WEST GERMANY'S FINANCIAL DEFIANCE

FOR the fifth time in 18 months, the finely balanced monetary system that is the foundation of Western commerce tumbled into chaos. The crisis threatened to paralyze the system of fixed-exchange rates that has been fostering a rapid growth of trade, tourism and general prosperity. For the moment, world leaders seemed powerless to devise a lasting solution. The all but certain prospect is that more, and perhaps worse, trouble lies ahead.

The turbulence began with a modest run on the wobbly franc after Charles de Gaulle resigned and speculators became convinced that France would order a long-anticipated devaluation (TIME, May 9). Then, last week, the attack on the franc turned into a far more disruptive rush to buy West German marks. Convinced that economically potent Germany must soon raise the official value of its robust currency, speculators and more conservative businessmen all over the world swapped their money for marks in the expectation of a quick profit. A speculator who converted $2,500,000 into marks, for example, stood to net $190,000 if the mark's value were raised by 7%, as had been widely expected.

Unequivocal Decision. As the flood of funds into Germany grew to $3 billion by some estimates, near panic swept European currency markets. Present arrangements call for each Western government to keep the official price of its money within 1% of its stated value. In an effort to hold the line, Denmark and Norway suspended all dealings in foreign money. France, Britain, Italy, Belgium and other countries were forced to dip into their reserves and sell dollars to maintain the official price of their own currencies. Despite all this, in stunning defiance of the world's financial experts, West Germany's political leaders at week's end ruled out any upward revaluation of the mark from its present official level of 25 1/3-c-. "The decision," insisted Government Spokesman Conrad Ahlers, "is final, unequivocal and for eternity. The government now expects and hopes that the speculation over the mark will end."

That is unlikely. In comparison with most other major currencies, the mark remains undervalued by about 8% to 10%; the disparity between it and the French franc may be as much as 15% or 20%. Speculation in marks may subside for a while, as happened after the Germans refused to revalue last November. But as before, it will probably resume after a few months. Until the mark moves up and the franc moves down, closer to their real value, financial markets will remain unsettled.

Indiscreet Talk. Last week's decision outraged many of Germany's trading partners, who saw it as a shortsighted and selfish maneuver that threatens their own economies. The French are bound to feel that the Germans are trying to force them into devaluing just after their June 1 presidential elections. The British rightly fear that their fragile pound will come under renewed speculative attack. Britain's foreign debts far exceed its reserves of gold and foreign money, and sterling may be able to cling to its $2.40 rate only if international creditors give the British more time to repay.

German government leaders aggravated last week's crisis with loose talk and internal wrangling. Indeed, the rush for marks rose to major proportions after foreign financial centers reacted to an indiscreet remark made the week before by German Finance Minister Franz Josef Strauss, who admitted that "the D-Mark is undervalued against certain currencies." He added that Bonn might raise its value by 8% to 10% if other countries could be persuaded to make simultaneous changes.

Economics Minister Karl Schiller, fighting vainly to persuade his government to revalue, publicly attacked Strauss (without actually mentioning him by name) for uttering "confusing and rash statements." Chancellor Kurt Kiesinger dallied over a decision, apparently hoping to pressure the French into paring the value of the franc at the same time that Germany would effect a revaluation. All week, secret and not-so-secret meetings dragged on, amid veiled comments and halfhearted denials that only stimulated the stampede into marks. The final decision by Bonn's coalition Cabinet came at a four-hour emergency meeting, which ended after European markets closed for the weekend. Dividing along party lines, Kiesinger's and Strauss's Christian Democrats rebuffed the pleas of Schiller and his minority of Social Democrats for revaluation.

Political Motives. Kiesinger's nein was motivated largely by domestic politics. It upheld his pledge of last November that the mark would not be revalued while he remained in office. New federal elections will be held Sept. 28, and revaluation is unpopular with exporters and farmers, who would stand to lose money from it. Still, last week's political decision could prove economically unsound over the longer term. If foreign funds continue to pour in, Germany's money supply may grow so large that domestic inflation will become a genuine danger. The Germans have had an extravagant fear of inflation ever since the early 1920s, when marks became so badly debased that a barrel full of them could barely buy one egg.

Need for Reform. Bonn plans to adopt some stiff measures to discourage foreign money from flowing in. A penalty charge on foreign deposits in German banks is among them. To curb its own exuberant economy, Bonn may well trim government spending and increase the 4% border tax placed on exports last year. Such measures, however, have proved ineffective in the past. If they do not work this time, Bonn's Cabinet majority may have to rethink its decision --perhaps soon.

The latest crisis makes clear once again that the international monetary system is badly in need of reform. At one time, nations were willing to combat trading deficits by adopting harsh deflationary measures that often meant fewer jobs; full-employment policies have largely eliminated that remedy. Countries with embarrassing surpluses also endanger the world's economic tranquillity. It is clearly more difficult for other countries to induce a prosperous Germany to raise the value of its money than it would be to force a devaluation if the mark were weak.

All of which makes the present impasse more dangerous. The Germans have now copied Charles de Gaulle in substituting narrow nationalism for cooperation in monetary affairs. The last time such beggar-thy-neighbor policies became common, during the 1930s, they contributed mightily to the century's worst economic depression.

This file is automatically generated by a robot program, so reader's discretion is required.