Lawrence B. Krause
I shall discuss two papers, that of Steven Kohlhagen, "The Experience with Floating: The 1973-1979 Dollar", and that of Michael Keran, "The Value of the Yen".
In the first part of the Kohlhagen paper, an explanation of movements of the dollar in exchange markets during the floating period with which I fully agree is presented. The complications involved in managing the dollar that grow out of its role as a reserve and vehicle currency are a legacy of the past that must and, in my view, will change. The evolution to a multiple key currency system has not been helped by the Bundesbank, which has resisted an enhanced role for the deutsche mark. Germany and other countries should facilitate the use of their currencies by other countries and foreign residents and, through cooperation with the monetary authorities of other key currency countries, make a multiple currency system work for the benefit of all countries.
One major deficiency of the floating period can be traced, as suggested by Kohlhagen, to massive foreign-exchange-market interventions in 1976 by the United Kingdom, Italy, and Japan and during most of 1977 by Japan. Excessive amounts of dollars were bought, which led to the rigidification of the dollar exchange rate when it should have fallen. If the dollar had been permitted to fall, the U.S. policy actions of November 1, 1978, might have occurred twelve or eighteen months earlier, and U.S. inflation would have been much reduced. A second deficiency was the failure of the United States to respond immediately to the decline of the dollar that began at the end of 1977. American policy makers failed to recognize the information implied by the decline of the dollar, namely, that excessive amounts of dollars were being created. They sustained their macroeconomic policies as though the dollar had not fallen, when they should have enforced greater restraint. Of course, the two deficiencies were related. If foreign central banks had thought that the United States itself would react to a decline of the dollar, they would have been less inclined to intervene them-