The End of a Gamble

By HP-Time

THE Nixon Administration has deliberately stalled for nearly two months in seeking the necessary congressional approval of the dollar devaluation that it agreed to last December. Reason: the President and Treasury Secretary John Connally believed that they could use the delay to wring a few further trade concessions from Japan and the Common Market nations. It was a high-stakes gamble, since their plan ran the risk of undermining confidence in the entire new system of currency exchange rates worked out in the Smithsonian agreement. Last week that system began to teeter, and the Administration decided to take what it could get and end the suspense. In Brussels, U.S. negotiators reached agreement with Common Market officials on several key trade issues. In Washington, Connally promised to send to Congress this week the long-awaited bill raising the price of gold and thus officially lowering the value of the dollar.

The monetary flurry was far short of an outright crisis, but it was nonetheless an uncomfortable reminder that not even the sweeping Smithsonian agreement had ended the world's money jitters. At one point, the dollar's trading value in West Germany sank so close to its allowable minimum that the Bundesbank spent some $90 million worth of marks to support it, the first time such intervention has been necessary under the new rates. At the same time, the price of gold on Europe's free markets soared to record heights of nearly $50 per ounce (v. the post-devaluation official rate of $38). After the U.S.-Common Market agreement was announced, the two courses reversed, with dollars gaining and gold losing in value.

Bits of Hearsay. The mini-panic was caused by a combination of wild rumor and hard economic fact. European speculators have been trading bits of unfounded hearsay that the Italian central bank was secretly selling some of its dollars for gold on the free market and that the U.S. Congress was somehow planning to double the price of gold. More sensible investors were troubled by the huge U.S. budget deficit that Nixon disclosed two weeks ago--which they feared would lead to further dollar-weakening American inflation--and by the gap between Europe's relatively high interest rates and the current low cost of money in the U.S. That disparity has at least temporarily prevented the large-scale return of dollars held abroad to U.S. securities, one of the expected results of devaluation. As a result, some dollar holders were convinced that devaluation was not working and sold out for other currencies.

Europeans were most disturbed by Connally's calculatedly slowpoke handling of the gold bill. They regarded the delay as a polite form of blackmail, aimed at forcing trade concessions from them as the price of monetary stability. Then, as time dragged on, some believed that Nixon might try to gain trade advantages on his own by seeking approval of a devaluation larger than the 8.57% level agreed to in December. After all, London's Financial Times noted icily, the Nixon Administration "has been known before now to reverse itself suddenly."

The trade package negotiated last week included a Common Market agreement to cut tariffs on U.S. oranges and grapefruit, a move that should encourage sale of these goods in Europe. In addition, the European Economic Community agreed to stockpile 1.5 million tons of wheat, thus eliminating part of this year's crop from competition with U.S. wheat on the world market. Looking toward long-range reform, the negotiators agreed to begin talks next year aimed at reducing tariffs and other trade barriers on a wide variety of goods and raw materials. All in all, the terms seemed to provide some important concessions on the part of the Europeans, but hardly a trade victory worth the risks that Connally ran.

Washington's part of the bargain was to promise speedy passage of the gold bill. However, since both houses of Congress will hold hearings on the bill before voting, it probably cannot become law until well into March. Considering the uncertainty and ill will needlessly caused by the delay so far, that leaves plenty of time for the fragile monetary system to suffer yet another round of spasms.

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