The Unjustified Crisis

When West German Economics Minister Hans Friderichs sat down to lunch last Thursday with Bonn's foreign press corps, he found a single dollar bill laid across his plate by a U.S. newsman. Wearily, the man at the center of the world's latest--and most shockingly timed--currency crisis looked up and cracked: "If that were the only one."

It was anything but. Before the day had ended, the German Bundesbank had to buy up a staggering $2.7 billion of unwanted greenbacks with marks, the largest sum ever paid out by a government in one day in an effort to keep its own money from taking an unwelcome jump in value. Other European central banks bought up about $1 billion. Then began a drearily familiar financial choreography. Foreign exchange windows from London to Tokyo were slammed shut, and they may well remain closed through at least part of this week. European finance ministers started meeting in Brussels Sunday to work out a unified plan for stopping the speculation.

The new assault on the dollar caught nearly everyone off guard, since it came only 17 days after the dollar's second devaluation since December 1971. "There is no rational justification for such enormous quantities of dollars to pour into West Germany," said British Prime Minister Edward Heath, who arrived in Bonn for a long-planned conference with Chancellor Willy Brandt the day the crisis broke. Economists obviously agreed. Alan Greenspan, a member of TIME'S Board of Economists, asserted: "On the question of how much in foreign goods a dollar will buy, U.S. currency may well no longer be out of line."

Then why had the crisis burst? The simplest and most ominous explanation seems to be that currency speculation has developed a self-sustaining momentum independent of economic logic. The crude fact is that speculators who have bet against the dollar since 1971 have profited, while people and companies that could have speculated but held dollars instead have been hurt by two declines in the dollar's value. Many "speculators" are bankers and corporate treasurers who are anxious to keep their overseas holdings in safe currencies. There also is evidence that Middle East oil sheiks, who are paid in U.S. currency for their black gold and thus pile up enormous dollar reserves, have lately traded heavily to get into currencies they think safer. The Arabs are known to have been heavy buyers of gold, which has rocketed up against the dollar on the London market in the last two months (see chart).

One effective way for a nation to dampen currency speculation is to "float" its currency, allowing supply and demand to determine its price in terms of other money. But though they were in the eye of the hurricane last week, West German officials were strongly opposed to taking that step on their own, since it would change the mark's value not only in dollars but also in French francs, Dutch guilders and British pounds. Instead, the Germans favored a combined float of all nine Common Market currencies. The currencies would be kept on a fixed parity with each other, but would rise or fall together against the dollar.

The idea obviously was high on the agenda of the Brussels conference. But the mechanics of arranging a joint float are formidably complex. The pound and Italian lira are already floating individually and would have to be repegged against neighboring currencies before the whole structure could be set adrift against the dollar. Then, in order to keep all the floaters moving in the same direction at the same speed, the Common Market countries would have to promise if necessary to buy each others' currencies in almost unlimited amounts. Nor could anyone be entirely happy with a joint float even if it worked; it would mean that speculators had begun to force monetary changes that do not correct but create distortions in currency values.

There are few other options, though. President Nixon emphatically declared that "there will not be another devaluation" of the dollar, adding that U.S. currency is basically "sound" and that "we will survive" the crisis. Moreover, a third dollar devaluation would probably aggravate rather than calm speculation by destroying whatever faith in the greenback is left among the people who hold the $70 billion that U.S. balance of payments deficits have spilled out abroad. Government controls on capital movements limit international economic freedom, and have not worked anyway. And something must be done to stop the dollar pandemonium.

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