Dollar daze

March 30, 1995|By Bernard D. Kaplan

Paris -- THE "ALMIGHTY dollar" is truly dead.

The real question raised by the hurricane that inflicted havoc on global financial markets in recent weeks is whether the United States can remain the world's top nation as the dollar ceases to be the world's top currency.

History suggests it's unlikely. Since Roman times, a strong, stable currency has been a crucial element of lasting political ascendancy.

Throughout the 19th century when Britain occupied the same dominant world role that America has had since 1945, the pound sterling was the currency against which all others were measured -- a position it held until British political strength began to ebb after World War I.

The emergence of the United States as the leading power at the end of World War II was enhanced by universal acknowledgment that the dollar had become a currency in a class by itself.

It wasn't an accident that in the unsettled conditions after the 1991 collapse of communism in eastern Europe and the Soviet Union, the dollar was the currency in which most transactions were conducted. For all practical purposes, the dollar became the national currency of Poland, Hungary, Romania and Boris Yeltsin's Russia.

While the dollar had its problems in the 1970s and 1980s, things are different now. This time there is no denying that the dollar has been knocked off the pedestal it has occupied for the past half century.

No two financial experts agree on why it happened when it did.

Some blame the Senate's defeat of the balanced budget amendment. They claim the Senate's action was the final psychological blow, unleashing worldwide nervousness over America's huge budget deficit -- not to mention its $150 billion trade deficit.

Others argue that the dollar's collapse was simply the culmination of fears that U.S. currency reserves will be drained -- away by the struggle to rescue Mexico from its financial follies.

Another view is that the marketplace, in its inexorable fashion, finally took its revenge for the way American officials have long made economic and monetary policy as though the rest of the world didn't exist.

Whatever the reason, virtually everyone agrees the dollar won't be back. It may regain some or even most of its losses. But its former unquestioned position as the No. 1 currency is gone for good.

The idea that a debilitated currency will sooner or later weaken the country's economic foundations -- first by aggravating inflation -- is something Americans understandably haven't thought about much. They didn't have to during the long reign of the "almighty dollar."

Even members of the Federal Reserve Board, who are paid to ponder such matters, seem to be having trouble getting use to the idea that the dollar has become just another currency.

Lawrence Lindsey, one of the board's governors, recently told a Japanese journalist that he wasn't alarmed by the dollar's humiliating tumble.

His colleague, Susan Phillips, chimed in that domestic economic factors took primacy over the dollar's stability in world markets.

But Alan Greenspan, the Fed's chairman, eventually announced after many days of monetary turmoil that a supine dollar "is both unwelcome and troublesome."

In a bid to reassure foreign investors who have been pulling out of the sinking greenback, he said the Fed would not be indifferent to further depreciation. He urged Congress to act fast to cut the deficit in order to restore foreign confidence and emphasized that he was ready to use the Fed's ample reserves to stop the dollar from sinking more.

Mr. Greenspan's words were belated and delivered in his usual sleepy style. But they amounted to a warning that a discredited dollar constitutes a major threat to America's place in the world and therefore to the nation's well-being.

Bernard D. Kaplan wrote this for the Hearst newspapers.

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