INTERNATIONAL MONETARY REFORM EVERYONE IN FAVOUR, BUT NO-ONE WANTS TO BE FIRST

Press, Volume CXII, Issue 32977, 25 July 1972, Page 12

INTERNATIONAL MONETARY REFORM EVERYONE IN FAVOUR, BUT NO-ONE WANTS TO BE FIRST

(By

PAUL LEWIS.

United States editor of the "Financial Times " Londonf

(Reprinted by arrangement

, ,^ n b°th sides of the Atlantic the latest currency upheavals have been taken as justification for last December's decision bv the ma or financial powers to organise a thorough-going overhaul of the international monetary system. But although thev have now agreed on the new Group of Twenty as the forum for these negotiations, there is still a remarkable reluctance in every camp to take the initiative and get the reform talks under way.

On the European side, the British have made a tentative first move with the Chancellor of the Exchequer’s proposals last September for a system in which the Special Drawing Rights (S.D.R.) would assume many of the pivotal functions now performed by the dollar and, to a lesser extent, the pound. But while this line of thought underscored Britain’s interest in extricating sterling from its reserve position on the eve of Common Market entry, it failed to meet the Americans’ central preoccupation or to assist the Community members with their plans for monetary union. A new chance Late this month the British will have another chance to show some leadership in the reform field when the Common Market Finance Ministers come to London to discuss the whole question at the Chancellor’s invitation. However, the sterling float has weakened his position and, whatever cards he may have up his sleeve for this occasion, the Americans have concluded independently that the Community is going to be far too busy with its own enlargement to spawn any coherent thoughts on this subject before the start of next year.

Another possible candidate to take the initiative might be the International Monetary Fund (1.M.F.). Since John Connally’s departure, its relations with the American Administration have been on the mend and as an organisation it is certain to play a significant role in the negotiations whenever they come. Yet to the dismay of some, its managing director, Mr Pierre Paul Schweitzer, has shown little taste for leadership in this field so far. Were it possible to think of an alternative, there might well be a move to replace him next year by someone with a little more fire in his belly. On this as on other questions, of course, the most obvious leader remains the United States which was, in fact primarily responsible for last December’s promise by the Group of Ten to overhaul the payments system. Since then the Americans have been accused on several sides of dragging their feet, and while Dr Burns of the Federal Reserve has done his best to get the Treasury on the move again, every halting step forward is still accompanied by lectures on the complexity of the subject and dire warnings that no reform at all is preferable to an inadequate one. No U.S. plans On the procedural level, the Americans have set up an inter-agency group under the chairmanship of Mr Paul Volcker, the Treasury Under Secretary, while the White House is trying to strengthen the President’s advisory council on foreign economic policy which will also have a key role to play in drawing up the Administration’s point of V'“w. But despite these moves, the official attitude is that the United States has no plans to slap in a blueprint of its own as a basis for negotiation and in general terms the approach is very much one of wait and see.

Several justifications are offered for this within the Administration. Telling other people what to do has always jeen against the Nixon approach to foreign policy and there is also a strong fear that anything the United States did propose would be attacked in principle by the Europeans. It is also admitted quite frankly that there is very little political interest in the subject at the moment with an election on the horizon, while in any case the Europeans seem scarcely better prepared. But while all these considerations have contributed to the general American lethargy, the most important factor of all is the conviction that it would not be in the national interest to get down to serious negotiations until the Smithsonian exchange rate agreement has had time to take effect. If the rest of the world is not prepared to let the United States right its payment imbalance, the dollar must perforce remain a reserve currency, convertibility will be impractical and any agreement must take account of these realities. On the other hand, a strong dollar would reinforce America’s negotiating position, go some way towards resolving the overhang problem, and pave the way for a new system that would prevent competitive devaluations.

Issue for Americans For the Americans, therefore, the fundamental issue at stake in the negotiations is not the elevation of the S.D.R. system into the major source of new reserves, but whether Japan and the Europeans are willing to accept the logic of the Smithsonian agreement and see their surpluses transferred across the Atlantic. It is only fair to say that however understanding American officials may be about the force of speculative pressures, they have not been reassured by the sight of the British Chancellor of the Exchequer devaluing the pound only six

months later amid talk of boosting exports and creating new employment.

The exact size of the payments turnabout the United States is looking for has been a controversial issue ever since last August. But whatever extravagant claims Mr Connally may have made, thinking today seems to have settled down on the proposition that a current account surplus of at least s6ooom will be needed to match foreign aid and direct investment in the developing world, on the assumption that investment in industrial countries continues to be matched bv a return flow of funds to the United States. Whether the Smithsonian agreement will be sufficient to produce even this, has been debated by many, however, including the Brookings Institution, and fears that the answer may be negative in part accounts for the importance the United States attaches to a parallel attack on trade barriers. However, it is also a question of doctrine. For the whole co-operationist school in the State Department, free trade is, like a balanced monetary system, part and parcel of the “open world” they have striven for since the end of the last world war. The cruel paradox is that having for so long supported European integration as the first step towards the great alliance of western nations, they now find that the Common Market is showing a rather different set of preferences with its agricultural support system, its association agreements, and its plans for monetary union. Patience and anger For some the answer is for the United States to bide its time in the belief that these insular manifestations will eventually disappear. Others can barely conceal their anger and talk ominously of blocs and trading wars. But at the top of those parts of the Administration with most experience of negotiations in this field, there is a readiness

|to think in terms of a more eclectic system that would somehow cater both for the European desire for unity as well as the free trading preferences of the United States and others. How this is to be done remains anyone’s guess, although there is no underestimating the political problems involved. The present Administration remains adamantly opposed to cutting back capital exports further to help the balance of payments as the Europeans have sometimes proposed. But it has still to get Congressional approval to take part in the trade talks next year. Any resumption of convertibility might also cause political problems, and both Europe and the United States will have to face the problem of converting uncompetitive industries in a world where neither tariffs nor exchange rates can be used to protect them.

While such thoughts as these are in themselves further reason for delay, there is a grudging acceptance at [the top of the Administration that sooner or later it will have to be the United States that takes the lead if anything is to be done. However, nothing less than a major currency crisis is likely to bring a change of attitude before the Presidential elections. For the experience of last August showed that Wall Street and the American economy in general are much more vulnerable to international fears than many had suspected.

The Rev. C. W. Parry-Jen-nings has been appointed vicar of the parish of Riccarton, St James, succeeding the Rev. J. S. Vincent, who will become vicar of Hororata at the end of August. Mr ParryJennings trained at the London Theological College of Divinity, being ordained in 1960. After serving curacies in English parishes, he came to New Zealand as curate of the parish of Shirley in 1967, before his appointment as vicar of Lincoln in that year.