Flare-up at Yawning Gap

In marked contrast to the encouraging results of President Carter's cautious domestic economic efforts, White House policy on the international front has been a growing source for grumbling. Last week disagreement with the Administration's foreign economic policy flared again in the wake of two developments: the plunge in the dollar's value to new lows against the West German mark, the Swiss franc and the Japanese yen hi international money markets, and the Government's report of a record monthly foreign trade deficit of $2.82 billion for June. For the first six months of the year, imports outpaced exports by $12.6 billion, and official estimates are that the deficit for all of 1977 could reach an alltime record of $25 billion--nearly triple last year's total.

Though no one in the Administration is ready to cheer a yawning trade gap and a weakening dollar, Treasury Secretary Michael Blumenthal and other top officials are by no means upset by them. They believe the best way to perk up the sluggish world economy is for the relatively well-off nations to buy more from depressed countries by either revaluing their currencies (to make imports cheaper) or expanding their economies faster (to increase demand for foreign products). The main reason for the big U.S. deficit, Treasury officials contend, is that the American economy has been growing at a much more rapid rate than its trading partners in Europe, South America and Asia. As a result, while markets for U.S. products have remained soft, American demand for imported goods has intensified. Foreign oil alone will cost the U.S. an estimated $40 billion this year, or about a third of all imports.

Blumenthal argues that the U.S. cannot boost the world economy alone. He has repeatedly called on West Germany, Japan and other nations with trade surpluses to follow the U.S. lead and take in more imports. But these countries have been extremely reluctant to comply for fear of igniting a new round of inflation. The growing U.S. deficits have been of concern to foreign money men; about a month ago they began dumping their dollar holdings to buy stronger currencies--thus setting off the current slide in the value of the greenback.

Blumenthal has added to the case of nerves in the currency markets by letting it be known that the Treasury would not be disturbed if the dollar dropped even further. Last week the dollar hit record lows of 2.2463 West German marks and 264.475 Japanese yen. The effect has been to run up the value of these currencies, thus making imports cheaper hi West Germany and Japan--which has been Blumenthal's goal all along. Says a Treasury spqkes-man: "Let's just say that while we haven't been pushing the dollar down, its drop is not altogether unwelcome either."

Risky Game. Reaction in Europe to the dollar's plunge was mixed. Furious West German bankers charged that when they refused to bend to U.S. pressure and revalue the mark, Blumenthal resorted to stealth to accomplish his ends. They said he deliberately provoked the dollar's slide; the U.S., rasped the daily Frankfurter Allgemeine Zeitung, was playing "a selfish, risky game that shows little responsibility toward the world economy." In Britain, the Bank of England responded to the dollar's decline by abandoning a policy of keeping the pound at a level of $1.72. Instead, the government pegged sterling's value against the currencies of its 21 biggest consumers and suppliers. Immediately, the pound climbed to $1.7415 and is expected to go as high as $ 1.76.

In the U.S., Blumenthal's policy drew fire from Federal Reserve Board Chairman Arthur Burns. Testifying before the House Banking Committee, Burns contended that the U.S. has a responsibility "to protect the integrity of our currency"--an apparent call for intervention in money markets to keep the dollar's value stable. Burns raised what most economists agree is the most serious danger of permitting the dollar to float downward: a cheapened dollar boosts the price of imports and fuels domestic inflation. Some economists also fear that a weakening of the dollar--the currency used by many nations for oil purchases--will prompt oil-producing nations to seek even higher world prices.

Dollar's Drop. Along with its critics, Treasury also has supporters. Richard Cooper, the former Yale economist who is now Under Secretary of State for Economic Affairs, believes that the major central banks can easily smooth out the money market movements caused by the dollar's drop. Adds Brookings Institution Economist Robert Solomon, noting the big trade surpluses enjoyed by the Japanese and the West Germans: "To any reasonable person, the appreciation of the yen and the mark is desirable." Moreover, Solomon contends, the shift in rates is not that great. For example, though the dollar has slipped roughly 10% against the yen in recent weeks, it is down only 3% against the mark and a mere 1% in relation to other currencies. Says Solomon: "The world can certainly adjust to changes of this magnitude without throwing the monetary system into chaos." Indeed, by week's end the money markets had calmed down somewhat, and the dollar was on the rise--but for how long is anybody's guess.

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