Time Essay: What to Do About the Dollar

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To prevent a further fall in the value of the greenback, the U.S. Government, in close cooperation with leading foreign central banks, should step in and buy large quantities of dollars on world markets. This would require assembling a vast war chest of funds to show currency speculators that Washington has the money to back up that policy. Two fast and impressive steps would be increasing sales from the nation's $60 billion gold reserves, as former Federal Reserve Chairman Arthur Burns suggests, and enlarging the so-called swap network of dollar defense funds from $25 billion to $100 billion, as Senator Jacob Javits proposes.

Critics of intervention argue that there is $400 billion to $600 billion in surplus dollars floating around foreign money markets —nobody knows the exact total—and Washington could not begin to buy them all. But if the U.S. expressed willingness and made funds available to buy huge amounts, speculators would conclude that the price would stay up, and so they would not sell their dollars. In short, a war chest to defend the dollar, coupled with a strong determination to use it if necessary, would act much like a nuclear deterrent: the more impressive it is, the less likely it will ever need to be used.

FIGHT INFLATION. An immediate dollar-support program will only buy time while the Administration takes the more fundamental action necessary to correct the dollar's underlying weakness. The most important step would be a tough, credible anti-inflation program. Inflation, of course, debauches a currency by reducing its purchasing power. As long as the West German inflation rate is under 3% while the American rate is more than 8%, the dollar will continue to depreciate, and the mark will rise. An austerity program that brings American inflation down toward the German level is an inescapable move to support the dollar.

President Carter is working on a Stage Two anti-inflation program that is expected to include voluntary wage and price guidelines. They can only supplement firm fiscal and monetary policies, which are still the surest way to slow inflation. The fiscal 1979 federal deficit is expected to be some $39 billion, and final planning will soon start on the 1980 budget. All effort should be made to keep that deficit well below $30 billion, for a larger figure would be a clear sign that the Administration does not take the inflation struggle seriously. The Federal Reserve must also continue its increasingly tight money policy, even though interest rates are starting to hit double digits.