One aspect of the new economic program of Nixon and John Connally should not have been unexpected: its benefits for the rich and disdain for the poor. Connally, in particular, has brought to the Administration a blunt favoritism for big business that calls to mind the way things are done in Houston. He has belittled the target of 4 percent unemployment and deplored the “unacceptable” level of corporate profits: both, he thinks, are far too low. He has announced to the world America’s resumed willingness to throw her weight around, as if there had recently been a moratorium. Like Lenin’s, the Nixon-Connally Administration’s New Economic Policy is an essay in realeconomik.
The domestic program pretends to evenhanded severity—a call for homefront sacrifices in the “war against inflation.” In fact, inflation may well have been receding when Nixon made his speech (the 0.2 percent price increase in July was one of the smallest in years), while the situation of the jobless was getting steadily worse (the rate of unemployment during the last twelve months has been the highest since 1961). The Administration’s new program does include a plan for increasing employment, but a predictably selective one. Taxes are to be cut for corporations and the affluent—an increase in the personal exemption, as liberals seem to forget or misunderstand, confers greater benefits on higher bracket taxpayers. Budgets will be cut for cities and the poor. Welfare reform is shelved while investment credits (a form of subsidy for business) are resurrected.
The only remarkable aspect of the program was its initial success in gagging the Democrats. Most of the Presidential candidates, stunned by Nixon’s trumpets, kept quiet about the direction of the march. It took an explosion from George Meany to remind the Democrats whose party they were supposed to be.
For some time now the opposition to Nixon has been counting on “the economic issue” as its meal ticket for 1972. But it has no specific program beyond “doing something” about prices and jobs. Now that Nixon has done something, the Democrats are left waiting around for things to get worse again.
Events may well oblige. When the ninety days are over, the Administration will have three basic choices: to abandon controls altogether, to maintain them on the entire economy, or to regulate merely the price and wage decisions of large corporations and unions. Statements by Connally and Commerce Secretary Stans have already indicated the Administration’s preference for the third approach, on the theory that a completely free economy would soon revert to its inflationary ways, while a thoroughly controlled price and wage structure would require the World War II-style bureaucracy that the President clearly wants to avoid.
But selective controls have their problems, too. The first dilemma facing the new wage price board will be catch-up demands from firms and unions whose scheduled increases were postponed by the freeze. It would be politically impossible to deny all increases to the groups covered by controls, while leaving the rest of the economy free to grab what it could. Teacher’s wages would have to be frozen while barbers’ were not; the corner grocer could raise his prices but the A&P’s would remain pegged. To be sure, the electorate might not be offended if controls applied merely to the prices charged by the nation’s largest, most monopolistic corporations; but Republican campaign contributors might have a word to say about that.
Politics, then, will force the board to allow some wage and price increases. But this strategy, too, will breed inequities. The economy’s wage and price structure is not based on logic or fairness, but rather on supply, demand, and bargaining power. There are no agreed standards for a government board to use in determining which workers or businesses “ought” to receive increases. Should machinists get 5 percent more, while typists are limited to 2 percent—or vice versa? Should Monsanto be allowed a 3 percent increase on sulphuric acid, while Dow Chemical must hold the line on dichloro-difluoro-ethylene? During World War II, with the entire economy controlled, the public accepted a certain amount of arbitrariness in wage and price decisions—though it also countenanced chiseling, evasion, and a vast black market. Today’s mood seems less congenial. In view of the President’s backhanded treatment of the unions and the blatant unfairness of his tax package, the likely post-freeze prospect is for strikes, quarrels, and continued (though perhaps somewhat slower) inflation.
Unemployment, too, will not just disappear. Several months ago the President said, “I am a Keynesian,” but he refused to lower taxes to rev up the economy. In his new program, he pledges to reduce taxes but proposes an equivalent cut in federal expenditures. If he really meant what he said, the decline in government spending would cancel out the expansionary effect of the tax reduction—and then some. The net effect would be fewer jobs as well as redistribution of income to those who are already better off.
But in fact, some of the proposed cuts in expenditure were illusory or overstated. Economists at the Brookings Institution estimate that the net effect of Nixon’s tax and other domestic measures will be to expand the economy at a rate of somewhat over $4.5 billion per year. This will create jobs, but far from the number needed to restore full employment.
The Democrats might show up Nixon simply by allowing his New Economic. Policy to turn stale. But they have another option as well. Labor’s outspoken complaints have given the Democratic party an opening for an economic program going beyond its customary mixture of simple Keynesianism and simpler opportunism. For the first time in at least a generation, the distribution of income in America is the subject of political controversy. Rising prices and taxes have angered the broad middle range of wage earners. While their discontent provides no constituency for a fully egalitarian program of redistribution, it does allow the issue of “who gets what” to be raised in Presidential politics.
As the government takes increasingly explicit responsibility for fixing prices and wages, candidates could begin to discuss the variety of ways in which government activities do or do not reshuffle wealth. Reform of tax inequities, warped budget priorities, collusive regulatory agencies, monopoly exactions—the whole complement of issues raised by Ralph Nader and the consumer movement (see NYR, September 2, 1971)—could be combined in a single economic platform. (The accompanying table lists some of these issues, how much money is involved, and who gets it.)
Waging a campaign on such issues would require some changes in thinking for the Democrats. It is difficult, for example, for liberal Democrats to acknowledge the failure of the regulatory agencies—the ICC, FTC, CAB, etc. These agencies were founded by New Deal and progressive administrations, pledged to harness the private economy to “the public interest.” Generations of liberal lawyers have gone to work for these agencies or for the Washington law firms that ensure their futility (or for both, in that order). The more perceptive among this group recognize that business regulates the agencies, not vice versa. But most of the young advocates who came to work for the regulatory agencies have become old apparatchiki, wedded to the institutions they sometimes criticize. Few are willing to consider such radical remedies as abolishing regulation and encouraging competition. It is more comforting to believe that some day the Interstate Commerce Commission and the Civil Aeronautics Board will rise from the dead, incorruptible.
Democratic legislators have their own reasons for going soft on the regulatory-industrial complex. The regulated industries have the knack for making and keeping friends: AT&T forgets about campaign phone bills; California savings and loan executives bankroll the Democratic machine; newspaper editors are friendly to the supporters of the Failing Newspaper Act (which softens anti-trust legislation for the benefit of publishers). Few Democratic politicians have been completely immune.
An economic offensive by the Democrats would, then, involve a break with old achievements and old friends. But it could also help to cement the new coalition that everybody talked about in 1968. Blue-collar workers, blacks, “civic-minded” suburbanites, and college students do not have much in common: but none of them loves the phone company.
In contrast to the bread and butter expediency of Nixon’s domestic maneuvering, the President’s foreign economic package is puzzling in motive and effect. Only the reason for its timing is clear: figures released in August showed that for the second quarter of 1971, the US had a deficit of over $5.8 billion in its balance of payments. This posed the immediate danger that Europeans and others who held large amounts of dollars would fear a decline in the value of US money and would attempt to trade their dollars for more reliable foreign currency.
But the Administration’s response far exceeded the stimulus. Without even a show of consultation with foreign governments, Nixon proclaimed that the dollars held abroad could no longer be converted into gold. Under the international monetary system which prevailed until Nixon’s speech, the value of all foreign currencies was, in practice, set in dollars and the value of the dollar was set in gold. With the dollar no longer convertible into gold, its value in foreign currencies was allowed to fluctuate on the world exchange markets and soon declined.
Thus Nixon put an end to the system of fixed international exchange rates for money which had been in effect since 1946. He also imposed a 10 percent surcharge on imports, in violation of the General Agreement on Tariffs and Trade. And he denounced the “unfair edge” possessed by America’s foreign competitors and pledged that the US would no longer compete “with one hand tied behind her back.” Suddenly, one Sunday, we were at war with Japan.
But in spite of the Administration’s battle cries, it is important to keep in mind that international trade doesn’t really matter much for the US economy. Trade accounts for only 5 percent of American GNP. If a “trade war” broke out tomorrow between the United States, Japan, and the Common Market, most Americans would never know the difference. But, of course, some would: more Boeing workers would be out of jobs if foreigners stopped buying 747s, while Detroit might perk up if Volkswagens were driven from the American market. Foreign countries, too, would know that something was happening: exports make up 15 percent of the Japanese economy, 25 percent of Germany’s, 30 percent of Great Britain’s.
For America, trade is more a question of politics than of economics. In domestic politics the minority of workers and corporations whose fortunes hinge on trade often counts for more than the general run of consumers. The big auto manufactures, in particular, have been hit hard by foreign competition; so have the markers of steel and TV sets. All of these corporations, and their workers’ unions, are influential and visible, and are listened to when hurt. Internationally, the fact that the US is not dependent on trade gives it freedom to use economic policy as a tool for its political objectives—it can spend money abroad to stage wars, shore up allies, or build up national prestige, without worrying too much about the effect on domestic jobs and output.
The economic insignificance of American trade helps to explain some of the perversity of Nixon’s new measures. The program is an act of nationalistic self-assertion, but it does not advance the economic self-interest of the United States. It derives from three quite different impulses: pure protectionism, designed to keep foreigners from competing with domestic corporations; neo-mercantilism, a modern version of the sixteenth-century notion that a country’s strength is measured not by its productive power but by its hoard of precious metals and foreign currencies; and a curious kind of banker’s morality, which regards balance of payments deficits as a form of mortal sin.
The protectionist aspect is perverse but understandable. A devaluation of the dollar lowers the real wealth and income of the United States and raises that of other countries. We have to pay the Japanese more dollars for each Honda while the Japanese pay us fewer yen for every pound of soybeans. For that reason it seems curious that the United States should have to—or want to—bully Europe and Japan into accepting an American devaluation. But while the over-all wealth of a country diminishes with devaluation, the position of its exporters, and of domestic producers who compete with imports, improves.
American exporters are helped by devaluation because their products can be sold at a lower price in foreign markets. And since imports become costlier in the United States, some American producers benefit from the reduction of competition: Bethlehem Steel has less to fear from Japanese steel mills. The loser is the American consumer, who must pay more for imported goods such as Toyotas and often more for domestic goods that are sold in competition with imports, such as Fords and Chevys.
Similarly, the reason Japan has been able to sell so much to the United States is that the Japanese government has maintained the yen at an artificially low value. If Japan had accepted a higher value for the yen, her purchasing power abroad would have increased; but Sony sales abroad would have suffered. The long-standing undervaluation of the yen amounted to a huge exploitation of Japanese consumers, which was intended for the benefit of Japanese exporters but incidentally conferred an annual gift of hundreds of millions of dollars on American consumers as well. Japan, by resisting for so long a change in the value of its money, and America, by demanding one, both placed protectionist politics ahead of national wealth.
Quite apart from protectionism, the Nixon Administration seeks devaluation because it will produce a “strong” dollar and supposedly bolster American prestige. For years the United States has resisted devaluation because it would betray the “weakness” of the dollar and therefore erode American prestige. In fact, there is no reason why national prestige should have anything at all to do with the exchange value of the dollar. Other nations have been able to strut about while maintaining overvalued rates, undervalued rates, multiple rates, or, as in communist countries, no real exchange rates at all.
But regardless of how little sense it makes to link our payments position with the national ego, the practice has both ancient and recent precedents. In the sixteenth and subsequent centuries, “mercantilist” ideologues and self-interested traders convinced statesmen that a nation’s proper goal in trade was to import little, export much, and amass precious metals. England prospered, they thought, when it exchanged Lancashire wool for Spanish gold. In their view, gold was good not because it could later be exchanged back for products, but simply because it was gold.
In this century, a more extreme version of this dogma has held sway. Countries strive with each other to amass international reserves even though these reserves now consist more of paper than of gold. Nations seek to maintain a balance of payments surplus—selling more abroad than they buy—so that their reserves will increase. Thus, for example, when De Gaulle’s France devalued the franc it traded away billions of francs worth of wine and Peugeots in return for a pile of gold and a sheaf of American IOUs in the form of dollars. France’s aim was not to save up for a rainy decade but to impress its neighbors. The policy amounts to a kind of white man’s potlatch, casting off goods in exchange for social prestige. The Nixon Administration’s talk of a 12 to 15 percent devaluation—far greater than any current undervaluation of the dollar—suggests that we too would prefer the pleasure of the bank book to those of the senses.
The most discouraging aspect of the Administration’s plan is its subjugation to the conventional morality of international finance. The United States is, and has been since the late 1950s, in substantial balance of payments deficit—amounting to $6 billion in 1969 and about $4 billion in 1970. What this means is simply that the amount we spend or send abroad—for Toyotas, vacations, investments, and wars—exceeds the amount that foreigners are spending and investing in the United States. If it were only a matter of trade we would not have had a deficit at all until the last few months. But military expenditures abroad ($4.8 billion in 1970) and heavy American investment in foreign industry have contributed to an unprecedented net outflow.
According to the banker’s code that has governed thinking about international finance for over a century, all deficits are immoral and big deficits are unspeakably so. America, by this view, has an unqualified obligation to correct its deficit, regardless of the domestic sacrifices or foreign opposition that the necessary corrective steps would entail. Indeed, the measures Nixon is taking to end the deficit—stopping gold redemption, imposing a tariff surcharge, demanding devaluation of the dollar—will injure American consumers and have already infuriated foreign governments. But they fulfill our duty to the traditional dogma of financial orthodoxy which again, as often in the past, has triumphed over the real economic interests of its adherents.
The root of this tradition was the nineteenth-century exchange system based on the “gold standard.” Payments for goods and investments abroad were transacted in gold as a matter of convenience. Since national money supplies were tied to gold coins (albeit loosely), countries that imported more than they exported suffered the penalty of a reduction in the domestic supply of money.
The result, supposedly, was automatically to reverse the flow of trade and restore balanced accounts. As money left the country, domestic prices were supposed to fall, making foreign goods relatively more expensive at home and domestic goods more attractive abroad. Moreover, the overall economy would contract with the shortage of money. As business conditions worsened, demand for all goods—domestic and imported—would fall off. While this would create unemployment, it would also improve the balance of trade. Finally, the government was supposed to help the process along by raising interest rates. High interest rates help the balance of payments by luring investments from abroad, but further deepen the decline in the domestic economy as it becomes harder for businesses to borrow for investment.
In sum, a country with a balance of payments deficit was supposed to endure falling prices, rising interest rates, and plummeting employment as the price for eliminating the deficit. The system did not work all that well, but most people viewed its harsh corrective mechanism as an inevitable punishment for the sin of financial irresponsibility.
A hybrid of the gold standard evolved over time. Dollars and pounds sterling became “reserve currencies.” Both the Bank of England and the United States Federal Reserve Bank held large quantities of gold, and both were willing to exchange their currencies for gold at a fixed rate. It thus became the custom to hold reserves and settle international accounts in pounds or dollars as well as gold. This new status imposed special obligations on the United States and Britain. Keeping the British pound as good as gold became a symbol of national pride in England which successive governments during the 1920s supported at the price of disastrous unemployment.
But when the full impact of the Depression was felt neither the United States nor Britain was willing to place international propriety ahead of domestic needs. Both countries cut loose their currencies from gold—“went off the gold standard”—in the hope of stimulating their own economies through export sales and protecting domestic markets for local industries. They hoped that their own currencies would depreciate against the rest of the world’s, making their goods cheaper and foreigners’ more expensive.
But other countries retaliated with their own devaluations. As trade warfare grew more intense, countries erected tariff and quota barriers, instituted multiple exchange rates (Germany had Reisemarks for travel, Askimarks for trade with Latin America, Sperrmarks for blocked accounts, etc., each with a different value and different restrictions), and began making two-way barter deals instead of trading in world markets. International trade diminished and the Depression grew deeper.
Little was learned from this experience except that international cooperation was needed to preserve exchange rates fixed in gold. At the end of World War II the International Monetary Fund (IMF) was formed at Bretton Woods as a kind of business counterpart to the United Nations. A General Agreement on Tariffs and Trade (GATT) was signed, promising progress toward freer trade and lower tariffs.
The new system involved two modifications of the old one. To prevent the “beggar-thy-neighbor” policies of the Thirties, countries resolved not to use tariffs and other trade controls for balance of payments purposes. Measures such as the Administration’s recent 10 percent import surcharge were flatly forbidden, on the theory that they would too readily provoke retaliation. The result was to tighten and codify the old rules of the game. Countries in balance of payments difficulties were still expected to achieve equilibrium by shrinking their domestic economies and enduring unemployment in an effort to reduce imports. Only as a last resort were they supposed to alter exchange rates.
To cushion the impact of these rules, the IMF set up a short-term loan fund to help countries that temporarily had deficits in their balance of payments. If, for example, France got into trouble in 1960, it could borrow up to $175 million (the amount of its contribution in gold to the Fund) with no question asked. Further credit, up to a total of $800 million, could be available at the discretion of the IMF. The larger the amount of the loan, the more power the IMF would have to insist that France, in order to restore the balance, follow the “correct” fiscal and monetary policies that would tighten credit, slow down prices, and shrink the economy. These IMF loans represented the first creation of reserves by international agreement. But their amount was strictly limited and calculated in relation to gold.
The result was a more resilient, though fundamentally unchanged, international exchange system. There was not much gold or IMF credit around to settle trade balances, but during the first postwar years the gap was filled by enormous Marshall Plan aid from the US. Later, private investment by Americans in Europe greased the wheels of exchange with dollars. The world’s expanding needs for working capital were supplied, not by the IMF, but by American balance of payments deficits. The dollar became the world’s chief “reserve currency”; countries would settle debts with other countries in dollars and hold the dollars as a reserve for their future foreign exchange needs.
As American deficits continued to mount, doubts were raised whether the huge amounts of US dollars held abroad could be converted into gold. By 1960, foreign claims on the dollar amounted to $20 billion, while the American gold hoard was only $19 billion. The Kennedy Administration, obsessed with the nation’s image abroad and committed to the restoration of pre-Sputnik American prestige, grew fearful of a run on Fort Knox. Maintaining a “sound dollar” and avoiding a currency crisis became high priorities for the government. Among other measures Kennedy imposed an “interest equalization tax” on US purchases of foreign securities, adopted “Buy America” policies for defense purchases, and maintained high interest rates to encourage US capital to stay at home and discourage it from seeking opportunities abroad. The Administration accepted limitations on domestic growth and employment for the sake of balance of payments rectitude.
Had it not been for the Vietnam war, the American deficit would probably have disappeared, leaving the dollar “strong” but the world economy short on reserves. But as it happened, American military expenditures abroad and the booming, import-happy economy at home sent the deficit to new heights in the mid-Sixties. Vietnam accounted for an $11 billion drain on the US balance of payments from 1965 through 1968—$6 billion in direct military expenditures and $5 billion in extra imports and reduced exports resulting from the fact that the economy was being run at a faster tempo during the war than Congressional conservatism had ever permitted during peacetime.1 In addition, direct investment abroad by US corporations exceeded foreign companies’ investments in the United States by $8 billion during the same period. Thus the United States would probably have had a substantial payments surplus if it had either stayed out of Vietnam or severely constricted corporate investment overseas.
The Johnson Administration, of course, did neither. It did extend some of its predecessor’s policies, adding some new controls on capital outflow, but for the most part it chose to ignore the balance of payments. Its own objectives, Vietnam escalation and home-front prosperity, took precedence over its fear of international financial embarrassment.
The result was the long-expected “crisis” on gold convertibility. Speculators and merchants rushed to dump their dollars for gold, and in March, 1968, the world’s central banks had to suspend their gold payments to private parties. America still remained pledged to redeem a foreign government’s dollar holdings with gold, but this clearly had become a Catch-22 promise, valid only until put to a real test. Any substantial run on the dollar would have forced the United States to stop converting dollars to gold.
The crisis came and went, leaving the United States with a continuing deficit, billions owed in foreign debts, and the most prosperous economy in its history. Soon economists and officials began to wonder whether the situation was really as perilous—or immoral—as orthodox economists suggested. Theorists began formulating a “benign neglect” policy toward the balance of payments. The United States, they argued, had no special responsibility to stanch its payments flow. Other nations, if they wished, could move to reverse their accumulation of dollars. They could pass laws to restrict new American investment or they could raise the value of their currencies, thus discouraging exports to the US and encouraging imports. But if they failed to do these things, America need not slow down her economy, or sacrifice her national programs, for the sake of international good citizenship.
This policy became influential in the Nixon Administration; but to the Europeans, it represented the summit of arrogance. Heedless of balance of payments constraints, America had financed the foreign currency needs of her military expansion in Asia and corporate expansion in both Europe and Asia (e.g., in Korea) simply by spending dollars and letting others accumulate them. Because of the dollar’s role as an international reserve currency, the Europeans complained, there was no effective limit on this process. Americans could buy abroad with overvalued dollars and expect foreign governments to hoard these pieces of paper, as if international finance were a giant Monopoly game with the US as banker. Without ever having asserted the right—and certainly without having been granted it—the United States had managed to get an indefinite free ride from the world’s other trading nations.
A special source of grievance for many Europeans was the use of America’s deficit to finance her investments in European industry. “Fifteen years from now,” wrote Jean-Jacques Servan-Schreiber in the late Sixties, “it is quite possible that the world’s third greatest industrial power, just after the United States and Russia, will not be Europe, but American industry in Europe.” Between 1964 and 1970, American investment in Europe totaled $21 billion.
The European complaint against our “benign neglect” policy has merit, as far as it goes. Had Europe shown any interest in stemming the flow of dollars by revising exchange rates, the United States would have had some moral obligation to cooperate. Indeed, we would have had little choice. Since the US doesn’t have enough gold to redeem the dollars held abroad, the Europeans could at any time have forced us to abandon the parity and let the dollar “float” to a new, lower level. But in fact, the European governments, like the Japanese, kowtowed to their exporters and resisted devaluation of the dollar. In these countries auto, steel, textile, and other manufacturers of exports wield even more power than their counterparts do in the United States.
Similarly, if the Europeans had proposed a revamping of the world monetary system to eliminate the privileged reserve status of the dollar, we would have had little right to object. Our de facto ability to make unlimited purchases of goods with dollars cannot be defended in principle. But as it happens, it has been the United States that has pushed proposals to increase the amount of international reserves that are not tied to the dollar, and the Europeans that have dragged their feet.
For years the French have had their own proposal: to topple the almighty dollar by restoring the reign of gold as the major world reserve currency. But this can hardly be called a reform. Raising the exchange value of gold would temporarily increase world reserves—each nation’s gold stock would be worth more in goods and national currencies—but it would have no impact at all on the basic problem of allowing countries to solve payment imbalances without crippling their domestic economies. In effect, increasing the price of gold would transfer the American reserve privilege to the major owners of gold—Middle Eastern sheiks, European speculators, and South African businessmen. While other European countries are less committed than France to the myth of gold, the prospect for a consensus on real reform measures is remote.
In view of the European attitude, an American attempt to force devaluation makes no sense as an act of international duty. Rather, it is an act of devotion, reinforcing the tradition that national prosperity and autonomy should be sacrificed to bankers’ ideology.
National autonomy, of course, is not always put to worthy uses. The dollar’s privileged position in world finance has made it easier to fuel the war in Vietnam. Stringent adherence to the orthodox rules would have limited our power to achieve all of our objectives, including the most deplorable ones. But it is not military adventures that the Nixon Administration intends to jettison. What Nixon has mainly accomplished by his devaluation of the dollar is a transfer of wealth from American consumers to citizens in foreign countries and to high-priced American manufacturers.
The European response to Nixon’s going it alone is uncertain. American mercantilism will strike a chord of recognition in the European financial community whose economic instincts are remarkably similar to John Connally’s. Should Nixon succeed in generating payments surpluses, some nations would have to accept debtor status. But the Europeans are not likely to sacrifice strong currencies to the American ego. They may retaliate by devaluating their own currencies, by erecting additional tariff barriers against American goods, or by subsidizing their exporters in order to regain access to the American market.
A trade war with Europe would have no serious impact on United States consumers, thanks to the near self-sufficiency of the North American economy. Damage in Europe would be more noticeable if exporters lost their substantial share of the $50 billion American import market, but the setback would not be disastrous. On both sides of the Atlantic, of course, a number of industries would be subject to very serious losses. From the view of American soybean farmers the Japanese market is more than a minor portion of national income.
A more notable cost would be intangible political losses in our relations with Europe and Japan. It is easy to write off the myth of the Atlantic Community as only a successful public relations job. European governments are presumably devoted to realpolitik, to maintaining workable relations with the US, and will not permit a breakdown to extend much beyond some nastiness in financial negotiations. But diplomatic progress on such questions as European disarmament, a European security settlement, and cooperative aid to underdeveloped countries could be retarded. In the coming months, there will be negotiations on the international monetary situation. One grim possibility is that a new system of rigidly fixed exchanges will emerge. Once more countries with unfavorable balances of payments will be pressured to shrink their economies and suffer unemployment.
A more sanguine possibility is that the tactic of floating the dollar might lead to the permanent abandonment of fixed exchange rates. It would in that case have served as a back door to the solution of the world’s real balance of payments problem: the rigidity with which the postwar regime of fixed exchange rates, like the old gold standard, has required countries to sacrifice domestic prosperity to international balance. Britain suffered years of privation to safeguard the value of the pound until Harold Wilson, like Nixon, decided he could treat devaluation as a mark of success. But even with the best of leadership, fixed exchange rates constantly pose a choice between austerity and crisis.
Floating rates, by letting the value of a country’s currency be determined largely by the market place, would allow more scope for domestic economic policy. A British government that wanted to reduce unemployment could pump up the economy without great worry about the trade accounts. As imports rose, the pound would indeed fall—but without a crisis or an international confrontation. Floating exchange rates certainly would not be an answer to all of Britain’s economic problems, but they would give its government greater leeway to pursue an aggressive growth policy. For this reason, more flexibility in international exchange has long been advocated by economic scholars. But until a few months ago, the combined opposition of Europe’s traditionalist bankers and its self-interested, politically powerful exporters prevented any European country from letting its currency float upward against the dollar.
Nixon’s moves may have disarmed that opposition. He may have inadvertently convinced America’s trading partners that competing with the US on mercantilist grounds is impractical. If the President of the US wants to exclude Volkswagens and Fiats from American markets, one way or the other he can do it. A prolonged period of floating, even without an explicit international agreement to float, could make clear the futility of nations competing to build up surpluses by overvaluing their exchange rates. But this may be wishful thinking in the narrow world of international finance which has never put a premium on rationality.
Rationality was not, of course, the theme of Nixon’s New Economic Policy, in either its domestic or its international editions. Its intent and effect were emotional and political. A single speech was supposed to reverse the Administration’s “game plan” for inflation, explain how the economy could be revived by cutting the budget, gloss over a regressive tax program, and win applause by devaluing the dollar. The method was dramaturgy, not logic. Its immediate political success testifies to our national belief that decisive action, regardless of its nature, will cure economic crises. With luck, the belief can be self-justifying, and the President’s belligerent and regressive moves may by their boldness alone produce some benefits. But no amount of showmanship will yield any permanent progress against the unemployment, maldistribution, and misuse of resources which now make a mockery of America’s trillion-dollar economy.
September 23, 1971