Propping the Dollar at Last

But will U.S. intervention buy anything except temporary relief?

The timing was unusual: major shifts in U.S. financial policy are not normally put into effect while the President is jetting around the world on a goodwill tour. But action to prop the falling dollar could not wait. When currency markets around the world reopened last week after the New Year holiday,

the dollar's long slide in value turned into a headlong, chaotic dive. In Zurich, where selling pressure was greatest, the plunge lopped nearly 4% off the dollar's value against the Swiss franc in a single day. So, at just about the time last Wednesday when Jimmy Carter told an evening audience of French businessmen in Paris that "the U.S. will strive to maintain the strength of the dollar," the Treasury and the Federal Reserve Board in Washington put substance behind his words.

The two agencies issued a terse one-paragraph announcement that the U.S. would actively begin supporting its weakening currency on world markets. That afternoon, the Federal Reserve began buying up unwanted dollars to shore up their price. The move touched off one of the wildest dollar rallies ever, but the upturn was as brief as it was explosive. By week's end the dollar was slipping again, raising the question of whether U.S. intervention in the money markets can buy anything but temporary relief for the battered buck.

In any case, the decision marks an about-face in U.S. policy. Throughout much of 1977, foreign governments bought dollars on their own to keep the price from sliding and pushing up the values of their own currencies, fearing that such a rise would hurt their economies by making their exports more expensive. Since their efforts were ineffective, they pleaded with Washington to join in. U.S. officials, led by Treasury Secretary W. Michael Blumenthal, steadfastly refused. So long as the dollar's decline was orderly, they argued, money markets were better equipped than governments to determine its true value. Blumenthal gave many western Europeans the impression that the U.S. actually wanted the dollar to go down, partly because that supposedly helps American exports (see box).

By December, Administration officials began to worry that the drop was getting out of hand; the man who finally decided to act was Blumenthal. First he persuaded Carter to make a statement on Dec. 21 that the U.S. would intervene if necessary to keep exchange markets orderly. That had only a momentary stabilizing effect, so Blumenthal decided to draw on a portion of the approximately $20 billion worth of foreign currencies that the U.S. can borrow from other countries under long-standing "swap" agreements. Such borrowings permit a country to buy up a specific quantity of its own currency without dipping into official reserves. Blumenthal discussed the plan several times with outgoing Federal Reserve Chairman Arthur Burns, a longtime worrier about the dollar, while both were vacationing in Florida between Christmas and New Year's, and got Carter's approval before the President left on his sevennation tour; only the timing was left undecided.

Last Tuesday's chaos in the markets convinced Blumenthal that intervention had to begin immediately. Says Blumenthal: "We have all along said that we would not allow disorderly markets, yet that is what this thing was becoming--totally irrational." First thing Wednesday morning. Federal Reserve officials telephoned their counterparts at the West German Bundesbank. The Germans eagerly agreed to make available the $2 billion worth of marks provided by an existing swap agreement, and reportedly even to kick in as much as $2 billion more.

Meanwhile. Blumenthal phoned Burns and said the two had better reschedule a previously planned Wednesday lunch for an earlier hour. They met at 11:45 a.m. in the Fed Chairman's private dining room and agreed on a joint 1:15 p.m. announcement that the U.S. was going into the markets. Blumenthal immediately communicated the decision to Carter. The President had been getting an earful about the dollar on his tour from King Khalid of Saudi Arabia and the Shah of Iran.

European leaders quickly applauded the move. An official in Bonn's finance ministry asserted: "At last Washington woke up. It's better late than never." Bundesbank President Otmar Emminger said that "the action should have a major stabilizing effect and put an end to speculative excesses."

So it seemed at first; the rally that followed the Treasury-Fed announcement was one for the record books. On Thursday morning in Zurich, the dollar opened 1% up in value against the Swiss franc from the previous day. the sharpest overnight dollar rise ever recorded there. In Frankfurt, where the dollar had sagged to a record low of 2.07 marks during its autumn-long slide, it abruptly recovered to nearly 2.16, also a record rise. In Tokyo. where the dollar had fallen to a postwar low of 237 yen on Wednesday, it promptly rebounded to 241.1.

But then on Friday, selling pressure began all over again. By day's end, the dollar had dropped back to 2.14 marks in Frankfurt, and to 2.01 Swiss francs in Zurich. One possible reason: speculators noticed that the Washington announcement a) did not promise any particular level of intervention, and b) hinted that the U.S. will not attempt to keep the dollar above any specified floor price--but will merely try to "reestablish order" on the exchanges. That would seem to leave room for a continued, though gradual, decline.

U.S. officials, indeed, hope to stabilize the dollar without actually having to buy up many greenbacks. They theorize that the dollar's price has been driven down below any rational calculations of its real worth by speculators who expected it to keep dropping mostly because Washington would do nothing to hold it up. In this view, an expression of concern, coupled with a little judicious intervention here and there, will make the bears run for cover.

Will it? That raises the question of why the world's most powerful economy has wound up with one of the world's weakest currencies. In part, the dollar's fall has been a price that the U.S. has paid for expanding its economy faster than have other industrial nations. More important, the dollar turmoil is a delayed effect of the quintupling of oil prices during 1973 and 1974.

In all, the U.S. in 1977 spilled about $18 billion into foreign markets. And a dollar excess, like a wheat excess, drives down the price. As TIME'S European economic correspondent, Friedel Ungeheuer, reports from Brussels: "No one is saying that the U.S. economy is not sound. It's probably the soundest around anywhere.

It's just that the bucket of dollars held abroad is full to the brim, and any additions cause it to overflow. So long as this trend prevails, no amount of central bank intervention can halt the monetary jitters that are shaking the system."

Should the U.S. care? Emphatically yes. It is true that monetary gyrations hurt the U.S. less than other nations who are far more dependent on foreign trade. But the dollar's decline injures America's foreign relations by angering friendly countries that fear the effects of a rise in their own currencies on the exports that are all-important to them. The dollar slide could accelerate world inflation: when other countries act to keep their own currencies from rising against the dollar, their moves, for complex technical reasons, increase the money supply in these countries --an inflationary force. And when exchange markets get as chaotic as they did last week, there arises the nightmare of a paralysis of world trade and investment.

The U.S. has long argued that West Germany and Japan should stimulate their own economies through domestic growth, thus reducing their trade surpluses and taking some pressure off the dollar. That would indeed help, and some progress is being made. Presidential Trade Negotiator Robert Strauss will visit Tokyo this week to put the finishing touches on a U.S.-Japanese agreement designed to permit more U.S. imports into Japan, and commit Japan to pep up its economy; it would enable Japanese consumers to buy more of the goods now being exported to the U.S. But West Germany has consistently rejected pleas to speed up its economic growth, mostly out of fear of inflation.

Far more important than whether West Germany and Japan expand their economies is whether the U.S. can manage to curtail its wanton consumption of imported oil. As President Carter grimly noted last spring in his energy address to the nation, if present trends continue, the country's oil deficit by 1985 will total a mind-stretching $550 billion. With the world monetary system already buckling under the weight of the nation's existing oil deficit, it is not hard to envision the disruptions that will follow from a more than tenfold increase in the burden during the next seven years.

Since oil imports are, more than anything else, responsible for the dollar hemorrhage, action by Congress on Carter's energy bill is now more urgently needed than ever. Though the bill is hardly likely to cut oil imports as much as Carter claimed--that is, a more than 50% reduction by 1985--it is a necessary first step, and passage by Congress is an essential precondition to restoring foreign confidence in the dollar. Unless Congress is willing to send a credible energy bill to the White House, the rest of the world can be pardoned for doubting whether the U.S. is really all that concerned about the long-term value of its currency.

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