You could have easily missed the significance of President Carter's recent decision to defend the dollar. Most people do not understand Special Drawing Rights, "swap lines" or even the discount rate. At the mere mention of these mysteries, the average American flips to the sports page, the comics or Ann Landers.
But do not be deceived by the jargon: Carter's decision represents a momentous turning point for the U.S. economy.
Carter and his advisers have mortgaged the future to the stability of the dollar. In the process, they may have inaugurated a period of slow growth - possibly punctuated by periodic recessions - as the only realistic antidote to the dollar's chronic weakness.
That dooms previous Administration hopes of reducing unemployment through rapid growth. More important, it ends three decades of consistent American policy to subordinate international economic problems to domestic goals.
Carter and his advisers have now conceded that we no longer have that freedom. The dollar's continuing slide threatens more inflation at home (by raising import prices) and a gradual erosion of U.S. economic and political power abroad.
But rescuing the dollar will mean high interest rates, making it more attractive for foreigners to hold dollars, and slower growth, reducing import demand. Two major economic forecasting services - Data Resources Inc. and Chase Econometrics Inc. - now predict a 1979 recession, with unemployment approaching 7 percent by next fall.
To see this squeeze simply as a temporary interuption of strong growth misreads Carter's decision. The United States has acknowledged an obligation to prevent, or limit, dollar depreciation. Unless we find a way of reconciling vigorous economic expansion with lower inflation, slower growth may become our permanent fate.
Vast quantities of dollars, totaling $400 billion to $500 billion, circulate in the international economy. Held by governments, multi-national companies, banks and individuals, they reflect the reality that the dollar - for all its flaws - remains the major international currency used to conduct trade, investment and lending.
Going back to early 1977, the dollar's initial decline stemmed four our worsening trade deficit and rising inflation. The trade deficit caused extra dollars to be sold for foreign currencies needed to pay for imports; higher inflation meant that traders offered less in their currencies for dollars.
But what started as a normal adjustment led to periodic stampedes, as dollar holders - deciding the dollar was headed down - switched into other currencies. Such switching became self-fulling. Dollars were sold, driving the price down and stimulating more sales. The depreciation aggravated U.S. inflation, which induced more dollar panic.
This is not an evil process, simply an inevitable one in a world where companies, banks and individuals can pick among currencies just as consumers pick among cars. But the Administration needed to stop this vicious circle, and, having failed to do so with its voluntary anti-inflation program, took decisive action.
In one form or other, the United States has committed to borrow about $30 billion worth of foreign currencies. If needed, these would be sold for dollars on foreign exchange markets to keep the dollar's value from sinking. In addition, the White House blessed the Federal Reserve Board action raising interest rates (the prime rate has jumped from 9 to 10.75 per cent since August and may go higher). Finally, the Treasury Department will increase its gold sales, reducing needed gold imports - and the trade deficit - by as much as $4 billion.
For the moment, this financial blitzkriegmay succeed: As an exercise in monetary tactics, it was splendid. It had the element of surprise. In the days following the announcement, the dollar rose spectacularly.
Consequently, traders who had sold dollars short - that is, agreed to deliver them at a predetermined rate - had to purchase those dollars in a rising market; presumably, their losses will make them more cautions in the future. The prospect of massive intervention by the United States and other central banks preserves this risk.
More important, the actions occur just as other factors favor a somewhat stronger dollar. Ultimately, a depreciating currency improves a country's trade balance by making its exports cheaper and its imports more expensive. That may now be happening to the United States. In addition, faster economic growth aboard - which seems likely - would also increase U.S. exports.
But assuming that the dollar does steady temporarily, no one should believe that successful tactics can substitute for successful strategy. If the basic causes of the dollar decline - high inflation, diminished competitiveness of U.S. industry and an inability of trade surplus countries (Japan, Germany) to spend their surpluses - remain unattended, no amount of shrewd gimmickry can avoid a future crisis. The sea of dollars is simply too large to be sponged up.
There is, of course, always the gruesome possibility that misfortune elsewhere will strengthen the dollar. Ultimately, the desire to hold one currency over another reflects a judgment about the stability and strength of one country over another. Even stolid Germany depends heavily on trade with its politically fragile European partners. Japan is almost wholly dependent on imported energy. Political or economic crises outside their control could would their economies - and currencies - mortally.
Short of this type of catastrophe, the Administration's actions represent a monumental gamble. If the United States borrows those foreign currencies, the borrowings must someday be repaid. The dollar then needs to be sufficiently strong so that the United States can go back into the market and buy those currencies (with dollars) without depressing the dollar's value. All this implies lower inflation and a stronger trade balance - or simply, slow growth and high interest rates.
That's the future to which we are now mortgaged.