Since the dollar's foreign exchange rate is too high in relation to the things that a dollar buys, why doesn't the government bring it down? In the old days--which means until the early 1970s--a government told its currency where to stand in the exchange markets and, with occasional interesting exceptions, it obediently stood there. Currently, governments might just as well save their breath.
In late July and early August, the United States spent a quarter of a billion dollars buying German marks and Japanese yen to hold their exchange rates up and the dollar's down. That operation may have broken a speculative rise in the dollar. But the results have not been dramatic. Why do governments suddenly seem to have so little control over the values of their currencies?
The New York Federal Reserve Bank recently published the results of a survey, taken last April, showing that about $33.5 billion a day was moving through the U.S. foreign exchange markets--dollars being changed into foreign currencies and vice versa. That was an increase of 43 percent over the volume in a previous survey in March 1980. The 1980 survey in turn showed that the volume then was five times as high as it had been only three years earlier. The flows through the foreign exchange markets here and around the world have risen with enormous speed and are now far beyond the capacity of any government to manage.
Governments are able to generate blips in the market to make life dangerous for speculators. That's what the United States was doing in midsummer. But they no longer have the resources to maintain constant exchange rates.
The basic reason for the extraordinary growth in foreign exchange flows has been the expansion of international trade. But the machinery that serves trade also enables a great tide of private and public money to move restlessly around the world, running away from political instability, seeking higher interest rates and playing the market.
In the years after World War II, the world had a relatively stable and predictable system of fixed exchange rates based on the American dollar. But that system collapsed in 1973 under other countries' rising economic weight, and now the major currencies float with their exchange values shifting constantly with the ups and downs of the market. Floating turns out to impose real costs and perils unforeseen 10 years ago. But nobody seems to be able, for the present, to come up with a practical alternative. The world's trading nations have outgrown the previous regime without finding their way to any other that promises stability. Meanwhile the amounts of money moving daily through the exchange markets continue to grow.