THE DOLLAR is falling, again, against the German mark -- or, depending on the way you look at it, the Deutschemark is rising. Six months ago the mark was worth 43 cents; now it brings just over 50 cents. That's a substantial appreciation. Question: How much should you worry about it?
Answer: Not much. For the country as a whole, this shift on the currency markets is neither good nor bad. The only way to avoid it would be to bring the American and West German economic policies into much closer coordination. But as a matter of basic political judgment, neither government is willing to change course. The Americans are willing to accept a higher inflation rate than the Germans, in order to pursue a better rate of economic growth -- which means more jobs. The Germans are willing to accept a lower growth rate in order to keep inflation down. After quarreling continuously over this difference for the past year, the two governments have agreed to disagree -- and to let the exchange rates reconcile the divergence. That is what is happening now.
Unfortunately, there is a tendency for currency values to get muddled in people's minds with national prestige, the flag and the Star Spangled Banner. It's useful to remember that not all currencies are rising against the dollar -- and that there have been several cycles of rising and falling in the seven years since the world abondoned fixed exchange rates. The currencies that are rising now are the Deutschemark bloc -- the mark itself, the Swiss franc and several smaller countries' currencies that are linked to them. In Western Europe alone, the currencies of the other major countries -- Britain, France and Italy -- were higher against the dollar in 1975 than they are today.
There are several ways to measure the general worldwide value of the dollar. The U.S. Treasury computes an average rate against the currencies of the other 22 industrial countries, with each of them weighted according to the amount of trade that the United States does with it. The dollar is now about 15.8 per cent lower, against all those currencies together, than it was in 1970 under the old fixed rates. But it is slightly higher now than at a previous low toward the end of 1974. The movement on the money markets is by no means all one way. The Treasury also uses a broader computation against 44 countries, which brings in our major customers in Latin America and the rest of the nonindustrial world. On this measure, the dollar is only 1.2 percent below the 1970 average exchange value. In late 1974 it was almost 10 percent below. Worldwide, there has been a strong rise of the dollar over the past three years as the American economy recovered from the oil crisis and the recession that followed it.
You would be correct if you attributed the present attention to the Deutschemark to considerations that go beyond the strictly financial. It wakens philosophical reflections on World War II, and it symbolizes Germany's strong resurgence since then. It suggests the economic dominance of Germany in Western Europe today, a fact of enormous significance. If you go to Germany this spring, you will find travel there exceedingly expensive. But, measured against the wider world in which Americans buy, sell and invest, the dollar is floating along pretty steadily.
There are two real dangers in the mark's dramatic rise. One is that the OPEC countries may seize it as an excuse to shift their oil sales, now conducted in dollars, to some other unit of count. It would be a way to raise prices indirectly but effectively. The other danger is psychological. Spectacular movements on exchange markets tend to unsettle people who deal on them, and lead them into a degree of extreme caution that chills the normal processes of the economy. Chicken Little, since you last heard from her, has gone into high finance and seems to have roosted in Western Europe. Her latest newsletter to her clients warns that a computer analysis of the dollar-Deutschemark relation indicates a rising stress in the firmament, with cracking possible, raising the possibility that the sky will fall. She is now calling, loudly and anxiously, on the United States to keep up the sky by supporting the dollar -- that is, by buying dollars on the market to keep the price artificially high. Our view is that the sky isn't going to fall, that currency support is a gross waste of money -- and that the markets are working exactly as they are supposed to.