An unusual conference on exchange rates and the U.S. dollar will begin here Monday. The brainchild of two former congressional aides and underwritten by major corporations, the three-day gathering has no official status.
Nevertheless, the meeting is being sponsored by two presidential hopefuls, Rep. Jack Kemp, a conservative Republican from New York, and Sen. Bill Bradley, a New Jersey liberal Democrat. And it has attracted an international list of participants, including the secretary of the Treasury, the vice chairman of the Federal Reserve Board, former French president Valery Giscard d'Estaing, the head of the Bank of Italy, the chairman of the Bank of Tokyo, dozens of other current and former officials, and many prominent economists.
A letter sent to prospective participants described the purpose this way:
"This small, by-invitation-only international gathering will discuss linking currency reform with trade reform, will probe politically feasible alternatives to rising protectionist sentiment, and will weigh the costs and benefits of achieving a more stable exchange rate system. . . .
"Of course, reforming the international system is a long and difficult process. This is a massive undertaking, and there are no easy answers. Yet we have a tremendous opportunity here. Clearly, there is an emerging cross-ideological consensus worldwide that the current international monetary system is a significant factor affecting the ability of manufacturers, farmers, finance markets and small businesses to work efficiently. It needs to be reviewed, and this is a first step."
Just about everyone would like to see more stable exchange rates, even the most ardent advocates of freely floating exchange rates. The key issues are what it would take to achieve them and what rates or range of rates governments would choose.
Since 1973, there have been no international commitments to peg the value of other currencies to the dollar, as had been the case for much of the post-World War II period. Almost no one seems very happy with the results.
Exchange rates have fluctuated widely, with the dollar dropping significantly in the late 1970s, surging upward beginning in 1981 and, since last February, declining substantially once again.
When the dollar was weak, officials in other nations complained that the United States was stealing their markets with cheap exports, and there were bitter denunciations of efforts by the Carter administration to "talk down the dollar."
When the dollar turned strong, the complaints shifted to the depressing effects it was having on the other countries' economies as they were forced to keep interest rates high to keep their currencies from falling still further against the dollar.
American farmers and manufacturers have seen the market for their goods decline drastically as the dollar has climbed -- though other also have been partly to blame, such as the need of many debt-burdened Latin American countries to reduce their imports.
Meanwhile, businessmen around the globe have had to learn to cope with much greater risks that a sudden, unexpected shift in currency values could wipe out their profits on international deals. As a result, elaborate new markets grew up to allow hedging of such risks in the futures market, just as commodity producers and dealers had been doing for decades.
But a corporate executive can't avoid the longer-term risk that a major shift in relative currency values could make his company's goods too costly to be sold. Of course, there is the possibility that the company could make a killing, too, if the currency values shift in the other direction.
If stability is generally regarded as a better condition than instability for exchange rates, why were they allowed to float in the first place? Because the countries that had pledged to keep their currencies pegged to the dollar, and the United States, which had pledged to keep the dollar pegged to gold, no longer were willing, or perhaps able, to honor those pledges.
Operating a system of fixed exchange rates -- or one in which rates are allowed to move up and down within some specified range -- requires that the countries involved be prepared to change their internal fiscal and monetary policies as necessary to meet that international commitment.
The currencies of the major European nations are linked within the European Monetary System, which has forced at least some degree of policy coordination among the countries.
But earlier this year, when the lira reached the bottom of its allowed range, the Bank of Italy declined to support it and the resulting sharp, chaotic drop in its value forced the other countries to accept a devaluation of the lira within the EMS. The other countries had resisted that because of the advantage the cheaper lira would give Italian exports in European markets.
Historically, a country with a weak currency, perhaps as a result of persistently higher inflation than in other nations, was expected to adopt tighter economic policies to bolster it.
As the country's economy slowed in response to the higher interest rates or tax increases, inflation was expected to decline and the demand for imports, which is a function of the level of economy activity, would rise more slowly or fall.
The higher interest rates, and the later improvement in the country's trade balance, would make the currency more popular, giving it the needed boost.
Countries with unusually strong currencies were expected to make moves in the opposite direction, but in practice they rarely did. The system functioned asymmetrically, with the burden of adjustment -- which often took the form of higher unemployment -- falling almost entirely on the country with the weak currency.
The United States has proven that these normal relationships between internal policies and the value of a currency can be stood on their head. So far during this decade, the U.S. trade balance has gotten steadily worse while the value of the dollar, until last winter, rose higher and higher.
Economists disagree precisely why this has happened, but many believe that the dominant force has been a desire by foreigners to invest in the United States because of safety and high real rates of return here compared to their home countries. This flow of capital has so increased the demand for dollars that the normally depressing effect of a huge trade deficit has been overwhelmed.
Suppose the United States had had a commitment to keep the dollar from rising as it did beginning in 1981. Would the Reagan administration have been willing to raise taxes to reduce the federal budget deficits that many economists think are a major contributor to U.S. interest rates being unusually high compared either to inflation or to similarly calculated real interest rates in other nations, particularly Japan and West Germany?
Alternatively, if the cause of the high real rates was that the tax cuts so raised the after-tax rate of return on business investment that foreigners were rushing to put their money here -- which administration officials maintain has been the case -- would the administration have been willing to raise taxes to lower those great rates of return?
Or would the administration and the Federal Reserve have relaxed their efforts to reduce inflation, and thereby weakened the dollar?
None of those options likely would have appealed to President Reagan, who sought the large 1981 tax cuts in the first place. Previous presidents, and the leaders and central bankers of other nations, have on more than a few occasions put domestic considerations ahead of an international commitment to maintain a chosen exchange rate.
For instance, President Nixon ended the guaranteed convertibility of U.S. dollars held by foreigners into gold in 1971 and slapped a special surcharge on imported goods as part of a policy package that also included wage and price controls and a tax cut to stimulate the U.S. economy.
Nixon's action on gold forced an international conference on realignment of exchange rates, but the new values chosen lasted less than two years. In early 1973, the dollar came under such pressure on exchange markets that the new arrangements also collapsed and currencies generally floated.
At the conference that begins tomorrow, there will be defenders of freely floating rates, of managed but flexible rate systems and of relatively rigid rules such as tying the dollar's value to the price of gold or some group of commodities.
As the letter of invitation said, it will not be easy to take even a first step toward increasing the discipline of nations' domestic economic policy actions because of new requirements to defend their currencies' value.