It was incorrectly stated in yesterday's edition that as part of its 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.
The complex series of actions President Carter announced yesterday to support the dollar boil down to this: he is deliberately taking the chance of recession in 1979 as the only way to beat inflation.
Carter has opted to put the economy through the traditional wringer of tight money, taking a leaf out of the "old-time religion" of the Richard Nixon era.The dominant philosophy of the Nixon economic advisers was that the only sure way to lick inflation was to restrain economic growth.
Carter's actions went further than those advocated last year by former Federal Reserve Board chairman Arthur F. Burns, which Carter then denounced, and which led to Burns' departure from his post.
They were an implicit concession as well that the president's week-old voluntary anti-inflation guidelines program - one objective of which was to restore faith in the dollar - had failed before it even got started.
Democratic economists George Perry and Arthur M. Okun of the Brookings Institution and Otto Eckstein of Data Resources. Inc., in Lexington, Mass, all said yesterday that the Carter program made recession almost a sure bet for next year.
Perry and Okun saw the recession beginning as early as next spring, with unemployment, now 6 percent, rising to 7 percent by the end of the year. They also thought the recession could be mild and end quickly.
That would be the best possible timing for Carter, who would plainly prefer to have any downturn out of the way and the economy heading up again before the 1980 election.
But conservative economist William J. Fellner of the American Enterprise Institute warned yesterday that any belt-tightening program, to be credible, would have to run at least three years.
In addition to all else, the course adopted yesterday by Carter may be the only alternative to the full-fledged wage-price controls he has shunned as a way of combating inflation.
And an unintentional side effect of a recession could be to reinforce Carter's guidelines program.
"If there's a recession in 1979," Perry observed, "labor negotiations will be conducted against a background of a weakening demand for manpower, and Carter won't have to worry so much about George Meany and his reaction to wage guidelines."
A restrictive money and credit policy coupled with massive intervention - a plan that up to now the administration had rejected as throwing good money after bad has long been recommended by economic fundamentalists. It is also the prescription that frantic European money markets have been calling for.
"The gnomes of Zurich got their way," said Democratic economist Okun, who added that "the risks have now definitely shifted in the direction of recession for next year."
High administration officials conceded that "there are always risks that you affect domestic growth when you tighten up on monetary policy." But Carter went along with the whole program, first laid on his desk last Friday, when Economic Council Chairman Charles L. Schulutze privately opined that the recession risk was not a "major" one.
That view was echoed yesterday by former treasury under secretary Robert Roosa. Discounting worries about recession, he said, "The interest rate as a deterrent to the economy is a minimal thing, compared to the benefits. The real economy is pretty strong, and will get a beneficial shock effect from all of this."
Still, the Carter decision came after some tortuous intra-administration debate. As recently as Tuesday, Barry Bosworth of the Council on Wage and Price Stability warned that heavy reliance on high interest rates would guarantee a recession.
But it was also clear from a generally negative response to the administration's voluntary anti-inflation program that something more dramatic was necessary to halt the decline of the dollar - itself a factor adding to inflationary pressures.
Brooking economist Perry said in a telephone interview yesterday: "If the name of the game is to get the inflation rate down to 4 percent by election time 1980, they need to have a recession to bring that about."
Over last weekend, Treasury Secretary W. Michael Blumenthal and Undersecretary Anthony Solomon argued with Schultze and Federal Reserve Board Chairman G. William Miller that all other considerations now had to be subordinated to stopping the dollar's decline.
For weeks, administration economists had been insisting that it would be of little use to intervene massively in the markets. They argued that the dollar would right itself once convinced that the "fundamental conditions" of the American economy were strong.
But the dollar drop "got out of hand," Blumenthal admitted yesterday, "and we came to the conclusion that strong action had to be taken."
Once the decision was taken that a dramatic announcement was necessary, Treasury and Fed officials agreed that the centerpiece should be a full point increase in the discount rate.
The idea was that this would be big enough, all at once, to accomplish the intneded purpose. "Otherwise," and official said, "the markets would have been looking for a series of smaller jumps, and never would have been satisfied with each one."
A high Treasury official said that response in the money markets yesterday "confirms our view that forceful action now will prevent interest rates from going as high next year as they might otherwise have gone."
Asked how the administration could now justify dollar-propping program that could pump as much as $30 billion worth of foreign currencies into the market intervention process, an official responded:
"The time comes when you can't let Adam Smith completely alone. Besides, we knew that there is a lot of dollar support out there, waiting for some help, because the U.S. trade balance is turning around."
He pointed out that on Tuesday, the dollar had dropped an incredible 5 percent in 24 hours, "and it might have dropped more if rumors hadn't make some move."
Perry, one of the nation's most respected forecasters, said he thought the big increase in money costs would begin to slow down housing and business activity quickly enough to bring the second quarter 1979 gross national with growth rate down to zero, with negative rates following for six months or so.
Administration and Federal Reserve officials contend that the impact of high interest rates has been softened by new 26-week "money-market" certificates available at savings institutions, which give savers an incentive to keep money there. In the absence of such certificates they would look for other investments when interest rates skyrocket. The new certificates enable the savings institutions to keep on lending for home-building.
But mortgage rates are now moving up to and through 11 percent - bucking usury laws in some states - and economists think that the savings institutions, though permitted to pay rates comparable to Treasury bills, will be increasingly reluctant to do so.
Plans by the Treasury to issue a massive $10 billion in foreign-denominated U.S. securitiesd to lure private holders of West German marks, Japanese yen and Swiss franc - the three foreign currencies which have been giving the dollar the most trouble - to lend their currencies to the United States.
A quadrupling of 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 billion pool that will be used to support the dollar 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 toward to defend the dollar since Nixon severed the dollar's link to gold in 1971 - amounted to a complete turnabout of policy.
Otto Ekstein, former adviser to President Johnson, said that his Data Resources Inc. forecast had been changed to recession after the presidential announcement. "With interest rates at those sky-high levels," he said, "housing will start to come down." He predicted that negative growth rates would start in the second quarter of 1979.