freely while prices and wages soar. Government efforts to constrict home consumption have yet to be felt. Result: problems are multiplying for the beleaguered pound. Britain's trade deficit widened to $137 million in May, the highest since November, thus reviving doubts abroad that Britain can squeeze by the fall without another financial crisis.

sb WEST GERMANY. No end of the ten-year boom is in sight. Fueled by tax cuts, high investment and consumer spending, German prosperity bolsters the rest of the Common Market. One weakness: labor shortages are inhibiting industrial growth.

sb FRANCE. After a government dose of deflation that cut the growth rate in half (to 2.6%), the economy is picking up again. Weak spots: auto sales, textiles, chemicals, shoes, construction. One strength: low unemployment.

sb ITALY. It is just starting to emerge from a 1964 slump, but is recovering more slowly than France. Strong spots: auto sales, steel. On the other hand, northern Italy's building boom has collapsed, idling thousands of workers.

sb BENELUX. Belgium's economy is slowing down somewhat after showing signs of overheating last year--but so is its price inflation. Business is getting steadily better in The Netherlands, where wages and consumption are rising faster than production.

sb JAPAN. What expansion-minded businessmen regard as a recession would be a boom anywhere else: the economy is still growing at about 7% a year. Prime Minister Eisaku Sato calls the Japanese slowdown "an adjustive stage after years of phenomenal growth," predicts an upsurge soon. Main problem: too many companies are deep in debt, vulnerable to slight dips in sales.

sb AUSTRALIA. Boomy prosperity is being marred--but not seriously threatened --by a drought, rising imports and a shortage of capital that has helped to depress its stock market.

sb SOUTH AMERICA. Brazil, where the cost of living rose 87% last year, has begun to control the world's worst inflation by recessionary shock treatment. Argentina, with less inflation (28% last year), has blundered its way into such a morass of public debt, deficits and fleeing private capital that financial circles predict monetary devaluation.

Fiscal Threat. What really worries most economists far more than today's troubles in the free world's economies is tomorrow's threat from something central bankers call international liquidity--the amount of gold, key currencies and credit in circulation to finance the world's trade. Reason: U.S. and British moves to end their balance-of-payments problems are likely to have the side effect of so constricting the supply of funds as to throttle world trade, whose expansion has been the chief bulwark of global prosperity.

Last week all the experts seemed to be talking about the obvious solution: reform of the world monetary system. Former Treasury Secretary Douglas Dillon warned that if "urgent" steps are not taken now to provide another source of liquidity, the dry-up of dollars will "hamper world trade, slow up the economic growth of individual countries and threaten a worldwide recession." Meeting in Basel, the Bank for International Settlements exhorted the major Western powers to end their stalemate over how to overhaul monetary arrangements. French Finance Minister Valery Giscard d'Estaing cheered a throng of European financiers by indicating that France's position on monetary reform has become more flexible; he called for changes that stop short of a return to a gold standard.

At midweek, Giscard flew off to London to talk about the problem with British Chancellor of the Exchequer James Callaghan. Next week Callaghan will arrive in Washington to discuss the subject with Treasury Secretary Henry Fowler. The signs are unmistakable that most leaders of the West agree with Douglas Dillon that "there is no longer any time to dally" about finding a substitute for dollars and pounds to finance the world's growing business.

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