A strong currency does not neccessarily mean a strong economy. Neither does a weak currency necessarily mean a weak economy.
Those home truths need refurbishing for the annual meetings of the International Monetary Fund and World Bank in Washington this week. For finance ministers and bankers are urging tough American action against inflation and energy imports to shore up the dollar. But while inflation and energy require vigourus measures on the merits, the dollar comes into the equation only in a secondary, or tertiary, way.
The common-sense definition of a strong economy is one that supplies a growing abundance of goods, services and jobs. By that standard the American economy has been far stronger that that of any other advanced country.
According to the annual report of the IMF, the American economy grew during the last half of 1977 at an annual rate of 5 percent, Japanese growth was at 3.8 percent; and European growth was at less than 1 percent. This disparity has continued in the current year.
According to the same report, the United States used 95 percent of its available manpower and credit resources. West Germany, which has the strongest European economy, used 91 percent. Japan used about 80 percent.
Thanks to its strong economy, the United States has been able to play an exceptionally responsible role in the world. Apart from maitaining security, this country has kept domestic markets open to foreign producers in a far more generous way than the Europeans or the Japanese. U.S. commercial banks, as the Development Report of the World Bank points out, have played a key role in financing the developing nations.
Even as the American economy keeps growing, however, the American currency has been dropping. The IMF reports the dollar declined by 13.5 percent against a basket of all other currencies during the past year.
Part of the reason has to do with trade balances. Becuase the U.S. economy is expanding, Americans are buying lots of imported goods. So the U.S. balance of trade ran at a deficit of $31 billion in 1977.
Countries that restrict economic growth and push exports, on the other hand, have run big trade surpluses. The West German surplus last year was $19 billion. The Japanese surplus was $17 billion. Tough the gap is narrowing slightly this year, the overall disparity holds true.
Becuase of the disparityon the trade side, the yen and the mark are far more in demand than the dollar. During 1977, according to the IMF report, the yen rose against the dollar by 28.4 percent. The mark rose against the dollar by 5.7 percent.
Together the appreciation of those currencies accounted for most of the decline in the dollar. Thus an appropriate way to restore the dollar is to expand the German and Japanese economies so that there wil be a growth in American exports and a bigger demand for dollars.
The second reason for the fall of the dollar - apart from trade patterns - has to do with a lack of confidence. Holders of surplus funds - companies, banks and countries - have come to expect that the dollar will fall, not rise. So they are switching into gold or other currencies - notably German marks and Swiss francs.
The reasons for the lack of confidence are complex. The trade figures themselves fuel low expectations for the dollar. So does the general weakness of the Carter admininstration in economic policy. Particularly important in that regard is the failure of the president to curtail inflation and energy imports.
Thus there is a certain plausbility to the demand that the U.S. restrict inflation and energy imports, the better to build up the dollar. But there are far better intrinsic reasons for curtailing energy imports and limiting inflation. If energy imports keep running at present levels, the United States iwll find that foreign policy is made in Saudi Arabia. If inflation runs on unabated, the American economy will stall, precititating a worldwide crash.
Given these overhleming reasons for action against inflation and energy imports, it smells fishy when foreigners keep citing the need ot protect the dollar. The smell is of a subteffuge where by all the blame for the weakness of the dollar is put on this country, and the Europeans and Japanese get off without any requirement that they expand their economies and open their markets.