It was incorrectly stated in yesterday's edition that as part of it's program to bolster the dollar, the government would quadruple gold sales to $1.5 billion ounces per month.The figure should be 1.5 million ounces.
President Carter yesterday ordered a series of sweeping actions designed to halt the runaway slide of the dollar on world money markets, including an increase in U.S. interest rates that some economists say may bring on a recession.
In a surprise announcement at the White House, a grim-faced Carter said the continuing decline of the dollar "is clearly not warranted" by basic economic conditions, and "threatens the economic progress at home and abroad, and the success of our anti-inflation program."
Treasury Secretary W. Michael Blumenthal, who initiated the push for a new dollar-rescue effort late last week after Carter's anti-inflation program had failed to stop the slide, declared flatly that "the foreign exchange stituation has gotten out of hand. It must end, and it will end."
Yesterday's measures, which marked a stunning reversal of the hands-off dollar policy the adminstration had followed earlier, was approved tentatively by Carter late Saturday night and kept secret by a handful of top policymakers. Carter gave the final go-ahead Tuesday night.
Officials said they acted from fears that further declines in the dollar's value would raise prices on imported goods so much it would knock the bottom of any anti-inflation efforts. But higher interest rates could reduce borrowing and choke off economic growth, possibly leading to a recession. All of Carter's advisers, however, endorsed yesterday's move in the end.
The series of measures, announced jointly by the White House and the Federal Reserve Board, includes an unprecedented pledge of massive U.S. intervention - backed by a huge $28.2 billion money pool - to bolster the dollar. Gold sales will be quadrupled. In addition, interest rates at home will rise.
Reaction to Carter's new moves was dramatic, both in the foreign exchange markets and in the stock and money markets at home.
Although exchange markets in many European capitals were lwere closed for all Saints' Day, the dollar rebounded sharply on those that remained open, climbing against every major currency. At the same time, the price of gold, to which spectators had flocked earlier, plummeted.
The reaction was just as euphoric on Wall Street, where the stock market leaped a record 35.34 points. The previous record of 32.93 came Aug. 16, 1971, the day after former president Nixon imposed mandatory wage-price controls. Even more encouraging, long-term interest rates - considered a bellwether of market confidence in the administration's anti-inflation efforts - fell an eighth of a percentage point in their first genuine decline in months. Short-term rates were pushed up by the Federal Reserve.
Despite the endorsement by the markets, Carter's actions to raise short-term interest rates were attacked by AFL-CIO president George Meany as "ill-conceived and shocking". In addition, several prominent economists, some of them Democrats who served in other administrations, predicted an economic downturn soon.
Administration sources said the package was approved by Carter solely on the basis of recommendations from his key economic advisers, without consultation with his political aides. Nevertheless the consensus among White House lieutenants was that the move would benefit Carter and other Democrats politically.
The proposals announced yesterday include these elements:
A pledge by the Treasury and Federal Reserve Board for "massive" U.S. intervention in the foreign exchange markets to buy up dollars if necessary to stem further declines in the value of U.S. currency. It was the first time high officials have come out flatly with such a promise.
A sharp increase in U.S.interest rates, designed to attract more dollars now held abroad back to the United States. Effective yesterday, the Federal Reserve Board raised its discount rate - its most visible credit-tightening symbol - a full percentage point to a record 9.5 percent.
The Fed later bolstered that move by pushing up the sensitive federal funds rate, which sets the pace for other interest charges such as the prime rate and mortgage interest rates. It also moved to tighten credit by requiring banks to hold more of their deposits in reserve.
Plans by the Treasury to issue a massive $10 billion in foreign-denominated U.S. securities to lure private holders of West German marks. Japanese yen and Swiss francs - the three foreign currencies which have been giving the dollar the most trouble - to lend their currencies to the United States.
A quadrupling previously announced gold sales by the Treasury to 1.5 billion ounces a month, beginning in December, up from the 300 million-ounce sales that have been offered so far. (The Treasury had planned to boost the sales to 700 million ounces in November.)
The $28.2 bill in pool that will be used to support also includes U.S. drawings from its International Monetary Fund reserves and an increase in credit arrangements with West Germany, Japan and Switzerland.
The package - the most sweeping the United States has put forward to defend the dollar since Nixon severed the dollar's link to gold in 1971 - amounted to a complete turnabout of policy.
As late as mid-October, officials asserted that the decline of the dollar was only marginally important, and that any further rise in U.S. interest rates would only hurt the domestic economy and risk bringing on a recession.
Yesterday, however, Anthony M. Solomon, undersecretary of the treasury for monetary affairs, insisted that the actions to support the dollar would not cause a recession.
Several officials stressed that the increase in the Federal Reserve Board's discount rate was intended mainly as a signal that the Fed is prepared to go further if necessary to bolster the dollar - but not as a firm commitment that it will.
Moreover, Solomon told reporters, the sharp hike in interest rates now could avert several smaller increases in coming weeks that might have occurred if the dollar had continued declining. "It may be," he said, "that this kind of shock will make it unnecessary to have a piece-by-piece rise later."
At the same time, however, Blumenthal carefully shaved a little more from the administration's forecast for the economy for 1979, predicting the economy would grow by "3 percent or so " instead of the 3-to-3.5 percent the White House had been expecting earlier.
Despite administrations assertions that no recession is likely, Democratic economists Arthur Okun and George Perry of the Brookings Institution and Otto Eckstein of Data Resources Inc. said Carter's actions made a recession by early next year almost a certainty.
For all the magnitude of yesterday's actions, officials insisted the United States was trying only to stem the decline of the dollar, and not to push the dollar back to a specific level. Carter said later the steps were not designed to "fix an exchange rate and hold to it". And Blumenthal told reporters, "we're not pegging the dollar,. We're saying that what has happened in recent days clearly is excessive."
Both Blumenthal and Solomon took special pains yesterday to denounce what they branded "recent speculative attacks" on the dollar, which they said had driven the dollar down for more sharply than economic conditions justified.
Carter and Blumenthal pointed out that with the dollar-rescue effort in place, the administation now has taken steps to plut in force nearly everything that currency traders had been complaining the United States lacked - an energy program, a tight budget, an anti-inflation plan and an increase in interest rates.