To Rescue the Dollar

Faint hearts do not win victories—and President Carter desperately needed an economic victory. Raging inflation was undermining the economy at home; overseas, the plunge in the value of the dollar posed a gigantic threat to the stability of the whole world financial system. Wild routs on the currency and stock exchanges were threatening to make his Stage II anti-inflation program a joke before it ever had a chance to get started.

So Carter made the bold move. He and his aides put together a dollar-rescue plan that amounts to a sharp and startling reversal of previous policies and aims to restore credibility to America's currency. The plan involves serious risks of starting a recession, and, at the very least, will slow down the economy. Thus Carter also risked alienating important Democratic constituencies—labor, blacks, liberals generally. But the Administration's economic team put the program together adroitly, with a sense of drama that won cheers from the world business community and provoked the most volcanic response on financial markets since Richard Nixon's surprise announcement of a wage-price freeze in 1971. The essence of the program: massive intervention on exchange markets to prop up the dollar and a switch to a really tough anti-inflation policy.

The week's drama began at 8 a.m. last Wednesday, when phones began ringing in the homes of startled reporters all over Washington. Administration officials told the newsmen that they had better get to the White House for an important announcement at 9. The callers gave no hint of what it would be about. Promptly on the hour, a grim-faced Jimmy Carter strode into a briefing room, climbed onto the podium and read a terse statement: "The continuing decline in the exchange value of the dollar threatens economic progress at home and abroad, and the success of our anti-inflation program ... It is now necessary to act."

Then Treasury Secretary W. Michael Blumenthal ticked off a list of drastic measures that the Treasury and the Federal Reserve Board will take to uphold the greenback. The key moves: 1) raising the federal discount rate by a full point to a record 9.5%, the sharpest jump in 45 years; 2) reducing by $3 billion the funds that U.S. banks have available to lend; 3) amassing $30 billion in foreign currencies, nearly all borrowed, to support dollar prices on foreign exchanges; 4) greatly increasing U.S. sales of gold.

The practical aim of these steps is to break the deadly circle in which inflation devalues the dollar, which in turn pushes up the prices of imported goods, which in turn worsens inflation. But like many governmental economic steps, this is also a psychological action designed to show the world that Carter is finally ready to move determinedly against U.S. inflation, which recently hit an annual rate of 10%. Said Carter to a Wall Street crowd, as he stood later in the week beneath a bronze statue of George Washington outside Federal Hall: "I mean business. I do not intend to fail and I will not fail."

Unlike previous Carter economic measures, which were thoroughly leaked so far in advance that the actual announcements became anticlimaxes, this one hit the financial markets with a bang. On the currency exchanges, investors and