POLICY: Nixon's Other Crisis: The Shrinking Dollar

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Wall Street is in a similar ban-the-boom mood. Corporate profits are expected to rise 23% this year above those in 1972. That anticipation would normally set brokerage houses afire with buy orders, but stock prices have sagged even more than the Dow Jones industrial average of 30 blue chips indicates; it is no trick to find lesser-known stocks whose value has been cut in half so far this year. One result is that tens of millions of Americans, whether they know it or not, face the prospect of retirement benefits less generous than they had hoped for, because the stocks that their pension funds invest in have gone down. The dive has mystified even top corporate executives. Robert Oster, senior vice president of California's Bank of America, the nation's largest, reports that on a recent nationwide tour he kept hearing the same refrain from corporate clients: "How the hell can we be that low on the market when our company is in such great shape?"

At least part of the mystery is bound up with inflation.

Inflation was once thought to be good for the stock market: after all, the very word meant rising prices, presumably for stocks as well as other things.

But market averages today are not much higher than they were in the late 1960s, while the consumer price index has gone up by a third.

Among the reasons: inflation has become synonymous with tight money and high interest rates. Indeed, last week major banks raised their prime rate (to 7½%) for the fourth time in eight weeks, making the cost of big-business borrowing more expensive than at any time since September 1970. The Federal Reserve then lifted the discount rate (the interest rate it charges member institutions) half a point, to 6½%, its highest level in more than 50 years.

High interest rates and decreased availability of loan money make it more difficult for would-be investors to buy stock, and tend to drain money out of the stock market into bonds and savings accounts, where interest yields are high. Further, every inflation brings with it the threat of a subsequent recession caused by Government efforts to restrain an inflationary boom—a distressing thought to stock investors.

The root cause of the dollar's decline abroad is the simple fact that there are too many dollars—some $80 billion —ricocheting round the world. They have accumulated abroad because the U.S. during the past 20 years has spent overseas—in purchases of foreign goods, military expenditures and business investments—far more than it has taken in from foreign countries. An oversupply of dollars, like an oversupply of potatoes, tends to drive down the price. That tendency has been given free rein since March by a change in the way that the international monetary system operates. Previously, foreign countries had been required to maintain set exchange rates between their currencies and the dollar—meaning that if no one else would buy dollars, government banks had to purchase them to support the price. Now nearly all major currencies are "floating," or free to sell at any price set by supply and demand, against the dollar.

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