Advice to Connally: Quit While You're Ahead

In his poker game with Europe and Japan on the surcharge, Treasury Secretary John Connally should quit while he is ahead. That is the opinion of TIME's Board of Economists. The most detailed explanation of the reasoning comes from David Grove, who speaks from the perspectives of both an international economist and an officer of one of the largest multinational corporations. He has been an economist in the Federal Reserve and consultant to several Latin American governments, and is now a vice president of IBM. He presents his views as an individual and not a spokesman for his company. Excerpts:

IF you ask, "What could the Administration expect to achieve over the first six weeks of the President's program?", I think you would conclude that they already have got, or could get within a week or ten days, as much as there is any reason to think they could get quickly. The Japanese have budged from the position that they won't change their currency rate, and the yen has floated up more than 7% against the dollar; it should be no great job to get the increase up above 10%. The German mark is up around 9%, and the rise could go higher. We have agreement that negotiations will begin on a new international monetary system and a consensus on the general contours of that system; for example, there is a widespread belief that there must be more flexibility.

The IMF meeting is a terrific opportunity for the U.S. to maintain leadership. I am afraid that the gathering will turn into a lengthy recitation of bitter statements by other governments about what we have done, but Connally can forestall that. He could announce that, because we have accomplished much of what we set out to do and have a better understanding of our problems on the part of the rest of the world, the U.S. 10% import surcharge is being removed. He could say that the dollar price of gold depends on the final arrangements for a new monetary system--or even give a little immediately and agree to a modest devaluation of the dollar. I think he would get a program that could be sold quickly.

If Connally does not do this at the IMF meeting, there will be no point later at which it will be so easy for him to make concessions without looking as if he is being forced into swallowing something that he does not want. This week is twice as good as next week for getting an agreement, and next week will be better than two months from now, because if the surcharge is not removed soon, other countries will begin to retaliate. That retaliation may come at first in rather subtle forms that would be hard to identify. I think Connally is right that we may not see a Texas type of retaliation, but there are other ways of killing your enemy besides shooting it out on the main street. There are lots of things that can be done to hurt the market and investments of American companies operating overseas. Ask any exporter about the problems of getting clearance through customs. You need licenses to do a great many things in foreign countries, and licenses can be slow in coming, or can be denied.

This is the sort of retaliation that Connally may not fully understand, but it can have quite an effect on our exports. On the other hand, what do we stand to gain if we hang tough and hold out? If Connally got all the revaluations that he could imagine in his wildest dreams, they would add only $2.2 billion to our net exports in 1972. -

It may be that moving toward economic isolationism would be popular with certain labor and protectionist groups, but suppose we do get into that sort of deteriorating situation. The President could enter the election with a situation where there had been a substantial disruption of world trade and investment, and an adverse impact on the stock market because of the bad effect on the earnings of companies that are heavily dependent on exports or have huge international investments. Nixon might be charged with being the President who undid with one stroke all the progress that had been made over 25 years toward getting an international monetary system--a system that until very recently worked reasonably well. I think this would be quite a telling blow politically. In short, the costs of settling a little too quickly are nowhere near what the costs will be if the Secretary plays his hand too hard.

I know that there are people in the Administration who see things this way, and I am assuming that good sense will prevail. But I am afraid that the initial success of the Nixon-Connally program may make it difficult for us to see the very, very great costs of waiting too long to get an agreement.

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