The Chairman of the House Banking Committee yesterday called for a wholesale re-examination of the Carter Administration's dollar-rescue program, charging that high interest rates being promoted by the Administration will actually weaken rather than strengthen the dollar next year.
And in terms of the depressive domestic impact of "budget austerity" now at the heart of Carter's announced economic policy, Rep, Henry S. Reuss (D-Wise.) warned that it could lead to civil strife in financially stricken cities like Cleveland, Newark, and Detroit.
The Wisconsin Democrat will begin two days of hearings before a Joint Economic Committee subcommittee on these questions today, with Treasury Secretary W. Michael Blumenthal and Charles L. Schultze chairman of the Council of Economic Advisers, as lead-off witnesses. Federal Reserve Chairman G. William Miller will testify on Friday. Academic and other witnesses will also be heard.
Reuss' major policy prescription is not a new one. He suggested in a statement released yesterday that the U.S. should rely less on massive intervention, and more on a "subbstitution account" at the International Monetary Fund, through which dollar-holders could exchange unwanted money for "enlarged and re-christened special drawing rights."
The "substitution account" idea has been popular among international monetary system reformers, going back to 1972. But it was put aside, when the IMF formally adopted floatingexchange rates as the basis for the international monetary system.
Reuss argued that a substitution account would relieve pressure on the dollar, and urged that Carter initiate discussions at the four-nation Guadeloupe Summit in January that would eventually lead to a diminished role for the dollar as a key currency, with movement toward "a basket-of-currencies unit under the aegis of a reinvigorated IMF."
Ruess mad clear that he endorsed the dollar-rescue program announced by Carter Nov. 1, which included an austtere budget policy, much higher interest rates, and a U.S. dollar intervention package of $30 billion.
He said the program had checked erosion of the dollar, and recovered "10 percent of its external value against other leading currencies." But he went on to cite "hazards," including the impact on the domestic economy.
Reuss contested the factual basis for believing that one rationale of the program, that is the ability of higher interest rates to "lure" foreign capital here, thus reducing the balance of payments deficit.
Instead, he said that tight money would slow business activity, as well as research and development, and thus worsen the prospect for controling inflation. "Super tight money," he said, "could simply lead to greater pressure on the dollar, and see the departure from these shores of foreign capital destined for either our stock market for for direct imvestment here."
As to intervention, Reuss expressed concern on two counts. First, he argued that it is a costly operation, and potentially ineffective considering the alleged $700 billion over-hang in the Eurodollar market. One the other hadn, he said that intervention could-in effect-be too successful, driving the value of the dollar so high that the U.S. loses export markets.
He indicated he would ask Blumenthal whether or not the administration has now adopted some private "reference" or "Target zone" level of the dollar exchange rates that it is determined to defend.
"Adminstration officials have consistently denied any such intention. But Undersecretary of Treasury Anthony Solomon in a recent Washington Post interview said the U.S. intervention policy was now decidedly more active and aggressive than the former policy of merely countering "disorderly markets."