Time Essay: What to Do About the Dollar

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The effects of a shaky centerpiece on the world economy are evident. Businessmen, who feel they cannot predict the value of their currency tomorrow morning much less a year from now, have grown overly cautious. Instead of marketing the new product that may (or may not) bring a profit in three or four years, they are gambling in the currency markets in hopes of making an overnight gain on a falling dollar or rising yen. That is one reason why business investment and economic growth in most Western industrial countries are running at only half the level of the 1960s.

Unreasonable exchange rates, which now mean a cup of coffee costing $2 in Geneva or a hotel room $100 a night in Tokyo, increase the danger of protectionist trade wars as everyone runs to shield his market against low-priced U.S. competition. The Tokyo Round of trade talks, which has been dragging on for four years, is in danger largely because of the dollar. Finally, global inflation is being fired anew. Uncertain what the value of a product will be even a few weeks from now, both exporters and importers raise prices a little more to ensure against a possible loss from a currency change.

Until very recently the Carter Administration had tried to find benefits in a weaker dollar, claiming that it would encourage American sales abroad; and a year ago, Treasury Secretary W. Michael Blumenthal was arguing that the dollar was too expensive, and tried to talk its value down. Fortunately that view has been forcefully dismissed. Says Federal Reserve Chairman G. William Miller: "Any idea that it is in the interest of the U.S. to have a weak dollar, to have a lower dollar, is false prophecy. It is just not right."

A new American policy to lift the dollar will have to overcome that past mistake because worldly bankers and investors are very skeptical about the commitment of the Administration, and they have adopted a "show me" attitude. Quipped one top banker at the annual meeting of the International Monetary Fund in Washington last week: "He who talketh down the dollar cannot talk it back up." Of course, the stability of the American economy and the world financial system demands a decisive policy that goes much beyond talk. It should be a threefold strategy, of immediate steps to stem the dollar's decline, medium-term measures to correct the dollar's underlying weakness, and long-term reform that would stabilize the American currency inside a more certain monetary system. In sum, the U.S. can come to the aid of its currency if it takes a mix of actions:

SUPPORT THE DOLLAR. Everyone from Swiss gnomes to Brooklyn cabbies agrees that the dollar is grossly undervalued. It can buy much more at home than abroad. Says Yale Economist Robert Triffin: "I used to buy all my suits in Europe because they cost half as much as in America. Now the situation is exactly reversed, and I buy my clothes in the U.S."