The Floating World

Grim-faced finance and treasury ministers from the West's major industrial nations streamed into Brussels and Paris last week for anxious, endless meetings about the latest monetary crisis. Even as they argued, a solution of sorts seemed to be working itself out. Though official currency exchanges were closed throughout Europe and will stay shut for at least part of this week, private money markets remained open much as usual. But rather than make deals at the official exchange rates, currency traders allowed monetary values to be set by supply and demand. In effect --and without formal government sanction--the world's major currencies were floating against one another, free to find their open-market level.

According to conventional monetary wisdom, that can be a prescription for chaos. In practice last week it turned out to be a formula for tranquillity: executives and travelers bought only as much foreign money as they really needed, at relatively stable, if unguaranteed, prices. No one can tell whether that quiet will last, and the official bet is still very much on chaos. Moneymen are continuing to search for some way to get the dollar's price in other currencies formally set again. But last week's experience nevertheless might be a foretaste of the monetary future.

The floating system was not without its hitches. U.S. tourists who unwisely changed their dollars in hotels and restaurants, rather than in banks, had to accept rates that were often unreasonable. Bankers and their customers did more than the usual amount of telephoning back and forth, trying to decide whether to let a currency deal go through at the going rate or wait for a slightly better one. The Common Market farm bureaucracy imposed a tax system on inter-European food shipments that was designed to compensate farmers who lost money because of the float.

It contained no fewer than 26 different border-tax rates for agricultural trade in Italy alone.

For all that, the de facto float was, on the whole, a notable success. The currency speculators who had precipitated the crisis by flooding central banks with unwanted dollars on the bet that the greenbacks would soon decline in value against other currencies were forced into retreat. The dollar's value steadied on most markets, though at week's end it still stood below its supposedly official post-devaluation rate and far down from its lordly values of 1970 (see chart). Most businessmen and bankers continued to operate normally, agreeing with Rome Banker Marcello Tagnaccini's optimism: "S'arrangiard," an Italian expression meaning "everything can be arranged."

Everything, that is, except joint agreement by the Common Market members' governments on what they should do. The West Germans continued to press for a common float in which EEC currencies would still drift in value against the dollar but would be lashed to specific parities among themselves. The Germans found little enthusiasm for that idea. The British and Italians have been floating their currencies for some months, and are not anxious to repeg them against other European currencies at present.

Double Risk. Jointly, singly or in combinations of countries, the non-Communist world now seems to be moving, at least temporarily, toward floating currency values. Moneymen long believed that such a system would create enough confusion to dampen the desire for international investment. Because no one could be certain, for example, how many Swiss francs a dollar would be worth on any given day, the investor would not only have to take a risk on his project but also on the currency transactions necessary to finance it. Thus the usual practice for the past 25 years has been for governments to agree on official exchange rates and to defend them by using national reserves to buy their partners' currency.

Yet after two devaluations of the dollar within 14 months, and more monetary crises than anyone cares to keep track of, businessmen have begun to doubt that fixed exchange rates really guarantee monetary stability. The newer theory is that they only cause currency changes to come joltingly overnight, by formal devaluations and revaluations, rather than gradually, by the day-to-day adjustments of a floating system. One reason is that speculators have gained a powerful weapon in some $70 billion worth of unredeemable dollars. The figure represents the spillage from two decades of U.S. balance of payments deficits. Foreign governments are committed to buy the dollars under a fixed exchange-rate system, but they do not really want them. This volatile cash rockets through European nations and Japan with alarming speed, searching for a currency that might be revalued upward and thus earn a quick profit for its holders.

Floating partly strips speculators of their advantage. "It's much more a onesided gamble if a government alone is pegging the dollars," says a monetary official in Canada, where local currency has floated against the U.S. dollar for nearly three years without major problems. "Under a float, a speculator has to gamble against other speculators. This helps settle the value of the dollar at a point somewhere near what rival speculators feel is about the right price." Besides, businessmen in recent years have learned to deal much more easily on the "forward exchange market" --where buyers and sellers of currency agree in advance on the rate to be used in a given transaction. Says David Grove, a member of TIME'S Board of Economists: "There is no reason to think that floating rates, once adopted, would really have sharp adjustments."

In an ideal world economy a nation should be able to set the value of its currency for at least reasonable lengths of time. But the present monetary system has been so battered over the years that for the time being there may be little alternative to the splish-splash world of floating.

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