President Reagan said last night in his State of the Union address that he has asked Treasury Secretary James A. Baker III "to determine if the nations of the world should convene to discuss the role and relationship of our currencies."
Such a conference has been sought for some time by France but previously has been strongly resisted by the Reagan administration.
"The constant expansion of our economy and exports requires a sound and stable dollar at home and reliable exchange rates around the world," Reagan said. "We must never again permit wild currency swings to cripple our farmers and other exporters . . .
"We've begun coordinating economic and monetary policy among our major trading partners. But there's more to do, and tonight I am directing Treasury Secretary Jim Baker to determine if the nations of the world should convene to discuss the role and relationship of our currencies," the president said.
A number of analysts said they believe that the primary purpose of the request is to turn aside criticism that the administration has not done enough to bring down the value of the dollar and make American goods competitive again in world markets. Baker is to report by December, a senior administration official said.
Nevertheless, the request underscores the major swing in administration thinking on exchange rates over the past year.
As recently as last spring, Reagan was citing the high value of the dollar as a sign of strength for the United States rather than a problem that needed attention, said F. Scott Pardee of Discount Corp. of New York.
Before Baker became Treasury secretary early last year, the official administration position was that market forces should determine exchange rate levels and that intervention should be avoided.
In September, the United States, Britain, France, West Germany and Japan agreed to intervene in foreign currency markets to reduce the value of the dollar.
The dollar had been declining since last February, but the five nations wanted to accelerate that drop and did so through large-scale sales of dollars.
"We've got a different system than we had a year ago," said Pardee, formerly manager of the Federal Reserve's foreign exchange operations. "Now there are people at the Treasury who want to hold the system together rather than tear it apart."
Pardee agreed that a new Treasury study would not be likely to lead to any proposal to fixed exchange rates among major currencies or to tie the system to the price of one or more commodities such as gold. But it could help to reinforce a commitment to consultation among finance ministers and central bankers and to the policy coordination that is needed, he said.
Between the end of World War II and the early 1970s, the world's major currencies were pegged to the U.S. dollar, whose value, in turn, was tied to a fixed price for gold. On occasion, currencies such as the British pound were devalued relative to other currencies but, in general, countries were supposed to follow budget and monetary policies that would maintain their fixed exchange rates.
That system of fixed exchange rates broke down completely after 1973 and was replaced by a system of floating exchange rates. However, within this overall floating regime, countries remain free to peg their currencies in any way they choose. Several continental European nations have limited fluctuations in their mutual rates as part of the European Monetary System. About 30 developing nations peg their exchange rates to the U.S. dollar, while roughly 60 more are linked to other major currencies or a group of currencies.
The new Treasury study will cover the same ground as one conducted by the United States and 10 other major industrial nations following the Economic Summit held in Williamsburg in 1983. That examination of the world's monetary system, finally released last June, concluded that the use of floating exchange rates "remains valid and requires no major institutional change."
Baker and the finance ministers of the other nations agreed that the system has some "weaknesses," including a tendency toward short-term volatility of exchange rates that can discourage trade and investment. The unanimous view of the ministers was that greater stability is desirable, but that it can be achieved only if various nations' basic budget and monetary policies are carefully coordinated.
In its annual report last fall, the International Monetary Fund said exchange-rate movements have become more volatile in recent years for several reasons. Those reasons include much greater flows of money among nations as a result of the growing integration of worldwide capital markets and an easing of restrictions on capital movements. Deregulation, such as removal of interest rate ceilings in the United States, also has played a role, the IMF report said.
In addition, information about developments in each country is available far more quickly and more cheaply than in the past, and the cost of acting on that information by, say, selling one currency and buying another has dropped sharply, it continued.
"To some extent, volatility of exchange rates may simply reflect rapid adjustment to new information, and the increasing integration of world financial markets favors that process by allowing positions in different currencies to be taken quickly and cheaply," the IMF said. "On the other hand, as with other asset prices, it is possible that investors may on occasion ignore fundamental determinants and concentrate on the perceptions of other investors' preferences, leading to 'speculative bubbles.' "