Warning that the dollar may face further instability because the world economic system depends on it as the single key currency, Republicans and Democrats of the Joint Economic Committee called yesterday for a changed, and less demanding, international role for the dollar.
The committee gave further impetus to a device that has become known as a "substitution account" by which countries holding what they consider excess dollars could diversify by turning them into the International Monetarv Fund for a form of composite credit.
The dollar "continues to play a role in world currency markets that is far out of line with the economic position of the United States in the world economy," the JEC report said.
Such "exclusive reliance" on the dollar, constitutes a threat "to the smooth functioning" of an international system based largely on floating exchange rates, the report continued. Under a "floating" rate system, exchange rates are supposed to reflect demand or selling pressures in the market, subject to intervention policies of various governments.
Just last week, the policy-making body of the IMF put a committee to work to study a substitution account and directed it to report back to the IMF annual meeting in Belgrade, Yugoslavia, next Cctober.
There are many possible variations of such a substitution account, and it could be mandatory or voluntary. But the basic idea, as espoused by the JEC, is for dollar-holders to turn amounts into the IMF for special drawing rights (SDRs), and thus take some of the private market selling pressure off the dollar.
The Carter administration had been reluctant, until now, to support such a step, and it still regards the IMF study -- which it approved -- as a way of strengthening the SDR role, and not as a dollar-booster (SDRs are a special IMF credit distributed to its members.)
But the JEC report puts another little bit of weight behind the substitution account idea. It points out that creation of such an account would mean a changed role for the dollar, since its very existence "would virtually ally guarantee that the United States would no longer be able to meet its international obligations exclusively through the issuance of dollars."
Many things about a substitution account are unclear -- as last week's IMF meeting attested -- and were not even mentioned in the JEC report, such as the question of how much interest would be paid on the SDRs, and how the surplus dollars would be invested or eventually redeemed (if at all).
On other international issues, the JEC, while endorsing the necessity of the Nov. 1, 1978 dollar-rescue program, expressed some apprehensions about the use of monetary policy for non-domestic objectives.
It recalled that a restrictive monetary policy was put into effect at that time as one of the elements of propping up the dollar, and said flatly:
"We should not sacrifice domestic expansion for the purpose of maintaining the dollar.
"Nor does it make any sense for us to protect the export industries of Western Europe and Japan by deflating our economy when these countries could bring about a slower decline in their relative competitiveness by undertaking internal policies to step up their real rates of growth."
The way to deal with exchange-rate instability, the JEC said, is to seek more "gradualist" fiscal and monetary policies at home, and achieve greater harmony among macro-economic policies of the major nations.
The committee endorsed the "floating" exchange rate system acknowledging at the same time that last year it did not function as well as in the four preceding years. But it blamed this not on the system, but on the failure to coordinate policy-making. The U.S. mistake was to push for too much economic growth, while the Germans and Japanese did not stress growth enough, according to the report.
There should be greater exchange rate stability this year, the report said, because of a reduction in the U.S. current account (trade and services) deficit. But almost as an afterthought, erthought, the report adds that cancellation of Iranian military contracts, and the intricate economic effects of tightened oil supplies, "could well nullify the expected gains in the U. S. current account... "