ECONOMIC

In the fourth quarter the dollar rose sharply. It rose 12 percent againstthe German mark and around 5 percent against the group of 14 currencies.Central banks intervened substantially to slow the dollar's rise, and claimsby foreign central banks on the United States declined.The first quarter of 1973: Fixed exchange rates are abandoned. Foreignexchange markets were stable in the beginning of 1973. In most foreignexchange markets the dollar was above the level where central banks werecommitted to buy dollars to keep its value within the agreed margins. Thestability was so fragile, however, that any disturbance had a highly unsettlingeffect on the market. The first such disturbance was an accelerationof the capital flight from Italy into Switzerland. Confronted with massiveoutflows, the Italian authorities allowed the lira to float, first for financialtransactions and later for all transactions. In Switzerland, the influx of fundsfrom abroad intensified an already high rate of inflation. To gain greatercontrol over its monetary policy, Switzerland decided on January 22 to allowthe franc to float. By terminating their purchases of foreign currencies insupport of a fixed value of the franc vis-a-vis other currencies, the Swissmonetary authorities were able to avoid further involuntary increases in theSwiss money supply.The floating of the franc by Switzerland, a country viewed by many asthe epitome of financial orthodoxy, strengthened expectations that otherexchange rate adjustments were inevitable, particularly for currencies ofcountries with large payments imbalances such as Japan and Germany.These expectations led to increasingly large speculative purchases of marksand yen for dollars. Such sales reached a peak in the first week of February,forcing the closing of foreign exchange markets on February 10. Extensiveconsultations among the monetary officials of major countries followedand culminated in a number of coordinated exchange rate adjustments.On February 12 the Administration announced that it would askCongress to approve a 10 percent devaluation of the dollar in terms of SpecialDrawing Rights (SDR's). At the same time, the Japanese authoritiesannounced that the Japanese yen would be allowed to float upward. Theresulting exchange rate structure was endorsed by the 14 major industrialnations.The multilateral adjustment of exchange rate patterns in February,including the devaluation of the dollar, did not, however, restore marketconfidence in the entire pattern of rates—in particular, the rate for theGerman mark. Large-scale flows of speculative funds out of dollars intomarks and some other currencies continued until exchange markets wereofficially closed on March 2.The exchange markets remained officially closed until March 19, althoughprivate trading of currencies continued. On March 19, five of the EuropeanCommunity (EC) countries—Belgium, Denmark, France, Germany, andthe Netherlands—allowed their currencies to float jointly vis-a-vis the dollarand other currencies. As before, these countries decided to keep the exchange184