JUST 11 YEARS ago this week, in a stunning reversal of entrenched American policy, President Nixon deliberately began to force down the value of the dollar. The idea was to strengthen the economy by making exports cheaper in world markets. Mr. Nixon abandoned the last vestige of a gold standard and abruptly told other countries that, like it or not, they were going to have to accept a lower exchange rate. Shortly, the world abandoned fixed exchange rates altogether, and the great float began. Then, throughout the Carter administration, there were vehement complaints from Europe that the United States was deliberately forcing the dollar still lower for trading advantages.
A strange thing has happened this year. The dollar has been rising, and this summer it's right back up -- in relation to the world's other currencies -- where it was in Aug. 1971.
That makes imports cheaper and helps to hold down inflation. But it also makes exports harder to sell, contributing to unemployment. The country's foreign trade balances have an effect on the larger economy as powerful as those of the federal budget deficits, about which you may have heard some talk recently.
The major reason for the dollar's rise has been the very high American interest rates of the past couple of years, and the way they have sucked in money from the rest of the world. But here's another strange thing: for the past couple of months American interest rates have been dropping -- and the dollar's exchange rate has not. Clearly, there must be more to the exchange rate than interest alone.
The best guess is that the nature of the flow of money into this country is changing. It's no longer solely smart money looking for the highest rate of return. It's now been joined by nervous money seeking a safe haven. Perhaps some of it comes from the Middle East, where war is now in progress. Certainly some of it comes from Europe, where there are spreading fears of more economic trouble ahead. It's a reminder to Americans that, for all of their complaints about economic uncertainty, to the rest of the world this country remains an emblem of security and stability.
While the dollar has been moving up, the Japanese yen has been moving down in response to heavy flows of investment out of Japan. The Morgan Guaranty Trust Co. publishes a revealing comparison of exchange rates adjusted for inflation. Over the past several years, the American dollar's comparative value has risen by one-fifth, while simultaneously the yen has fallen by one-fifth. The enormous spread that has opened between the two explains much of the increasingly serious friction over trade between the two countries.
It's curious. This year, there's been a wave of American political and academic commentary lamenting the country's allegedly declining economic strength in the industrial world. But this summer the dollar is too strong for comfort.