Too Big a Bang for the Buck

The almighty dollar is causing problems at home and abroad

A country's currency is usually regarded as a symbol of national vitality. A strong currency is seen as a sign of a vibrant, confident country; a weak one is considered an indication that a nation is on the skids. For nearly three years the U.S. dollar has been riding high, perhaps too high and for too long. Now the almighty dollar's very robustness is creating alarm both in the U.S. and abroad. Says Commerce Secretary Malcolm Baldrige: "As the ancient Greeks said, 'An individual's faults are virtues carried to excess.' When the dollar is excessively strong, it hurts our trade and that hurts jobs in the U.S. Too much of a good thing can be bad."

Since 1980 the dollar's surge has been all but relentless. Its value has increased 105% in relation to the French franc, 53% against the West German mark and 50% against the British pound. Now America's currency is about 25% too strong for its own good, according to such experts as C. Fred Bergsten, director of the Institute for International Economics in Washington, and Otto Eckstein, chairman of Massachusetts-based Data Resources.

The toll taken by the strong dollar has been heavy. Some economists believe it has been responsible for the loss of more than 1 million American jobs. Europeans complain that it could cause their prices to spiral upward. Cash-starved developing nations argue that an overvalued dollar undermines their ability to repay huge foreign debts. When world moneymen gathered in Washington last week for the annual meeting of the International Monetary Fund and the World Bank (see box), some financiers feared that the dollar had become a barrier to recovery around the world.

The dollar's current strength is a mirror image of its weakness in the late 1970s, when it sank to new lows against the West German mark, the Swiss franc and the Japanese yen. Then, many of today's problems were reversed. The abject dollar worsened U.S. inflation by raising the price of imports. European leaders angrily charged that the weak American currency made U.S. exports too cheap and was thus hurting the sale of European goods. The failing dollar also encouraged the Organization of Petroleum Exporting Countries to keep jacking up oil prices since member countries were being paid for oil in dollars that were losing value almost daily.

In fact, a number of European fiscal leaders were far more shaken by the feeble dollar than they are by the currency's present strength. A top U.S. financial official met recently with foreign moneymen and asked them bluntly whether they preferred a weak or a strong dollar. The answer: a strong one.

The robust dollar took seed precisely four years ago during the Carter Administration. At the 1979 annual meeting of the IMF in Belgrade, foreign moneymen told Federal Reserve Chairman Paul Volcker that he had to do something to bolster the then sulking American currency. Volcker returned to Washington and three days later unveiled a strategy for curbing U.S. inflation and stopping the dollar's skid. The plan called for the Federal Reserve to keep extraordinarily tight controls over the growth in money, even if that meant sharply higher interest rates.