Time Essay: What to Do About the Dollar

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REFORM THE MONETARY SYSTEM. Beyond these short-and medium-term measures, there is need for long-range changes in the world's money system. Since early 1973 the system has been based on floating rates: a currency's value is set by supply and demand on money markets. This replaced the old system in which rates were firmly fixed in relation to gold and the dollar. The earlier structure had served fairly well for almost three decades but then had broken down because exchange rates could be changed only abruptly, sharply and in a crisis atmosphere. Yet now with floating rates, the world endures a permanent crisis and fundamental economic instability, as currencies gyrate madly in response to today's headline or rumor. Says former Federal Reserve Chairman William McChesney Martin: "The floating-rate system is not serving the world well, buffeted as it is by structural imbalance, inflation, widespread lack of confidence and, as a result, excessive fluctuations in exchange rates."

In search of greater stability, many countries are beginning to turn away from floating rates. The Europeans are moving to set up among themselves rates that would diverge very little because central bankers would manage them. On the other side, the U.S. has steadfastly argued that only floating rates can avoid the old rigidity and periodic crises. But Princeton Economist Peter B. Kenen asks, "Can the U.S. be content with a monetary system in which we have no role except to complain that there is too much management of currency values, or would we be better off to participate in the management?"

The U.S. should join the trend toward more managed exchange rates, something of a compromise between fixed and floating rates. World central banks would have to cooperate closely, buying and selling currencies in order to keep the rates within certain ranges. Former Under Secretary of the Treasury Robert V. Roosa says that a first step toward this arrangement would be to set up "reasonable ranges of value for the three key currencies — the dollar, mark and yen." Other currencies would quickly fall into line behind the big three. The IMF could monitor national economic activity and recommend when currency values should be increased or decreased and by how much. Last April the IMF set up a "surveillance system" that could perform this function. Though some American officials have opposed such an idea because it would limit national economic independence, the U.S. should strongly support it as a major step toward greater stability in exchange rates.

Since the shocks of the early 1970s, the world's economies have lived in a period of tension and trauma. Oil price increases, world recession, rampant inflation, low growth and severe balance of trade problems have left leaders in the chancelleries and the counting houses doubting the present and fearing the future. But nothing has been worse in a period of crumbling foundations than the decline of the dollar, which is the talisman of an uncertain world. A first move toward a more secure economic future would be to re-establish the stability of the dollar inside a more managed and predictable international money system.