Monetary Analysts See Need for System Reforms

Hearst Newspapers

PARIS _ Federal Reserve Chairman Alan Greenspan recently told Congress he personally favors a return to the gold standard, which he said would be the best solution to the world's increasingly critical monetary problems.

British analyst Will Hutton said the way to restore order to the anarchic global monetary system is to establish a fixed exchange rate as rapidly as possible between the dollar and the yen.

Former French finance minister Michel Sapin has argued that the system of so-called floating exchange rates set up 24 years ago has become so unstable that international currency crises are now the norm rather than the exception.

The answer, he said, is a fixed link through gold between the dollar, the yen and the German deutsche mark _ with the D-mark eventually replaced in the equation by a single European currency.

Their voices are part of a growing chorus of experts urging the overhaul of a worldwide monetary system that many fear is poised to implode.

"The dollar's latest slide has brought much closer the day when the system of floating exchange rates will be scrapped," according to Gerd Sperber, a Paris-based currency specialist. "It has become clear to everyone a far-reaching reform of a system that was never very satisfactory to begin with is inescapable."

Sperber said the only questions remaining are what replacement will be chosen and how fast the United States and other major economic powers will act to put it in place.

He points out none of the reasons advanced for the flight from the dollar in the midst of a booming U.S. economy _ the Mexican peso crisis, Congress' failure to pass a balanced budget amendment, the jettisoning of dollars by hardpressed Japanese investors _ provides a wholly satisfactory explanation.

Many experts, he said, have concluded "that what is really at fault is the floating exchange rate system itself, which encourages enormous sums of speculative money to race around the world seeking hour-by-hour, even minute-byminute profits. It's not so much a floating exchange rate system as a global floating crap game."

When Greenspan repeated his long-held views favoring a gold standard, he made it clear that so far he sees no broad U.S. support for such a system.

But many European analysts agree that, whatever it's called, monetary reform will inevitably contain many of the characteristics of the dollar-gold linked system of the past.

"The purpose of money is determine the price of goods," noted French economist Paul Fabra. "Throughout history, pegging currency to gold has proved the only stable method of determining what goods are worth. No satisfactory substitute (for this method) has ever been devised."

Gerald Nelson, an international banker in Paris, said that among other benefits, a return to a fixed-exchange standard would re-establish a connection between the strength of America's economy and the dollar's worth.

Under present circumstances, the value of the greenback, like that of other currencies, is "merely a matter of opinion," Nelson said.

"As matters stand, the dollar's level has little or nothing to do with the national assets that actually back it," he claimed. "It's completely vulnerable to the latest rumor, to betting on what the trend in its value will be over a period of time and to concerted manipulation once that trend becomes a matter of consentual agreement among dealers."

The link between the dollar and gold was broken by the Nixon administration in 1971 when inflationary pressures produced a surfeit of dollars around the world and led nervous foreigners to demand bullion from the U.S. Treasury for their paper money.

With America's gold reserves threatened, Washington abandoned the guaranteed exchange that made the dollar "as good as gold."

This signaled an end to the post-1945 fixed-exchange-rate system for all currencies, which was based on gold officially priced at $35 an ounce.

A system of floating exchange rates was hastily hammered together to replace it. Critics say it has never worked well.

In retrospect, Nelson argues, the change opened the way to two decades of currency turmoil and economic uncertainty.

He suggests that instead of abolishing the dollar-gold link, America should have boosted "the guaranteed price of gold in terms of the dollar (to take account of inflation) to, say, $350 an ounce. At a stroke, that would have restored foreign confidence in the dollar and avoided most of the problems that have since arisen," he added.

Nelson predicts that a restoration of the dollar's linkage to gold will occur within the next few years. "It is the only workable solution," he insisted.

Copyright 1995
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