ONCE upon a very recent time, only a banana republic would devalue its money twice within 14 months. But last week, when the U.S. did just that by cutting the value of the once almighty dollar another 10%, the step proved to be both internationally popular and politically easy. In contrast with the four months of testy negotiations that were required to swing the 1971 devaluation, only five days of whirlwind conferences were needed to bring about last week's large and surprising reduction—which made a total slash of 17.9% since December 1971. Foreign moneymen agreed with the U.S. view that cutting the dollar once more was the best way to end what had become a new and virulent world monetary crisis. When the deed had been accomplished, Treasury Secretary George Shultz proclaimed it almost with pride, saying: "There can be no doubt we have achieved a major improvement in the competitive position of American business."
The matter is infinitely more complex, of course, and devaluation will have many momentous effects, both pleasant and painful. Inside the U.S., it should create jobs in businesses that produce goods for export, by making their products cheaper for foreigners to buy. But devaluation will also aggravate American inflation—how badly no one can yet tell—by pushing up the prices of imports. In addition, American travelers will have to spend more on foreign trips; for example, the price of a single room in Tokyo's Hotel Okura last week was $27.75, v. $24 the week before and $22 in late 1971.
By itself, last week's devaluation will not end the persistent tendency of Americans to spend abroad more than they earn. After the 1971 cheapening of the dollar, the U.S. trade deficit more than doubled, to $6.8 billion last year, because devaluation did not lift exports as much as had been expected and the nation's surging economy attracted more and costlier imports. To prevent a repeat, the U.S. is demanding that Japan and the European Common Market nations buy more and sell less in America. President Nixon is making protectionist mercantilist threats about what he may do if they balk.
Acrobats. The dual devaluation of the dollar has hastened the creation of a turbulent new world of money in which the once rigidly fixed values of some currencies are bouncing up and down like acrobats on a trampoline. Since late 1971, for instance, the British pound has risen from $2.49 to $2.64, sunk to an all-time low of $2.32, and last week closed at $2.44. Five important currencies —the pound, Japanese yen, Canadian dollar, Swiss franc and Italian lira—are "floating" with no fixed exchange rate at all. They sell at prices set mostly by supply and demand. That arrangement creates new uncertainty for importers, exporters, investors and tourists, who never know exactly how many dollars will be needed to buy any of these currencies tomorrow.
For all the problems and confusion surrounding it, the second dollar devaluation seems to have been inevitable. The credit for recognizing that fact and meeting it head-on belongs largely to George Pratt Shultz, the mild-mannered but steely-minded professor (see box next page) who plays as dominant a role in the economic policy of the second Nixon Administration as Henry Kissinger does in its diplomatic policy.