In a major switch of policy, the Reagan administration announced yesterday that as part of a return to "fundamentals," the U.S. government will intervene in foreign exchange markets to protect the dollar only in those limited cases where it is necessary "to counter conditions of disorder."
In the first formal outline of the administration's overall international economic policy, Beryl Sprinkel, Treasury under secretary for monetary affairs, told the Joint Economic Committee that the Carter administration, in an effort to defend the dollar, had followed "an activist intervention policy," which the Reagan administration concluded immediately after taking office "was neither needed nor desired."
In effect, Sprinkel was announcing the abandonment of the Nov. 1, 1978, dollar-rescue package that former Treasury secretary W. Michael Blumenthal had engineered in concert with other major nations to build reserves of other currencies with which to buy up dollars when the price weakened in foreign exchange markets.
In his comprehensive statement, Sprinkel also:
Predicted that the U.S. current account (materials and services sold overseas) would swing from a modest surplus to a deficit this year or in 1982. But he said the way the Reagan administration looks at things, "A current-account deficit does not necessarily result in a weak currency." If the U.S. economy is dynamic, attracting investment funds, the dollar will remain stable in the face of a current account deficit, he said.
Said that the Reagan administration will not develop "a gold policy" until it receives a report due from a congressional commission on Oct. 1.
Restated the administration's commitment to "a more open and competitive international economic system."
Backed the International Monetary Fund's effort to foster worldwide monetary cooperation, but warned "it would be a serious mistake to yield to pressures to weaken the concept of conditionality" -- that is, strict terms of repayment.
Advance word of the administration's decision to follow a less-activist policy already has drawn some criticism on Wall Street and in the banking community. Supporters of the old policy say that Sprinkel exaggerated the degree of intervention. They now argue that by promising to intervene only in limited cases, the Reagan administration will be signaling the markets that a major financial crisis is at hand when it actually intervenes.
But Sprinkel said yesterday that given the success of President Reagan's economic recovery program, if the Federal Reserve is able to keep the growth of the money supply steady, few situations involving "disorderly conditions are likely to develop."
He purposely did not define "disorderly market conditions" but said that markets have become more efficient in evaluating real economic conditions.
"Significant and frequent intervention by governments assumes that relatively few officials know better where exchange rates should or shouldn't be than a large number of decision makers in the market and that public funds should be put at risk on the basis of that assumption," Sprinkel told the committee.
The Treasury official revealed that when the Carter administration left office, the U.S. government held $5 billion in foreign currencies after repaying all foreign-currency liabilities arising from swap arrangements and other foreign-currency securities (known as Carter bonds) issued in the wake of the Nov. 1 rescue effort. If the Reagan administration decides to unload any of these holdings, "We will tell the marketplace," Sprinkel said.
Although intervention now will be held to a minimum level, Sprinkel said that "we will continue to monitor closely developments in the exchange markets as we do in other financial markets." A study also will be made to determine whether government controls of any kind are disrupting the performance of markets or affecting exchange-rate fluctuations.
In the larger area of U.S. foreign economic relations, Sprinkel said that the Reagan administration's overall policy objective will be to restore "the U.S. economy and the dollar as a source of stability and growth for the rest of the world economy."
He said that the Reagan administration "rejects an international monetary policy based on indifference or benign neglect."