Business review; International monetary policies

From the national educational radio network here is a Business Review ASSOCIATE PROFESSOR ROSS Wilhelm of the University of Michigan Graduate School of Business Administration presents his views and comments of business and economic activity. It's clear that the recent action by the French government to deflate its economy rather than to value the franc will not solve the basic underlying contradiction or indeed in our international monetary system. Our international monetary system has been directed toward the achievement of three goals which are in conflict. The three goals of the maintenance of the sovereignty of nations to pursue their own internal monetary policies. The achievement of a world in which goods capital and ultimately people can move freely from one country to another. And thirdly the maintenance of fixed rates of exchange between the currencies of the various nations of the world a fixed exchange rate of safety for West German marks for five francs for a dollar implies that the relationship between the purchasing power of marks francs or dollars is constant and yet when some nations such as Britain France

and the United States have higher rates of inflation than does West Germany. The purchasing power of the currencies of these nations declines. The Kleins relative to the purchasing power of the market. And such declines in purchasing power contradict the fixed exchange rates maintained for international trade. It's obvious that so long as the nations of the world follow independent internal monetary policies wherein some use inflation as a means of solving internal problems while others do while others do not. The world cannot continue to hope to maintain both free trade and fixed exchange rates. One or the other must be sacrificed. Unfortunately the nations of the world particularly United States Britain and France have been sacrificing free trade in an attempt to continue fixed exchange rates. And this is a poor choice at best. In recent years in an attempt to maintain the purchasing power of the dollar and international trade despite our growing inflation and the actual reduction of the dollar's buying power we've been putting increasing restrictions on

international trade and the flow of capital between nations. More restrictions on overseas investments are reductions in the amount of tariff free goods tourists may bring home after a trip import quotas on products such as textiles and oils. The hosel for a tariff on steel products and further restrictions on foreign travel by Americans are all steps down the road toward a menage international trade and away from the world of free trade. And the reason we've been taking these steps is because we have refused to permit the exchange rate of the dollar to reflect the dollar's actual reduced purchasing power. The high rates of economic growth which have been experienced by nations of the world since World War 2 are strong testimony to the value of maintaining free trade when free trade exists nations can specialize in the production of the things they're best able to produce and they buy the other things they need from the rest of the world. The benefit which all nations realize from free trade is that each nation lives at a higher standard of living and has higher rates of economic growth than would be the case otherwise. To sacrifice the benefits

of free trade as we've been doing with our growing list of restrictions simply to maintain the dollar to a fixed unchanging rate of exchange borders on Folly. The principal reason why we have made this choice has been that past administrations foolishly promise the world that they would not change the exchange rate of the dollar even though its actual purchasing power changed. A second reason has been a stubborn resistance to change by the American financial community. Fortunately we will soon have a new administration in Washington which is not made promises to maintain the exchange rate of the dollar and which is capable of talking sense to the financial community. Mr Nixon as president will have an excellent opportunity as soon as he takes office to grasp this nettle and to return our international monetary system to a rational basis. The most obvious and direct action which must be taken is to permit the exchange value of the dollar to reflect its actual purchasing power. This can be done in a number of different ways such as devaluation or moving to some form of market determined exchange rate. The action which probably would have the greatest political acceptability would be to move to some form of a

free floating exchange rate by having the Treasury stop buying or selling gold buying and selling gold or to allow the dollar to float freely within some range type of crawling peg or something of this sort whichever approach is taken is unimportant. The important thing is to allow the exchange rate to reflect the actual purchasing power of the dollar and to return to the path of encouraging greater free trade throughout the world. That was Associate Professor Ross Wilhelm of the University of Michigan Graduate School of Business Administration. With his views and comments on business and economic activity Business Review is recorded by the University of Michigan Broadcasting Service. This is the national educational radio network.