A Yen for Dollars

|

Advocates of strict monetary policies such as the gold standard can be grateful for a small favor. The Federal Reserve has taken a micro-step toward a more stable currency. As of January 1990, if a proposed rule isn't changed before it goes into effect, commercial banks may begin offering savings accounts in foreign currencies. When you deposit your paycheck, you can ask for it to be held in pesos, lira, or whatever. The rule will make it easier for people to make contracts in foreign currencies—providing a potentially powerful check on the government's ability to manipulate the dollar's value.

The importance of this change can be understood with a simple economic analogy. By lending money to member banks, the Fed "sells" dollars to the public. If Americans can easily "buy" foreign currencies at their local bank, the Fed can sell its dollars only by competing successfully against the currencies of foreign countries. When Americans hear the money presses start running, they could react quickly to the threatened increase in the money supply (which devalues the dollar) by switching to foreign currencies.

Already, institutional investors and wealthy individuals can achieve the same result through overseas investment firms. The new step mainly benefits smaller investors, as well as U.S. banks now barred from offering foreign-currency accounts except through overseas branches. But it's not clear how many smaller investors will want to hedge against inflation in this manner nor how many commercial banks will offer the service.

The real beneficiaries of the new rule may be U.S. companies with international business. In contracts with Japanese companies, for example, they can agree to pay in yen when products are delivered. By keeping enough yen in the bank for the upcoming payment, they won't have to worry about fluctuations in the yen/dollar exchange rate. Most European countries, perhaps because they rely more on foreign trade than does the United States, already allow their banks to hold foreign-currency accounts.

Advertisement