One day last spring in Paris, I was discussing the budget for a proposed international research project with its director. At that time, the budget was planned in both dollars and Deutschemarks. When I was back in Paris recently, the budget had been redone - now it was calculated only in marks.
"We consider the mark a strong currency, and the dollar a weak currency," said the director.
It is still very hard for Americans to get used to that notion. After all, the dollar has been the symbol of U.S. leadership and the centerpiece of the postwar international economy. Indeed, in the 1960s, the dollar's problem was just the opposite of what it is today. Many considered it overvalued. Leading the charge was the late French president, Charles de Gaulle, who attacked what he called "the monumentally over-privileged position that the rest of the world has conceded to the American currency."
But such privilege was already coming to an end. While an overvalued dollar may have helped U.S. firms to acquire foreign subsidiaries, it undercut the competitiveness of American exports. In a dramatic move almost exactly seven years ago, Richard Nixon ended the convertibility of the dollar into gold. The dollar itself was devalued at the end of 1971, and again in February 1973, and then, in a real break with the postwar practice of fixed exchange rates, allowed to float in March 1973.
Floating, however, hardly describes what is happening now - more like plunging or diving. Between July 1977 and July 1978, the Japanese yen increased 31 percent in value against the dollar. In the month since, it has increased 8 percent more. Both President Carter and Treasury Secretary W. Michael Blumenthal have recently described international money markets as "disorderly." But that, too, is an under-statement for the current chaos.
Sudddenly, we are experiencing the kind of monetary turbulence that Britain underwent in the 1960s, when the pound lost its place as junior partner to the dollar as world currency. Like the English in the 1960s, Americans are beginning to discover how currency weakness can be a major constraint on domestic economic policy and activity.
But the dollar's present fall is far more serious than that of the pound. For there was a dollar behind the pound in the 1960s. Today, there is no alternative "dollar" behind the American dollar to pick up the role of world currency. No "basket of currencies" is up to the job. Thus, the turbulence in the money markets poses a basic threat not only to the well-being of the United States, but to the functioning of the world economy.
"There is and eerie aspect to this," the chief econimist for one big Wall Street," firm said. "With the dollar going down, you have an international monetary system without a rudder."
The irony in all this is that, since the 1973 oil crisis, the American economy has appeared more attractive - in its fundamentals, is vitality, in its natural resource base-than the European and Japanese economies. That is one of the main reasons foreign investment has flooded into the United States in the last five years.
But in the last year or so, the United States has suddenly begun to look a lot more vulnerable. We are seeing the effects of a combustible mixture of economic analysis and psychological mood, the latter beginning to hint of panic. Basically, there is a crisis of credibility about American economic leadership.
Within the United States, many commentators are blaming the dollar's deterioration on inflation. Frankly, however, it seems to me that they are seizing on the dollar's problems to score points in a different debate about the inflation and government policy. It is very difficult to believe that the international markets are focusing on U.S. inflation rates, except as they add to the general weight of doubts.
Much more on people's minds outside the United States is the awesome U.S. trade deficit - $16 billion in the first half of 1978. Concern centers on the scale of American oil imports, which have risen to almost half of our total oil consumption.
The failure to achieve an energy bill, in particular, has cut the ground out from underneath the dollar. One finds that Europeans and Japanese have been following the energy program's progress (or lack of it) much more closely than most Americans. They now doubt whether any meaningful program can be achieved. The promises and pledges have by now been discounted. This situation in turn has strengthened the conviction about the weakness of the Carter presidency, and a growing belief that an immobilism, and ungovernability, has taken hold of the American political process, that perhaps the United States can no longer manage its own most important affairs.
The Bonn Summit in July was supposed to restore confidence, but Carter's trip was bracketed by Ambassador Andrew Young's remarks about political prisoners and the departure of drug-policy adviser Dr. Peter Bourne - hardly the sort of thing to rebuild credibility. Note how the dump-dollars bandwagon has speeded up since the summit. The point is now being reached where firms and institutiions that have stayed out of the currency markets will fell they have no choice but to get on the bandwagon, even if, eventually, it may crash.
A further fear is pushing the present frenetic activity. A debate is now going on within OPEC as to whether to stay with the dollar, to raise the price of oil to compensate for the dollar's decline, or to move into some other kind of currency (which would also be a de facto price hike). On the one hand, as the dollar drops, so do OPEC's earning on oil and investments. Kuwait's Central Bank recently claimed that the dollar's erosion was costing it $440 million a year. On the other hand, to move even part way out of the dollar would undermine the value of OPEC's current huge holdings of dollars, and would lead to a wholesale flight out of the dollar, threatening the entire international economy - in other words, a most unpleasant self-fulfilling prophecy. Faced with this dilemma, OPEC dollar committee did recommend in July that some action be taken because of the decline of the American currency. Knowledge of that recommendation seems to have had a profound influence on money markets.
Can a further fall be averted? Can the dollar be stabilized? Prompt movement on the energy program is what is now required, if some measure of international confidence is to be restored. Congress may at last have been scared into some action. At the same time, some swift step to restrain oil imports is necessary. Yet Carter has been inhibited from so acting for fear of angering Congress and further alienating public opinion. Rather irrelevant words about inflation will not do much to calm the international money markets. But strong, constructive action to limit oil imports would do Carter - and, more important, the dollar - a lot of good, and would do so quickly.