THE DOLLAR U.S. WILL PLAY CURRENCY GAME BY AMERICAN RULES

Press, Volume CVI, Issue 31142, 19 August 1966, Page 10

THE DOLLAR U.S. WILL PLAY CURRENCY GAME BY AMERICAN RULES

IBM

DAVID WATT,

Washinglon correspondent of the "Financial Timet "I

[Reprinted from the ••Financial Times” by arrangement.l

WASHINGTON, August 12. After a longish period of eclipse, the United States balance-of-payments problem is about to make a reappearance in the headlines. The official figures for the second quarter of this year are due to be announced next week with the usual panoply of press conference and pronouncement from the authorities. The statistics, it seems, will show an overall deficit of about 300 million dollars for the quarter, almost halving the first quarter’s alarming total of 580 million dollars —and Mr Henry Fowler, the Secretary of the Treasury, can be expected to make the most of the occasion with an understandable amount of flag-waving.

Just the same, it will be surprising if the subject does not quickly relapse into relative obscurity. For the recent lack of interest has been due less to the flamboyance of Britain's payments difficulties than to a deep and significant change which has occurred in Washington during the last few months —the United States Administration is no longer on the defensive about the dollar. All last year scarcely a week passed without some I stern admonition from some members of the Government about the need to wipe I out the balance-of-payments deficit. Not only were we told that it would be virtually impossible to reach an agreement on the reform of the international monetary system while the imbalance continued but the dollar itself was threatened by the steady conversion of dollar surpluses abroad into gold. President’s Programme The President's "voluntary” balance-of-payments programme was introduced to stem the out-flow of capital through American banks and businesses, and was then tightened and retightened. Government departments were hounded by the Treasury to reduce the balance-of-payments costs of their operations and there was even serious talk of a tourist tax. The result was a drop in the deficit from $2798 million in 1964 to $1354 million last year. But even this, according to Mr Fowler, was not enough. It was still necessary to fulfil President Johnson's promise, made last September to the annual meeting of the International Monetary Fund and the World Bank that “we must in our own interest and in the interest of those who rely on the dollar as a reserve currency, maintain our payments in equilibrium. This we will do.” And equilibrium, in Mr Fowler’s definition, means a deficit of no more than $250 million.

It has been clear for some months and will be even clearer after the publication of next week’s figures that this simply cannot be achieved. This year’s deficit will almost certainly be as large as last year’s, if not larger. Yet there is less evidence of concern within the administration than at any time for the last 18 months. The voluntary programme restricting capital outflows continues, certainly, and so does the pressure on the

Pentagon and other departments. A bill providing new tax incentives to foreign investment in the United States is now before Congress; the drive for exports is on and friendly governments, like the British and Canadian, are encouraged to avoid making technical adjustments which will adversely affect the American payments statistics. Transformation But if one talks to senior officials here on the subject, the mood is relaxed and even self-confident —a deficit of $l5OO million this year would be “unfortunate,” they concede, but the American economy and gold reserves are strong enough to stand it, and the prospects of an international liquidity agreement would not be reduced a jot. There is certainly no hint of the old sense of vulnerability and panic. This remarkable transformation can partly be explained by the demands of domestic and international public relations. The approach of the Congressional elections is not exactly increasing the proportion of gloom, or even realism, in the pronouncements of administration spokesmen on any

subject least of all one as emotion-cluttered as the dollar. The jittery state of the foreign exchange markets and the weakness of sterling are strong arguments for striking a carefree pose whenever possible. And, finally, the Vietnam war which is expected to cost the United States at least $750 million in foreign exchange this year, provides an excellent public relations platform from which to justify the deficit to everyone except those who do not agree with the Vietnam policy. Where the American Government is concerned, one can never dismiss the imageregarding motive and no doubt it has been present here. Nevertheless, I believe that the present absence of worry in the administration is based on more fundamental considerations. The first is the realisation that what cannot be cured must be endured. There is in fact, very little more that can be done to reduce the balance of payments deficit without radical and possibly dangerous changes in American policy. The balance of payments cost of Vietnam is bound to go on rising so long as the escalation continues. Foreign aid is already cut dangerously low and is tied at almost every available point to purchases of American goods. A tourist tax is out of the question in an election year. The balance of payments guidelines which govern business capital outflow, have not worked as well as was hoped but they can hardly be tightened any further without imperilling the President’s precarious consensus with the business community. As for the banks, they are well below the permitted ceiling on overseas lending as it is and are unlikely to increase it while the present frantic scramble for funds continues in the United States. Trade Prospects The imports bill, which continues to rise steadily, could be reduced by deflation at home. But a tax increase has been ruled out for political reasons, while even higher interest rates might have the disadvantage of attracting short-term funds out of sterling. Exports will presumably continue to rise but if, as the Americans hope, Britain achieves major reductions in her own deficit this rise may be limited. American statisticians calculate that if Britain reduces her deficit by $lOOO million about $250 million will be at the expense of the United States—much of it through new British inroads into shared markets. It follows from all this that the United States has very little choice at present but to sit it out. Yet even if this were not so, there is another factor at work—a widespread realisation in Washington that the United States position is not so precarious as the Americans had at one time thought. It has dawned upon American officials that their acceptance of the Continental view of the dangers of gold conversions amounted, as one man put it, to “playing the game according to the other fellow's rules when we didn't have to.” Several factors have contributed to this new self-con-fidence. One is undoubtedly the balance of payments difficulties of West Germany and the Netherlands, which have

reminded everyone that there is nothing permanent or inevitable about the European dollar surpluses and have re-opened the possibility (joyful thought) that some day even the French may run a deficit. Another consoling feature is the relative case with which the Europeans have been persuaded to go on holding dollars. In the 12 months ending June, 1966, the balance of payments deficit ha- been about $1750 million but the gold drain during that period has been only $520 million. The French will obviously continue their present policy of converting all new dollar surpluses into gold, but at the current rate of less than $5OO million a year the Americans consider this supportable.

Hand Overplayed In fact, the strength and persuasiveness of American financial diplomacy have certainly been helped by the tendency, now almost universally acknowledged, of the French to overplay their hand. The arrogance and intransigence of Mr Debre, for example, at the meeting on liquidity at The Hague last month not only irritated his partners in the European Economic Community but also forced Mr Fowler to remind himself, and others, that if the present monetary system was going to be pulled down it would not be the United Slates incomparably the strongest economy in the world—which would be the chief sufferer. It is by no means certain any longer that the United States would respond to a large sterling devaluation and consequent Continental devaluations by raising the gold price against the dollar. The Americans are gradually getting into a mood in which they would adopt almost any solution rather that reward the French Government for its present policy in such a fashion. They would certainly look first for some kind of arrangement with other members of the group of ten (excluding the French) within the present framework, but if that failed one’s suspicion is that they might prefer to restrict payments of gold for dollars or even allow the dollar rate to float. An Angry Glint All this is still a mere angry glint in Mr Fowler’s eye and it would be quite wrong to assume from Mr Harold Wilson’s remarks during his last Washington trip that the Americans are now concocting a plan to be put into effect if the liquidity negotiations failed or that the pound would necessarily be central to such a plan if they were. The American Government still basically envisages a future in which the present reserve currency system persists, in which the pound survives on its own merits, in which the United States can continue to run a comfortable liquidity-creating deficit of up to $lOOO million a year and in which the European countries can be induced to agree to create more liquidity, when that appears to be necessary, rather than reducing it by aggressive gold purchases. But if this world does not materialise then the Americans do not propose to be the loser. They are now prepared, if necessary, to play the game by their own rules.