Secretary of State George P. Shultz and Treasury Secretary Donald T. Regan yesterday told advocates of fixed exchange rates that the Reagan administration still believes in a floating, or flexible rate system--and would give no ground on this issue at the upcoming Williamsburg summit.
The administration officials spoke at a "Pre-Williamsburg" conference sponsored by Rep. Jack Kemp (R-N.Y.), Columbia University professor Robert Mundell and other proponents of an international monetary system linked to gold. Shultz said that "ultimately, exchange rates are determined by domestic economic and monetary policies, and no exchange rate regime will relieve governments of the effects of these domestic policies on the international value of their currencies."
The biggest concern right now should be to restore economic growth, "including a smart revival of world trade" and restoration of the creditworthiness of major Third World debtors.
"There is no nobility in more austerity than is temporarily necessary to achieve this new base for growth," Shultz said. "Here, I'm a Kempian, 100 percent, that growth is the name of the game."
Many economists--those who believe in gold and some who do not--have been saying recently that the floating rate system that went into effect about ten years ago has resulted in wildly erratic swings in exchange rates that are destabilizing for governments and business.
Federal Reserve Board Chairman Paul A. Volcker recently argued that there is a role for modest intervention to control extreme fluctuations. Volcker said that while it often is impossible to measure the "correct" exchange rate precisely, financial officials can figure out when it is clearly out of line.
Regan ruled this out, and so did Shultz. As if in answer to Volcker, Shultz said yesterday he doubted whether anyone was "smart enough" to know when to step in.
Mundell argues that the floating system is a monetarist experiment that has essentially failed, and therefore should be abandoned in favor of fixed rates.
Citing today's multiple economic woes, Mundell asked: "What's gone wrong? The answer is that we've been running the world economy without its natural rudder, a co-ordinated international monetary system."
Otmar Emminger, a former president of the German Central Bank and a major force in European monetary affairs over the past 30 years, said that with all its faults, the floating system was still the best available.
"We should resign ourselves to living with floating rates for some time to come," Emminger said, "but it doesn't have to be the same floating system we've had."
Emminger criticized the idea of "target zones"--narrow bands of allowable fluctuation--as suggested by former Assistant Treasury Secretary C. Fred Bergsten and others.
Former secretary of State Henry Kissinger, in a luncheon address, repeated his belief that as "an objective" there should be an eventual return to some form of global fixed exchange rate system. Kissinger warned that the debt problems of a number of developing nations may be "only beginning." He urged summit leaders to "transform the debt problem from a financial problem into a development and growth problem."