least until sufficient time has elapsed to assess its economic impact and to consider whether the goal of reducing imports by 1 million barrels. per day in 1975 is really in the national interest.

I recognize that this recommendation runs the risk of continued congressional inaction. And, for this reason, I make it reluctantly. However, I have concluded that it would be so damaging to our already weakened economy to increase energy prices across the board that I am prepared to take this risk.

I hope that if the Congress decides to reject the tariff, it will not delay in developing an alternative-perhaps along the lines suggested-which will bring our Nation's energy budget into better balance.

Thank you for the opportunity to present my views. I would be happy to answer your questions.

The CHAIRMAN. Thank you, Dr. Sawhill, for a very fine statement. Our next one is Dr. William Janeway, vice president of Ferdinand Eberstadt and Co. Dr. Janeway, we are delighted to welcome you to the committee.

STATEMENT OF DR. WILLIAM JANEWAY, VICE PRESIDENT,

F. EBERSTADT & CO., INC., NEW YORK, N.Y.

Dr. JANEWAY. Thank you, Mr. Chairman. I would like to begin by noting the invitation of the committee to participate in these hearings. The reference to the implications for inflation, unemployment, the domestic economy, world trade, and the stability of the world financial system is broad enough to be realistic.

Specifically, it realistically unites domestic economic issues with international financial issues. It, therefore, invites consideration of the relationship between the exercise of power in world markets and the domestic impact of that power upon American consumers, workers, and investors.

In order to accept this invitation, I will focus on a subject that may at first appear unrelated to the primary points at issue in the debate over energy policy. The subject is the international value of the dollar-and why it matters to Americans concerned about the price and availability of gasoline, fuel oil, and feedstocks. My purpose is to use this question to help place the domestic debate over energy policy in its proper international context.

Why does the international value of the dollar matter at all? The promise of "floating" exchange rates was that it would eliminate the international value of the dollar as a matter of concern for policymakers. The foreign exchange markets could be counted on to set appropriate and equilibrium exchange rates which would reflect the demand and supply of the dollar relative to other currencies. Moreover, the fact that a floating dollar could be expected to decline in value was an additional positive factor-for, according to the textbooks, depreciation of the dollar would improve the U.S. trade balance as U.S. goods became more competitive with foreign produced goods.

This double analysis, representing the "conventional wisdom" of received economic doctrine, rationalized first the Smithsonian devaluation of the dollar and then the subsequent policy of "benign neglect," which reached its climax in the floating of the dollar in 1973. In the

real world beyond the textbooks, it fails at both levels. First, it assumes that exchange rates are effectively determined by the exchange of goods and services between national currency areas as if there were no such thing as bank accounts.

In fact, in any given day or week or month, it is short-term capital movements which dominate the foreign exchange markets. Bank accounts may be, and have been, shifted from one currency to another for reasons unrelated to the current flow of international trade, such as international interest rate differentials or fear of governmental controls.

In a system of floating exchange rates, such movements become selffulfilling and self-justifying prophecies. When, for example, dollars are sold for D-marks, the dollar declines in value. Then when the dollar declines in value, imports cost more in terms of dollars and exports earn less in terms of foreign currencies. This is the "terms of trade" effect of changes in foreign exchange rates. The initial impact on the trade balance is negative, thus justifying the decline in the dollar's value.

At this point, the supposedly beneficial effects of a depreciating currency are to be called into question. The conventional analysis assumed that the volume of exports will rise and the volume of imports will fall by amounts that more than offset the worsening of the terms of trade. To the extent this occurs, it should be emphasized that a real cost is paid: a larger proportion of U.S. output has to be shipped abroad as exports to pay for the same physical volume of imports.

In fact, in the real world a large proportion of world trade appears to be relatively insensitive to the price shifts generated by exchange rate movements. Much of world trade, after all, is in commodities that are the staples of human and industrial life-and that are traded internationally because there are limited alternative sources of supply. Another large portion takes place between the subsidiaries of multinational corporations. Certainly the dramatic, if temporary, turn around in the U.S. trade balance between 1970 and 1972 offers little evidence to the contrary. The speed and extent of the shift from deficit to surplus can be adequately explained by three "special" factors, all without reference to the effective devaluation of the dollar: (1) the deliberate decision by the Japanese Government, in response to the succession of "Nixon shocks," to eliminate Japan's provocatively large bilateral trade surplus with the United States; (2) the explosion in U.S. food and feed prices triggered by the Soviet wheat deal; and (3) the extraordinary incentive to export provided by domestic price controls at a time of world boom which lifted some export prices to levels as much as three times above the domestic ceiling.

So far, this analysis of the negative impact of the successive decline in the dollar's value has accepted the restricted terms of conventional theory. It is reinforced by three further factors: one, economic; the second financial; and the third political.

The economic factor is one that is well understood everywhere but the United States. A declining currency increases domestic inflation, as import prices rise directly and as the prices of internationally traded goods are marked up toward levels which correspond to the old, higher foreign currency prices. It has generally been thought that foreign trade was such a small factor in America's overall supply and demand that this effect could be ignored here.

The proportion of American farm output entering world trade and the proportion of American energy demand supplied from foreign sources alone explain why the aggregates were misleading.

In each case, the international price has set the domestic price, except where American consumers have successfully sought relief from their Government.

The financial factor, even more, casts light on a destructive failure of understanding. During the postwar era, the dollar, above all other currencies, became the world's store of value.

Because of its unique usefulness as a medium of exchange, the dollar was the preferred asset for governments and corporations and individuals around the globe.

Certainly, by the later 1960's, the supply of dollars had been massively increased, even more through the unlimited multiplication of dollar deposits in the Euro-currency market beyond Washington's control than through the direct outflow of dollars to pay for commercial imports and to build productive facilities, as well as to finance the Viet

nam war.

But the benefits to both the private and public sectors of the U.S. economy provided by foreign willingness to hold dollar assets remained enormous, as foreign critics repeatedly pointed out. In this environment, the U.S. Government chose to devalue the dollar. The negative impact on those who held the dollar as an asset and who looked to future dollar earnings to pay their way was massive.

The period of "benign neglect" confirmed the apprehension: safety of the dollar as a store of value was and remains open to question.

The financial impact of the decline in the dollar's value has been the direct source of the third, political force. Not all who saw the purchasing power of their dollar assets fall were powerless to act. Some could do no more than switch their wealth into other currencies or gold.

A few had available a more active response, for they held and hold resources which Americans need. To increase the dollar price of oil, thereby recouping the loss of purchasing power generated by past, present, and future oil production was a thoroughly rational act.

A political decision in Washington whose effect was to reduce the wealth of OPEC, denominated as it overwhelmingly is in dollars, was countered by a political decision by OPEC's members to offset and far, more than offset the loss of their wealth. No surprise that, only 10 days ago as the dollar continued its most recent downward slide, the Petroleum Minister of Kuwait should have called for yet another offsetting increase in the dollar price of oil.

If then for no other reason, because the value of the dollar matters to the member governments of OPEC, it matters to Americans.

Under the present regime, whenever the dollar declines significantly, a new chain reaction threatens, and higher oil prices foster further declines in the dollar as payment is made in dollars to producers who then diversify their assets as best they can, above all into currencies. whose rising value has been the other side of the coin from the dollar's fall. Temporarily at least, a new chain reaction appears to have been deferred by Chairman Burns, whose organization of concerted Central Bank support of the dollar testified to his understanding of the signifi-} cance of the dollar's value.

Yet, outside of the Federal Reserve, the value of the dollar remains the neglected issue in the debate on economic policy in general and energy policy in particular. The reason goes beyond the theoretical simplistics of the advocates of floating exchange rates. It reflects a barrier whose existence renders much of the debate on energy policy superficial and parochial.

The barrier divides the international aspects of the energy issue from the domestic aspects. The former include: the price set by OPEC, the security of future oil supplies from OPEC, the accumulation of reserves by its members, the corresponding payments' deficits and financing problems of consuming nations-all the expressions of the major shift in the balance of economic and financial power which we have been experiencing. All these have collectively come to be identified as "political" questions that is within the domain of the Secretary of State. The domestic impact of OPEC's exercise of power then is debated on the basis that the shift in the balance of power to OPEC is taken as given. Simply put, the "problem" for energy policy has come to be defined as: how to enforce the adjustment of the American economy to OPEC's power?

The alternative question is seldom heard: how to redress, if only partially, this drastic and disruptive shift in the balance of economic and financial power?

And disturbingly often, when that alternative question is raised, the answer is: only by military force. Of course, the answer is all the more disturbing because contradictory and implausible-when it is accompanied by a massive flow of arms to those who control the oil.

Saber rattling, whether seriously meant or not, misses the point as completely as does the unquestioning acceptance of OPEC's price as if it had been set by the forces of supply and demand in a competitive market. OPEC's exercise of economic power and its consequent accumulation of financial power are the result of concentrated control over a large portion of the supply of one resource. As with any other oligopolistic situation, a bargaining relationship exists among the sellers and between the sellers and the buyers.

The obvious, time-honored response has been to concentrate buying power on the other side, the buying side of the market. At the very least, individual acts of bargaining can be undertaken-bartering with specific sellers for price concessions in return for access to resources they need. And this is precisely what other consuming nations have been doing with success.

Instead; the energy policy debate within the United States has evolved, remarkedly, into an argument over how to enforce OPEC's energy policy. The administration's commitment to the price mechanism, both to force less consumption today and to encourage more production tomorrow-no doubt places it at a severe disadvantage. For OPEC has effectively expropriated not merly the oil, but the price mechanism for oil as well.

No wonder that the unilateral imposition of import fees and the proposals to impose excise taxes on domestic production and to decontrol old crude generate the charge that the administration has joined OPEC.

For, with new crude already decontrolled, it appears to many that the administration is saying: OPEC did one thing wrong; it did not raise the price high enough.

Returning excise tax revenues to impacted consumers through income tax cuts does not answer this criticism. It merely confirms that the energy program was conceived in an exclusively domestic context. In this context, indeed, the flow of funds between domestic consumers and domestic producers and between the public and private sectors can be taken into account. But from this domestic context, the fact that the proposals legitimate an affirm OPEC's exercise of power is excluded. Similarly, the proposal-only formally made to foreign governments as yet to set a high floor permanently under all energy resources carries the same message.

Worldwide price supports for all energy producers would sponsor indefinitely the purely wasteful economic rent, the windfalls, now being received by producers, of course, maximum benefit would be enjoyed by the lowest cost producers, those in the Middle East.

Less obviously, perhaps, alternative proposals to reduce consumption by quotas and rationing, and tighter allocations share the same failure. For they are conceived as fairer alternatives to price rationing. While the medium is different, the message is the same: adjust to OPEC's power by reducing consumption. Import quotas and rationing are certainly a more effecient way to achieve a specified reduction in consumption, given the excedingly low price elasticity of demand for energy as demonstrated over the past year. And it may be that over time the quality of life would benefit from lower energy consumption per capita. Given the social and economic geography of the United States and given the enormous amount of capital-household and corporate and governmental-sunk in energy inetfficient facilities and equipment, however, any short-term gains from enforced conservation can only be limited and probably have already been achieved.

In fact, the ongoing contraction in industrial output, employment and real income hardly asks to be reinforced as a depressant of energy consumption. No doubt there is some level of worldwide depression at which OPEC's power over price would succumb to price cutting among its members. As Winston Churchill might have said in this connection: "Some baby. Some bath."

Transforming the market conditions in which OPEC sells as a deliberate policy would first succeed in generalizing and deepening the already distressed market conditions in which OPEC's customers buy. Against the background of rising unemployment, declining real income and financial strain, the real issues of energy policy, so neglected in the ongoing debate, remain as they have been for some 15 months.

The still relevant point of departure is the shift in the balance of economic and financial power, which was expressed and accelerated by the decline in the dollar's value and then dramatically established by OPEC's exercise of power.

The short term problem remains: to mobilize immediately available bargaining power on the buying side of the oil market, for the price of oil today reflects the balance of effective power, not the balance of supply and demand.

The long term problem has not changed: to mobilize domestic resources in order to buttress international bargaining power in the future.