Business: Nixon's Dollar and the Foreign Fallout

BY ripping the dollar loose from gold and slapping a 10% surtax on imports, Richard Nixon inaugurated a global power play designed to boost U.S. exports and cut the country's worsening balance of payments deficit. Though his moves came as a shock, it appears that he acted none too soon; last week the Commerce Department reported that in July U.S. imports had exceeded exports for the fourth straight month. Still, now that some of the excitement surrounding the Nixon initiative is subsiding, a hard truth is hitting bankers, businessmen and government leaders the world over: a return to any sort of lasting stability in trade and currency dealings will be tedious, time-consuming and laden with difficulties.

Closed Window. Nixon's dollar moves constituted an invitation to foreign governments to float the dollar against their own currencies by allowing the factors of supply and demand to dictate its value overseas. His aim was to force the U.S.'s major trading partners, especially Japan and the Common Market countries, to increase the value of their currencies—and thus the cost of their exports. Once Nixon shut the gold window, the dollar was expected to drop, and the value of foreign currencies to go up. The money exchanges of the world had been effectively closed since the Nixon announcement; until they reopened last week, no one knew for sure how much the dollar would fall or other currencies rise.

The only decisive development came at week's end from Tokyo. After two weeks of agonizing over the Nixon pressure and several times denying flatly that the yen would be revalued, the government of Prime Minister Eisaku Sato finally announced that it would allow the Japanese yen to float against the dollar. This was probably an unavoidable decision for Sato, but it was especially painful and will produce wide-ranging economic woes for Japan. By in effect increasing the price of the yen, Sato dulled the cutting edge of Japan's export drive, not only in the U.S.—which buys 30% of all Japanese exports—but throughout the world. Beyond that, a floating yen proportionately decreases the value of Japanese dollar holdings, which now total $11.3 billion. Japanese shipyards, which currently hold more than $5 billion in construction contracts written in dollars, will be especially hard hit. A 10% floating revaluation would cost Japanese shipbuilders $500 million.

Just how widely the yen will be allowed to fluctuate is not yet clear; the Bank of Japan said it would intervene to prevent too drastic a swing, at least for now. On the first day of the limited float, the yen was traded at an increase of 5% to 7% over the old rate, but just where it will settle is still uncertain. Japanese officials noted that the flotation was only a temporary measure, but U.S. importers were already predicting that the higher yen rate on top of the 10% surtax could effectively close the American market to Japanese steel and most consumer goods.