The Carter administration, in a major policy declaration, warned the international community that to solve the problems of the dollar and the international monetary system, all nations "must be prepared to give up some of the freedom they have enjoyed to manage their domestic economies."
In a speech to an international audience in London, the administration's chief monetary technician, Under Secretary of the Treasury Anthony Solomon, said that the basic problem is better coordinated economic performance, in a world that has become interdependent.
He said "the time has come" for the International Monetary Fund to exercise its newly acquired and stronger powers for "surveillance," not only of exchange rates, but of its 138 member nations' domestic economic policies.
Solomon, chief architect of the Carter administration's Nov. 1 dollar rescue package, said that the U.S. is "encouraged" by the initial response to the program. He revealed that consultations with other countries in assessing exchange market developments had been greatly intensified.
He said the U.S. is willing to consider other steps, including larger future roles for other currencies and for the IMF's special reserve unit, Special Drawing Rights (SDRs).
But Solomon argued with emphasis that the fundamental and continuing problem, to which "there is no magic, overnight solution," is to "bring about a better balance in global economic relations."
He pointed out that part of today's problem of widely fluctating currencies can be traced to the breaking down of barriers to trade and capital movements. This results in rapid-fire changes in exchange rates -- especially when inflation and growth rates in different countries move widely apart.
"We are all far more vulnerable now than in the past to developments abroad and to the operations of the international economic system," Solomon declared.
He singled out a much expanded role for the IMF as the major way of bringing national economic policies into greater harmony. A recent amendment to the IMF Charter - a much-publicized Article IV -- gives the international agency new authority for "surveillance" to encourage a better balance in international accounts.
Under these new powers, the IMF is entitled -- at least theoretically -- to persuade strong as well as weak nations to change their economic policies if those policies are having an adverse effect on the international balance of payments. A country that ignored the IMF pressure could be denied the right to borrow from the agency.
In its own Annual Report last year, the IMF said that while every member is obligated under Article IV to promote a stable system of exchange rates, "it is easier said than done." The assumption has been that in applying its surveillance powers, the IMF would have difficulty in dealing with a country that has a strong payments surplus, or which is politically powerful for some other reason.
IMF Managing Director Jacques de Larosiere said at the conclusion of the 1978 annual meeting in Washington that the new Article IV powers would give the IMF sweeping new influence in international economic affairs.
But as Solomon pointed out in his speech "Progress in implementing the IMF's new surveillance role has been cautious and deliberate. This is understandable, given the very short time these powers have existed." De Larosiere had suggested that the IMF could effectively pressure nations to change policies that were leading to international imbalance, largely through its "moral authority."
But Solomon seemed to be calling for a more direct underpinning of IMF authority that would call for a yielding up of some national sovereignty.
"I have no doubt that the Fund's new provisions afford [Words Illegible] national community a framework for policy coordination that can be made effective," Solomon said. "The potential is there. The question is whether governments will permit -- indeed, help -- that potential to develop. If they are willing, the prospects for sustained monetary stability and maintenance of our open, interdependent system are good.
"We need, in effect, a new attitude -- a recognition that if nations want the benefits of an interdependent world with freedom of trade and payments, they must be prepared to give up some of the freedom they have enjoyed to manage their domestic economies without full consideration of the international environment."
As for other less specific -- and in the U.S. view, clearly less important measures -- Solomon ruled out any controls over capital flows, although he said some steps could be taken to expand the flow of information about world money markets.
He said some further steps might be considered to strengthen the supervision of banks operating in the Euromarkets, but he added that the degree to which the Euromarkets are "unanchored and unregulated" has been exaggerated.
Solomon also repeated an assurance given by Treasury Secretary W. Michael Blumenthal in congressional testimony last month that the U.S. had no objection to an evolutionary process that would reduce the reserve role of the U.S. dollar. Blumenthal added at that time that "we are not stone-walling, but for a long time the dollar will have to play a central role."