In the windows of Bloomingdale's on Lexington Ave. in New York, four lengths of skirt are on display: thigh-high, above the knee, knee-length, and just grazing the ankle. There is good reason for this fashion quandary. Finance ministers from the seven leading economies are trying to fix exchange rates again.
It is by now widely recognized that the experiment in a ''managed floating'' international currency regime ushered in by the September, 1985, G-7 meeting at the Plaza Hotel three blocks away has been a near cataclysmic failure. The subordination of U.S. monetary policy to first, driving the dollar down and, second, once America's foreign creditors got wise to this surreptitious debt repudiation, to propping the dollar up, has put the world's financial markets on a roller coaster that fewer and fewer investors seem willing to ride.
Surging expectations of inflation and euphoria on Wall St. were followed by the October market meltdown and predictions of recession, depression or worse - in the end yielding the present despairing, hopeful uncertainty. A less trivial but no more revealing measure than skirt-lengths of the total confusion surrounding Federal Reserve policy could be found in one week in February when The Economist announced that the Fed was putting greater emphasis on its long- neglected money supply targets again, while the New York Times declared with equal certainty that the Fed had abandoned them all but completely.
Misconcieved
Outside the secluded circle of finance ministers and the supply-side necromancers on the Wall Street Journal editorial board, experience should suggest to most observers that the peekaboo price-fixing on foreign exchange markets in which the Seven have been engaged for the past 2 1/2 years was misconceived. For about two months after Black Monday, even the G-7 seemed at last to have got the message. But after the New Year they reverted to form and, at their April 13 meeting, rather than free exchange rates, vowed to work toward a system approaching formally fixed rates, anchored by a commodity standard. Markets celebrated this news the next day with a 101-point drop in the Dow Jones.
The Seven continue to hold their poses in this Canute tableau based on two mistaken lessons drawn from the early part of this decade, following the conquest of the Great Inflation. One holds that ''technical monetarism,'' the use of money- supply targets to govern monetary policy, is no longer feasible. The second teaches that floating exchange rates confuse investors, dampening trade volumes and slowing growth. These twin beliefs have gained support in recent years in the same proportion as the evidence has disproven them.
That monetarism is in disrepute is less because governments have overshot their targets than because this hasn't seemed to matter all that much. An overshot target has not necessarily been an indicator of monetary looseness. But it is curious that authorities should be urged to make a final break with targets just as the forces which for a time made them unreliable are receding. It's hardly surprising that the aggregates should have behaved oddly after the sudden, wrenching halt of 30 years of accelerating inflation, at the same time as a sea- change in financial regulation, lifting the ban on interest-bearing chequing accounts. But both of these were one-shot affairs we may hope will not need to be repeated.
It is equally strange that flexible exchange rates should be declared a disaster after the longest peacetime expansion of the century. Wild swings in exchange rates there have been, but the important point to note is how smoothly the leading nations have adapted to them. Remember all the hand-wringing HD:s over the rising yen? Japan's economy has switched over to domestic-led growth with surpassing ease. Remember how the high dollar was supposed to have destroyed the U.S. manufacturing base? Manufacturing exports have rebounded more than 20% in the past year, and were never as weak as depicted.
SHOOT THE MESSENGER
To decry floating exchange rates, moreover, is to shoot the messenger. No other system could have endured the strains of financing $200-billion U.S. budget deficits. In one sense, the US$ was overvalued in 1981-85, in that it was above the value that would establish ''purchasing power parity'' with other nations' currencies. But in another sense, it was exactly where it should have been. Does anyone really believe that even the fitful efforts at deficit reduction we have seen would ever have been made had the dollar not shot through the roof?
As Walter Wriston, former chairman of Citibank, has noted, we live in the age, not of gold or commodity standards, but of the Information Standard. Government fiscal and monetary decisions are subjected to the instant, simultaneous judgment of millions of investors in currency and capital markets around the world.
It is not without significance that those crying loudest for the muffling of this currency criticism - France and the U.S. - are those most painfully stung by the tail of their own profligacy. The argument for flexible rates is akin to the argument for free speech; both can help to nudge authorities toward saner policies.