Seething seas of world trade break toward calm
For 16 years - ever since the Bretton Woods monetary agreement was scrapped by President Nixon - financial gales have howled through world trade. Disturbed by the insecurity, some financiers speak of a need to return to the gold standard. Others suggest the creation of a single world currency or a world central bank. Everyone wants more stability. And slowly that seems to be occurring.
Leaders of the key industrial nations are using secret indicators and diplomatic suasion to try to keep exchange rates from getting too far out of whack. But the problem, according to several central bankers and finance ministry sources, is that nations will be nations - and when political constituencies at home cry out, this must take precedence.
So floating exchange rates - rates determined by supply and demand on international markets - are here to stay. The floating, however, may be a little more stable for the foreseeable future. The dollar's slide has paused if not ended, and trade patterns are slowly coming into balance.
Money-trading cowboys rode in
Before the demise of Bretton Woods, exporters, importers, and international investors found it hard enough to do business, given the standard uncertainties of competition, inflation, and credit conditions that always exist in world trade. Afterward came ever-shifting exchange rates.
Buying raw materials, shipping and selling goods, making foreign sales calls - all international transactions became budgetary nightmares. A big profit in a local currency could become a big loss when the money was converted and repatriated.
``Businessmen,'' says Richard Cooper, a professor of international economics at Harvard University, ``feel they know their business well. They feel they know about technological developments. They feel they know the market. But what they cannot be expected to know is how the whole economy functions and how that in turn determines exchange rates.''
To cope with - and exploit - this stormy new financial climate, foreign-exchange operations proliferated, growing from a small part of banking into a huge, high-tech, high-tension, 24-hour service industry. Around the globe, hundreds of men and women scan their ranks of computer terminals and shout multimillion-dollar commands into their telephones: ``Buy deutsche marks at 170! Sell yen at 150!''
All this activity is a necessity today. Sometimes traders are reacting to shifting exchange rates. Sometimes they are making those exchange-rate gyrations more pronounced.
Still, despite the cries of some monetary reformers for a return to the gold standard, the fixed rates of the Bretton Woods era are gone for good, according to the world's top commercial bankers. Meeting last week at their annual International Monetary Conference in Hamburg, these influential bankers appeared to agree that while perhaps some volatility could be wrung from the currency markets, fixed exchange rates are but a dimming memory.
``There is no possibility under the prevailing circumstances,'' Walter Seipp, chairman of the Frankfurt-based Commerzbank, told his colleagues, ``to return to any kind of gold standard or to a kind of Bretton Woods system of fixed exchange rates, and not even to a system of target zones.''
Under a system of target zones, central banks would attempt to restrain currency fluctuations within a wide price band.
Not only would these systems impair ``flexibility,'' Mr. Seipp said; they would require ``a political acceptance we are not yet ready for.''
No country in the world wants to get stuck with a difficult exchange rate or the thankless task of stabilizing the market.
``Bretton Woods will never come back again,'' agrees Jan Ekman of the Stockholm-based Svenska Handelsbanken.
Fighting the tidal pulls
But to try to reintroduce some of that pre-1972 stability without returning to a fixed standard (gold at $35 an ounce), government and finance chiefs from leading industrial nations are trying to strengthen their cooperation. They are meeting as the Group of Three, the Group of Five, and the Group of Seven (variously including the United States, Japan, West Germany, Britain, France, Italy, and Canada). They aim to make sure that no one's budget deficit, trade balance, inflation rate, or interest rate gets so far out of line that it causes undesirable tidal pulls on other nations or on the whole financial system.
Cooperation and coordination are the buzzwords now among central bankers and finance ministers. And embedded in these words is criticism of the way the US has turned financial markets upside down in the 1980s through policies that led first to an excessively strong dollar (brought on partly by deficit spending and high interest rates in the US) and then to a dramatically weaker one (the better to help stem the huge US trade deficit). Between 1980 and '85, the dollar rose by 40 percent against major currencies. In the past 2 years the dollar has plunged about 40 percent.
Meanwhile, US external debt has soared, hitting $263.6 billion last year, according to a Commerce Department report last week. Trade patterns now seem to be shifting in America's favor. Meanwhile, the fallout has included more protectionism and trade tension among allies.
As a result of US policies, says Toyoo Gyohten, a Japanese vice-minister of finance, ``many countries, including my own, took advantage of the surge of the US demand and boosted their exports to the American market. ... Their economies were restructured dangerously as export-oriented and became dependent on the US economy.''
Because of all this turmoil, West German Finance Minister Gerhard Stoltenberg now calls for ``renunciation of the political use of exchange rates as a means of trade policy.'' But if the US or some other nation was hit again by huge trade deficits, it would probably once more encourage a decline in the value of its currency.
Years ago, central bankers would have hesitated to publicly criticize the domestic economic policies of other nations. They would have considered it indelicate. That's no longer the case.
While applauding the progress the US is making in trimming its budget deficit, Dr. Stoltenberg says, ``decisions to further reduce the budget deficit are urgently needed.'' He contends, too, that ``Japan should considerably speed up the opening of its markets,'' and says Europeans should be ``deregulating, dismantling barriers to investment and creating job-generating employment conditions.''
A world currency suggested
Beyond coordination, Japan's Mr. Gyohten suggests something akin to a global central bank - a ``very large internationally managed reservoir of financial assets denominated in major national currencies. By shifting the currency composition of the reservoir in the world market, this mechanism may function as an international open-market operation. It will alter the money supply in respective economies and influence the price of their currencies.''
Professor Cooper of Harvard goes a step further. He advocates one currency. Opening his wallet at the monetary conference last week, Cooper shuffled through the greens, blues, reds, of dollars, pounds, and marks.
``They're all becoming the same size,'' he said, noting that most of the currencies now fit in a billfold. But that is not really the proposal's aim.
``I do not mean,'' he told bankers, ``one world currency, but rather one currency in the core of the system - among the industrial democracies of North America, Europe, and Japan. That in turn means a single, unified monetary policy.''
He concedes that this is a much bigger political commitment than governments are willing to consider today.
In principle, major countries are already committed to a kind of international money called Special Drawing Rights. Some European currencies have been tied together in the European Monetary System (EMS), with the German mark dominating the system. Most other currencies are pegged to the US dollar, Japanese yen, British pound, or French franc.
This regional linkage doesn't always proceed smoothly. After much debate, for instance, British financial leaders say their nation will not join the EMS.
Although the US economy's dominance in the world has been reduced since the Bretton Woods days, the dollar remains a key currency in the world, says Japan's Gyohten. And while Japan and Germany have become more important, they have been unwilling to push their currencies into wider global use.
Karl Otto P"ohl, governor of the West German central bank, notes that the limit on global economic coordination is reached ``at the point that it jeopardizes domestic considerations.''
Still, US Federal Reserve chief Paul Volcker says the difficulties inhibiting more worldwide economic convergence ``are not that great.'' Indeed, Mr. Volcker says: ``I'm encouraged by the speed we are moving at in this area.''
Sure, let's keep talking, the financial leaders are saying. But we're not going back to Bretton Woods, nor are we quite ready for a world currency.