Why world bankers look askance at returning to fixed exchange rates
The French commercial banker lamented, with a smile: ''My poor government, it got no support at all.'' He was referring to President Francois Mitterrand's call for a meeting to reorganize the world monetary system and his call for fixed exchange rates. Neither proposal, apparently, got the backing of the 110 or so representatives of the world's largest commercial banks who met here last week.
Nor have these French suggestions won any supporters from among central bankers of the major industrial nations. ''There is no possibility to get back to fixed exchange rates,'' held Karl Otto Pohl, president of the Deutsche Bundesbank, West Germany's central bank. ''There is much too much floating capital in the world.''
The major industrial nations had a fixed-exchange-rate system up until 1973. Each currency had a par value in terms of the US dollar or gold. A government was responsible for maintaining the price within a certain range of that par by buying or selling its own currency on the foreign-exchange markets. If a nation was defending its currency, it had to use its reserves of dollars or gold to buy its own currency on those markets. This increased demand kept up the price.
But these days there are hundreds of billions of dollars that could easily move from one currency to another out of fear or speculation for profit. It could take enormous reserves for a nation to defend its currency against an assault of fear and speculation. In a ''floating''-exchange-rate system, such as for the dollar, prices change freely.
Within the European Monetary System (EMS), the member nations do maintain a fixed-exchange-rate system among themselves. But even this limited system, within a group of nations that share a tariff-free common market, has had to face up to several realignments of exchange rates. Because its member nations experience differing levels of inflation, the value of their goods gets out of line among the nations. This must be adjusted for by lowering or raising the value of the currencies within the system.
Before the most recent EMS currency realignment March 21, Mr. Pohl complained , some 15.5 billion deutsche marks (US $6.2 billion) flowed into West Germany in hopes of taking advantage of the widely anticipated change. A Frenchman, for instance, using francs to buy marks a few days before the change would have made about 8 percent on the transaction when he later switched back to francs. Most of the money flowed out of Germany again after March 21. The French franc was devalued 2.5 percent and the German mark revalued 5.5 percent.
For Germany, however, the flood of mark purchases created monetary problems. It added billions of marks to the nation's money supply, which, if the money stayed long enough, could add to inflationary pressures in the nation. ''It could destroy our monetary policy,'' Mr. Pohl said.
In economic theory, a central bank might be able to neutralize such inflows of capital by domestic sales of government debt. But this tightening up might raise interest rates and be unpopular.
So Mr. Pohl concludes fixed exchange rates ''can't be a substitute'' for proper domestic economic policies. What he meant, in a sort of polite monetary code, is that the franc has been falling in value on the foreign-exchange markets because the French socialist government followed an expansionary economic policy when it should have continued an anti-inflationary one. As a result, French inflation has been higher than in its major trading partners, and this has meant French goods were no longer so price competitive. It prompted the devaluation of the franc.
As for a meeting to reorganize the international monetary system, that is regarded widely as pointless - if not asking for political trouble from the developing countries and perhaps elsewhere. US Treasury Secretary Donald Regan has suggested the idea be studied, which is often a diplomatic way of taking no action.
In any case, it looks almost certain that for some years to come the dollar will ''float'' in value against the currencies of other major currencies, influenced by mostly nongovern- mental demand and supply for those currencies. Because today's high US interest rates invite much foreign money into the American money market, the dollar is currently strong.
Also, the dollar's value in relation to such European currencies as the Belgian franc or German mark has moved up or down relatively rapidly. This makes it hard for exporters to make production and sales plans. ''They never know what their revenues will be in francs,'' said a Belgian banker.
To consider this problem, the United States initiated a study at the last summit in Versailles. The report of the seven-nation (plus the European Community) working group, considering whether limited intervention by governments in the foreign-exchange market might be helpful in reducing fluctuations, was published April 29.
The 30-page report is not conclusive in its recommendations. But it does say that intervention, whether or not coordinated by more than one government, was ''no substitute for necessary changes in economic policies.'' And, looking at history, the group found that coordinated intervention had been more successful than action by one central bank alone.
Whatever, the report has not ended the debate over the merits of intervention to correct exaggerated movements in foreign-exchange rates.
Paul A. Volcker, chairman of the Federal Reserve Board, described intervention as ''a distinctly subsidiary but helpful tool at times.'' But Beryl Sprinkel, the top international monetary official at the US Treasury, has regarded intervention as pointless.
The Germans aren't automatically opposed. Since some $25 billion of foreign exchange is bought and sold each day in New York, however, they figure it could be difficult for central bankers to have much influence on prices for more than a short period.
On the other hand, the Belgians, who export nearly half their national production, crave intervention. Said Prime Minister Wilfried Martens: ''More international cooperation is needed to achieve greater monetary stability by reducing the exchange-rate fluctuations between the dollar, the yen, sterling, and the currencies of the European Monetary System.''
Whether the summit meeting at Williamsburg, Va., this weekend will take this debate any further remains to be seen.