Despite the desirability of achieving greater stability of exchange rates for the world's major currencies, it will be many years before anything more than modest improvements can be made in the present floating-rate system, a senior Reagan administration official said in an interview.
Although President Reagan's State of the Union message called for studying whether there should be a major new global conference on monetary reform, the administration does not at this point intend to recommend a new monetary system at next month's session here of the International Monetary Fund and World Bank.
"We are going to the Interim and Development Committee meetings of the Bank and IMF and listen with interest," said the official. "We don't have our minds made up on what the next steps should be.
"We think there will be a lively debate, and some of the issues relating to fixed vs. floating rates will be joined. But I would be surprised if a consensus emerged there."
In essence, he suggested that the world will have to be satisfied with small steps forward.
"To get true international economic policy coordination that would deal with all interconnected policies relating to economic growth, interest rates, investment and debt, there would have to be some degree of supra-sovereign management," the official said.
"It seems to me that there's going to be resistance for at least a couple of decades to developing true supra-national policy coordinating machinery. So for this interim period, we're going to be forced to rely on coalition-building among the big economic powers and what one would hope is that it would be on a basis that is more consistent, more predictable, more coherent and less ad hoc."
In a fixed rate system, such as the one that prevailed from 1944 through the late 1960s, nations agree to fix the value of their currencies to some base. In the old system, the benchmark was gold, originally priced at $35 an ounce. Under the pressures of global inflation and the first oil price shock, the system broke down. The dollar was detached from its gold relationship and its value in relation to gold and other monies was allowed to float.
Under the floating-rate system that then evolved, the value of the dollar, yen, German marks and other currencies changes according to demand in the markets. Nations can affect the value of their currencies by intervening in the markets to support or drive down the price.
In recent years, there has been growing criticism of the wide currency fluctuations allowed by the floating-rate system. Many believe the lack of stability has been a major factor in huge trade imbalances, and the resultant growth of protectionist pressures. Support for greater exchange rate stability has steadily increased in Europe and among a powerful bi-partisan group of U.S. senators and congressmen.
But the official cast doubt on the likelihood that the Economic Summit in Tokyo in early May will be able to do more than it has done before -- commission additional studies of the possibilities for greater stability and the usefulness of a conference.
This conclusion may change in the month or so before the Bank/IMF session. Some White House officials are toying with the idea of establishing "target zones" within which currencies would fluctuate, but keeping the actual targets a secret.
Other administration officials, as a variation on the theme, debate the possibility that nations agree on exchange rate targets derived from economic growth, employment and inflation targets. Under that interim proposal, there would be no requirement for intervention to meet the targets.
"That wouldn't satisfy either group," a participant in the debate acknowledges. "But the virtue of an in-between step is that believers in a free floating system could see something that preserves the old way, and those who want something more fixed know they can't get from here to there in one jump."
These conclusions are likely to disappoint not only many on Capitol Hill, but also financial market participants here and abroad who had concluded that the Reagan administration had shifted toward more active management of exchange rates, abandoning a total commitment to freely floating rates.
The view that the administration had adopted a more pragmatic attitude was based in part on its dramatic promotion of the September 22, 1985 Group of Five exercise that authorized coordinated intervention in the exchange markets and helped trigger a sharp drop in the dollar.
The Group of Five includes the United States, West Germany, Japan, France and Britain. They are joined in the Group of Ten -- which has 11 members -- by Canada, Italy, Sweden, Switzerland, the Netherlands and Belgium.
Under Treasury Secretary James A. Baker III, the administration has moved substantially away from the anti-intervention policy of former Treasury Secretary Donald T. Regan.
But there are other points of view at high levels in the Reagan administration. Secretary of State George Shultz (who in an earlier incarnation as Treasury Secretary helped create the floating-rate system) is a strong force working against major changes. Nonetheless, Shultz reportedly has become concerned that the big jumps in the dollar in 1983 and 1984 fertilized protectionist sentiment, making his job of managing foreign policy more difficult.
President Reagan himself leans toward greater stability in and more predictability for, exchange rates, and has expressed a yearning for the return of the gold standard. Officials in the Commerce Department and Office of the Trade Representative also have been anxious to find ways of minimizing the exchange market gyrations that distort trade balances. Economic Council Chairman Beryl Sprinkel reportedly is dead set against changes, but insiders doubt that he has the ear of Regan -- now chief of staff -- on this subject.
Said a Capitol Hill aide: "I don't think Don Regan advocates the same hands-off position he did when he was secretary; otherwise, the president's call for a study of the possibility of a global conference wouldn't have stayed in the State of Union speech."
But a high official points out that "the presidential directive to Baker is really a minimal directive. It merely calls for a recommendation as to whether or not there should be a conference among nations. It does not ask him to recommend some new monetary system."
The president also said in the State of the Union address that "there's more to do" in coordinating economic and monetary policy among the major trading partners. He asserted: "We must never again permit wild currency swings to cripple our farmers and other exporters."
This was applauded by advocates of greater stability in exchange rates, ranging from supporters of "target zones," such as economist John Williamson and banker Robert V. Roosa, to backers of a gold-based exchange rate system including Rep. Jack Kemp (D.-N.Y.). It brought approving comments as well from French officials, who long have favored not only greater exchange rate stability but a world-wide meeting, on the style of the Bretton Woods Conference of 1944. That session created the IMF and World Bank and set out the rules that governed the gold-based system that lasted for 25 years.
Reagan's initiative generally was welcomed, as well, by Third World nations, who argue that the overvalued dollar brought them nothing but high interest rates and exploding debt. A panel of these nations, known as the Group of 24, has produced a report calling for major reforms.
On the other hand, the Reagan suggestion distressed the West German government. Even if a target zone system could be established, said West German central bank President Karl Otto Poehl in a speech last week, "it can safely be assumed that the markets would test target zones. Given the huge potential for capital movements, central banks would have a hard time defending them."
Privately, a German official added: "We are for coordinating policy, but keeping everything fuzzy."
In meeting the president's directive for a study of a possible new global conference, Treasury officials are operating on the theory that if there is any rationale for such a formal meeting, it would be for ratifying an agreement already made and educating the public about it.
"The inventing of a new system would have to precede it," a high official said. "There's legitimate analytic uncertainty as to what would be best, and the practical fact of the matter is that among the key governments that would have to run a new system, there is a strong difference of opinion at the moment."
With the French committed to target zones -- they prefer to call them "reference zones" -- and the West Germans firmly opposed, the Japanese are somewhere in the middle. The present government in Tokyo does not favor target zones, but also is opposed to the free floating system which until recently had allowed the dollar to become highly overvalued compared with the yen.
Treasury officials would like to emphasize improving economic policy coordination among the key nations, regardless of whether there is a move toward greater stability.
"If you have a free floating system, and you can't straighten out the policy fundamentals, it's going to float to a direction that the political system won't tolerate -- and you're going to end up with something like a crude protectionist response," said a Reagan administration official. "But similarly, if you had a fixed-rate system and you didn't coordinate the fundamentals, and the fundamentals were moving against the fixed relationship, the fixed system would not survive. And it's true in spades when you're trying to manage in between."
Some Reagan officials agree with Poehl that a weakness of target zones is that the limits will be tested by market forces. If the fundamental factors of economic growth, inflation, etc. do not by themselves keep the rates within the target zones, "you are going to end up with the exact same problems of instability as if it were a fixed-rate system being tested."
Nonetheless, a group of Reagan administration officials believes some "incremental" improvements can be made. But these improvements, according to the policy-making officials, will have to be crude or at best informal, because sovereign states do not wish to yield any of their independence even if they pay lip service to the interdependence of the global economy.