Five years have now passed since the world's major industrial nations abandoned fixed exchange rates for the dollar, and the warnings of Cassandras that the end result could be global currency chaos seem uncomfortably close to coming true. Scarcely a week goes by without the once mighty greenback reeling from a fresh thrashing on the money markets; and when it does steady, as it did in Europe last week (see ECONOMY & BUSINESS), no one can trust the stability to last. Though the effects of this beating remain of only peripheral concern to most Americans—unless they travel abroad—the dollar's travails are deeply alarming the U.S.'s allies and trading partners.
While many Americans often view the dollar only as their own national currency, it is also the principal trading and reserve currency for the rest of the world. What the U.S. does or does not do with the dollar affects every country on earth, and Washington's mismanagement of its money has lately begun to seem more and more like a script filled with dire trouble for everyone.
The perils start with the possibility of protectionist measures being taken by nations seeking to isolate themselves from the effects of monetary instability. Then come the threats of a breakdown of world trade —caused partly by protectionism, partly by uncertainty about what exchange rates will be the next day or even the next hour—followed by a speedup in global inflation and, finally, international recession. Relations between Washington and its two most important economic allies, West Germany and Japan, both of which are crucially dependent on exports for economic growth, have already deteriorated alarmingly. But doomsday is not inevitable. For more than three decades the world has looked to Washington for economic leadership, and now it is begging for it—almost desperately. There is no time to lose.
The immediate problem is that there are just too many dollars in foreign hands. Last year the U.S. spent an estimated $19.5 billion more than it received in all "current account" transactions (trade in goods and services, tourist outlays, weapons exports) with foreigners, an abrupt turnaround from two years earlier, when the U.S. racked up a towering $11.6 billion surplus, caused in part by a drop in imports during the recession. The massive swing back into deficit, which began early in 1976 and has accelerated ever since, has added to a pile of dollars owned outside the U.S. that is estimated to total anywhere from $300 billion to $400 billion.
The deeper problem, however, is a loss of worldwide confidence that the U.S. knows how, or even wants, to manage its economy in such a way as to give those dollars any lasting value. That confidence has been eroding for more than a decade now, and restoring it will be no easy matter.