A yen for your thoughts
MONEY
WILLIAM JANEWAY
`Money' and 'crisis'—the words have become virtually inseparable. But the twice-yearly financial farragos which send speculators into orbit and central bankers into consultation are, in fact, no more than the froth on two quite different waves of world financial and economic evolution. The first wave is the haphazard emergence of a truly international financial system—the 'dollar system' described recently in Geneva by Professor Milton Friedman. The second is Japan's continued growth as an in- dustrial and exporting power. In the middle, caught between the reality of American fi- nancial power and the threat of Japanese trad- ing power, is western Europe, from the weak pound to the strong Deutsche Mark. `Money' and 'crisis'—the words have become virtually inseparable. But the twice-yearly financial farragos which send speculators into orbit and central bankers into consultation are, in fact, no more than the froth on two quite different waves of world financial and economic evolution. The first wave is the haphazard emergence of a truly international financial system—the 'dollar system' described recently in Geneva by Professor Milton Friedman. The second is Japan's continued growth as an in- dustrial and exporting power. In the middle, caught between the reality of American fi- nancial power and the threat of Japanese trad- ing power, is western Europe, from the weak pound to the strong Deutsche Mark.
On the financial side, it is an irony of history that the strength of the dollar today is due largely to the proclaimed and acknowledged weakness of the dollar a few years back. Eight years ago, presidential attempts to limit the much-criticised us balance of payments deficit by discouraging foreign borrowing in New York gave the crucial push to a massive and continuing expansion of the Euro-dollar market. More recently, American banks have followed the dollars overseas. Now there exists outside the us an unregulated and practically unlimited pool of credit which American banks —far the strongest factors in the market—can feed or drain as conditions warrant.
The first quarter us balance of payments figures tell the story. To relieve and frustrate the Federal Reserve's tight money pressures within the United States, American banks pulled $3 billion out of Europe—forcing in- terest rates in Europe up and incidentally, just about reversing the $14 billion us payments deficit on other transactions. National mone- tary authorities can expand or contract domestic money supplies to offset in part the impact of the us dominated Euro-dollar market. But they can do little to affect the critically important supply of internationally good money—the dollars available to finance world trade and international investment. And the Federal Re- serve itself has become subject to a monetary Third Law of Thermodynamics: every action A takes to tighten money within America is likely to be offset by an equal and opposite reaction from the Euro-dollar pool.
In fact, while the experts he ve been talking about international monetary reform, the world's money has already been reformed. The dollars which went overseas to finance past American payments deficits are now available as the supply of world liquidity which the ex- perts have been calling for. But because reform followed the realities of world economic power rather than the niceties of political negotiation, that pool of liquidity is very much an American lake: having financed past us deficits it is now. .being used to finance the Current and con- tinuing us boom. There is no shortage of world liquidity; rather there may be too much: for the effective supply of Euro-dollars is infinitely expandible since no reserve requirements or monetary authority exist to limit their creation.
Nicholas Davenport is on holiday Nobody planned things this way, least of all the American authorities. But three factors have contributed in a negative way to the evolution of the dollar system: de Gaulle's disastrous attempt to gain financial leverage on America; the hubris of the gold bugs who overreached themselves in forcing the separation of the fate of gold from that of the dollar; and the failure of the west's monetary authorities to come up with an alternative, cooperative monetary sys- tem. The new system received its baptism when the latest mark crisis ran its course with nary a flutter on the private gold markets: what was happening in Bonn had no effect on the stability of the dollar.
The evolution of an international dollar sys- tem explains in good part why the latest local difficulties between European currencies gen- erated no fears about the dollar. Euro-dollars purchased to speculate in marks could easily be recycled by the American banks to meet the continuing boom demand for loans back home. The rest of the explanation grows out of the underlying source of the dollar's historic strength: the enormous attractiveness of American assets for investors anxious both to get a piece of the long-term growth in American values and to protect their capital from poli- tical-military threats in East Europe and the Middle East. But the fact that the mark was not upvalued, and is not about to be upvalued, is due far more to the evolving structure of world trade—which is to say, the emergence of Japan as the west's second industrial power.
The growth of Japan's industrial power is led by the growth of her industrial exports; both are the highest in the world. The Germans are already meeting the Japanese in the world's most competitive market. America. and are coming out second best. Volkswagen's export slump, for example, is matched, car for car, by the accelerating rise in Toyota's and Dat- sun's sales. There was a basic economic realism behind Herr Strauss's shrewd political handling of his pro-revaluation critics (capped by his forcing the SPIYS Brandt and Schiller and the Bundesbank's Blessing and Emminger into a losing alliance uncongenial to both parties). For, while the mark may be overvalued vis-d- vis the franc and the pound, it is not at all vis-à-vis the yen. (For readers interested in economic field research, comparison shopping for transistor radios will indicate the quality of the Japanese competition that is just barely beginning to be felt in Europe.) The evolution, in its turn, of an integrated European economy capable of dealing as a financial equal with America and as a trading equal with Japan (and with America, still the world's largest exporter) remains too far off to offer much comfort. Successful insulation from the changing structure of world trade and finance is, certainly, chimerical for western Europe's economies, dependent for their pros- perity on the world economy. But the Japanese themselves have shown what countries such as Britain can do. For the Japanese, without allow- ing a whit of foreign control over their eco- nomy, have mobilised American capital and technology for their own unprecedented devel- opment.
To become a beneficiary, rather than a victim, of the evolution of the world economy, Britain needs a Japanese-style drive towards economic redevelopment. Ever-growing trade competition is bound to keep the pressure on domestic in- dustry to modernise. while a deliberate pro- gramme of importing foreign capital embody- ing foreign techniques can provide the money and the know-how for modernisation.
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