MONEY AND TRADE: Saved by the Float

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While it stunts industrial output and cramps consumers, the oil emergency has also stalled the movement toward reform of the international monetary system. The values of major currencies have been wildly gyrating—some up, some down. The dollar has been rising against other currencies because the U.S. has much more oil than Western Europe or Japan and thus stands to be hurt less severely than they by the energy emergency. In the past six weeks the dollar has climbed about 10% against the French franc, 8% against the German mark and 7.5% against the Japanese yen.

Despite the wide fluctuations, international trade and investments have continued to flow without noticeable interruption. Ironically, the reason is that the finance ministers of the 126-country International Monetary Fund were unable to reach agreement on a new monetary system at their meeting in Nairobi last September. Postponing any further action on reform until July, they left in effect the ad hoc system of "floating" exchange rates that has existed since the last big monetary crisis a year ago. If they had agreed at Nairobi to fix rigid exchange rates, the pressures generated by the oil price hike in late 1973 could well have led to huge devaluations and other dislocations and paralyzed the monetary system. As Paul McCracken, former chief economic adviser to President Nixon, says: "It would have been a disaster. Whatever they had agreed on would not have survived the events of the last few weeks."

By contrast, the floating system, which allows exchange rates to be set mostly by supply and demand, absorbed the fluctuations with relative ease. Because the full impact of the oil price increases is still not known, the IMF'S Committee of 20—which is dominated by the industrialized nations that call the shots in monetary affairs—agreed at a meeting in Rome last week to put off indefinitely any plans to fix firm currency exchange rates. Even the French government abandoned its usual allegiance to fixed rates. It decided to stop propping up the value of the franc, which it had done by spending its foreign currencies to buy francs. Now the franc will probably decline.

While a monetary crisis has been avoided so far, international trade and payments problems are looming. The Organization for Economic Cooperation and Development predicts that the industrialized countries will have to pay $50 billion more for imported oil in 1974 than they did last year. Thus, instead of running up a combined trade surplus of $15 billion, as expected before the oil emergency, these nations could have a trade deficit of $20 billion to $25 billion. U.S. officials, including Treasury Secretary George Shultz, believe that the current sky-high prices will exact such a toll on the world economy that "something has to give." Shultz last week urged the oil-producing nations to cooperate with the rest of the world in reducing prices and "scaling down the magnitude of the financial problem."

Some countries might still attempt to cushion the blow to their economies by sharply devaluing their currencies or trying to expand vastly their exports to other hard-hit nations while restricting their own imports. The result, warned IMF Managing Director H. Johannes Witteveen last week, could be a resurgence of old-fashioned protectionism and a devastating trade war.