Time Essay: What to Do About the Dollar

After long considering a strong dollar a national birthright, Americans lately have learned the humiliation of holding a currency that sinks, slumps and plummets almost every day. In the past year the dollar has declined 17% against the West German mark, 29% against the Japanese yen and 34% against the Swiss franc—and even 9% against the Indian rupee. The Carter Administration has responded with a Dr. Feelgood litany that the dollar's health is sound, and that it will recover from its indisposition if everyone will only wait long enough. But the world's money traders are not buying that happy talk and are now demanding fundamental shifts in U.S. dollar policy.

The value of the dollar determines much more than merely what the doctor in Houston must pay for his new Mercedes-Benz or the housewife in St. Paul for her Swiss chocolates. Prices of domestic goods go up because the competing imports are more expensive; the dollar's decline will add as much as 1.5% to the inflation rate this year. More important, a nation's currency is the symbol of its economic vitality and the instrument by which it exercises its world role. The fall of the once-mighty British pound from $4.03 to a low of $1.55 was both a contributor to and a measure of Britain's postwar decline. When Charles de Gaulle returned to power in 1958, one of his first acts was to restore the French franc to strength with a currency reform that devalued the franc, established an austerity program and even symbolically replaced the Monopoly-money ancien franc with a nouveau franc at a rate of 1 new for 100 old.

The fate of the dollar calls into question the way the whole world does business. The international monetary system is a precarious structure held together largely by paste, baling wire and confidence in the dollar, since it is the currency in which most international deals are made and which central banks keep in their vaults as reserves. During recent runs on the dollar, the first signs of financial panic could be seen. World money markets now resemble the urban ghettos of the 1960s, when a random traffic ticket or barroom scuffle could set off days of bloody rampages. The most implausible rumors out of Washington or the Middle East cause currency jitters and a dollar fall.

For no apparent reason, one Monday morning seven weeks ago, bankers, corporate treasurers and speculators suddenly wanted to sell dollars, causing a mindless two-day dollar run. Washington policymakers are still frightened by the episode because they have no idea why it started. While not predicting The Crash of 79, the dramatic title of a novel that foretold the collapse of Western civilization after a dollar disaster, Henry Kaufman, a partner in Wall Street's Salomon Bros., warns that the attack on the dollar "has placed the entire international monetary system in jeopardy."