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Fortunately, tempers are cooler on the equally important issue of crafting a new world monetary system. Shultz reports that in the wake of the latest financial crisis, foreign moneymen are showing more interest than ever before in lasting monetary reform. They had better; the world right now lacks any coherent monetary system. The old system of fixed values tied to a dollar that in turn was tied to a supposedly "immutable" price in gold was destroyed by the 1971 dollar devaluation. Since then, devaluations, revaluations and floats have been coming with dizzying rapidity. The new flexibility is by no means bad. It enables currency values to change so that they reflect more accurately the international competitive strength of each country. But the world sorely needs some agreed-upon rules for making the changes, so that they will not always be forced by a series of wrenching crises.
Shultz seized the initiative last fall and proposed a detailed plan for a new system. Its main feature: currency changes would be keyed to shifts in the size of the monetary reserves that each nation accumulates in its dealings with the rest of the world. Countries that either persistently lose reserves through excessive spending, like the U.S., or pile up reserves through excessive trade surpluses, like Japan, would be obliged by international agreement to bring their accounts closer to balance. Nations could change their trade practices or could make small devaluations or revaluations as a more or less routine procedure. Shultz also contemplates a lesser role in global finance for the dollar. It would be gradually replaced by Special Drawing Rights ("paper gold") as the major currency that nations use to settle debts among themselves. This would enable the International Monetary Fund, which issues SDRs, to use them to buy up the billions of loose dollars that now slosh disruptively from country to country.
Complaining. The Shultz plan is being discussed by the finance ministers of a committee of 20 nations. In March, the ministers will gather in Washington for the next in a series of meetings that are supposed to produce an outline that could be approved at the IMF meeting in September. But Shultz, in announcing the devaluation, made a point of complaining that the negotiations are going too slowly. Last week he hinted that if agreement is long delayed, the U.S. will act to balance its international payments on its own, presumably by protectionist restrictions on imports or even further devaluations.
Finance ministers of other nations should heed the warning —and the U.S. should temper its emerging nationalist line. It is possible to foresee the second dollar devaluation leading to a strengthening of the U.S. economy, a tearing down of barriers to trade and investment around the globe, and a newly sensible monetary system in which currency values shift frequently but moderately and with little fuss. It is equally possible to envision a world of continuing U.S. deficits, protectionist fences around national economies, and monetary chaos that would strangle the international movements of money, people and goods. Money markets move so swiftly nowadays that the governments of the world's rich nations must act quickly to bring the first vision into being—or risk suffering the second by default.