James Baker's commodity index

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Tue Nov 16 2004 - 11:10:01 EST

 From Harry Cleaver's website:


Walter S. Mossberg and A. Murray, "Baker Suggests a Role for Gold In
Setting World Economic Policy," Wall Street Journal, October 1, 1987.

Article on Treasury Secretary James Baker's suggestion that a basket
of commodity prices be used as one index of global inflation to guide
the "secret economic planning process the big countries use to
coordinate their economic policies and stabilize exchange rates."
N.B.: box with recent chronology.

Walter S. Mossberg and A. Murray
"Baker Suggests a Role for Gold in Setting World Economic Policy"
Wall Street Journal, October 1, 1987.


Treasury Secretary James Baker is proposing a system of "indicators,"
a commodities basket, which includes gold, to be used as a guide for
shaping monetary policy. The idea behind Baker's proposal is that the
prices of commodities can be used as indications of impending price
changes to aid the government in adjusting economic policy to bring
stability to the highly volatile exchange market.

A New Guidepost

The overall goal of Baker's proposal is to help curb inflation and
stabilize currencies. Baker's commodity index would introduce a
strong price-sensitive measure that the big countries could use in
their planning process that is used to coordinate economic policies
and stabilize exchange rates. It does not however represent a shift
back to the gold standard that was abandoned in the 1970s. In
contrast this new index would be composed of many commodities and
would itself only be a contributing factor in the decision making
process of economic policy. Federal Reserve Board Governor Robert
Heller highlights this distinction.

             "One has to differentiate between a commodity standard
and the use of commodity prices as an indicator. As an indicator it
is just one variable, one additional input into the decision making
process." (italics added)

'British Speech a Surprise'

Prior to Baker's announcement British Chancellor of the Exchequer
Nigel Lawson made a separate address praising a similar system of
coordinating economic policy with world commodity prices. He went on
to reference the Louvre Accord, an agreement made in February to
stabilize the dollar at its current level, saying that the plan had
been a success and that its future success would be furthered by
coupling economic policy with the use of commodities as market

             What this represents is a current trend among national
leaders to push for a more formalized system of managing exchange
rates. The disastrous effects of the floating rate system led to the
Louvre Accord, which by many has been seen as a success. Furthermore
there has been more vocal advocacy for monetary policy driven in part
by commodity prices such as with Baker's index.

             Though many are pushing for this shift, there are some
doubts about the accuracy with which you can predict overall price
changes using commodities as an indicator. Fed chairman Alan
Greenspan has been known to criticize the reliability of commodities
indicators as having changes over the past 20 or 30 years. Today
commodities prices largely reflect prices changes amongst commodities
using industries and not so much in the realm of the growing high
tech and service industries. On the whole however Baker's plan is
seen as a successful first step toward stabilizing the exchange

Summary by Brent Sapstead

Walter Mossberg, "Baker's Gold Gambit: Step to Stability?" Wall
Street Journal, October, 12, 1987.

Discussion of current "managed float" (read "dirty float") and
possible usefulness of Baker's commodity index.

Secretary of the Treasury James Baker has proposed steps to bring
stability and coordination to a world market that has been riddled
with gyrations since the Bretton Woods system was dropped in 1973
(see Mossberg and Murray's article "Baker Suggests a Role for Gold in
Setting World Economic Policy.)" The article contrasts the post-WWII
economy to the global economy of the late 1980s. Contrary to Bretton
Woods, Washington no longer dominates the world economy. More
specifically proposals have been made to bring increased cohesiveness
to the economic policies of the Group of Seven countries (US, Canada,
Great Britain, France, Italy, Japan, and West Germany). As these
major industrial countries attempt to gain stability in the currency
markets their success will depend on greater economic policy

Though some manageability has been achieved in the highly volatile
system of exchange rates, Baker pushes for economic policy that
corresponds to his proposed system of "indicators." While it is not a
full shift back to the rigid gold standard, Baker's indicators are
composed of a commodity basket which includes gold. What is involved
is a system of policy coordination based on his system of indicators.
This policy cohesion is the key to success of bringing stability to
the floating rate system. The article serves as an analysis of
Baker's proposal. In order for his or any other plan to bring
stability to exchange rates it must be done on a cohesive and
cooperative scale.

Summary by Brent Sapstead

Hugo Kaufman, "A Gold Guide Won't Take Us Far," New York Times,
October 12, 1987.

Critique of Baker's proposed commodity index: 1) an index based on
commodities is not a good indicator: "Alas, an increase in the price
of gold or other commodities need not signal a flight into real
assets stemming from inflationary expectations. Price increases can
come about through changes in industrial demand or the domestic or
international political climate. . . . they can just as well follow
supply shocks. The proposed commodity-price indicator is incapable of
differentiating between these causes - but correct monetary policy
will have to distinguish between them." , 2) inclusion of gold is a
surrepitious reentry of gold into the system: "Not more comforting is
the contention by Rep. Jack Kemp that Mr. Baker's gold index proposal
is 'a victory for those of us who have been working to restore a
sound dollar'", and 3) focus on monetary policy is too narrow:
"Attention should finally be given to United States domestic fiscal
policy, the magnitude of the public sector's debt and borrowing
requirements and the linksages between them, interest rates and the
external imbalances". Kaufman is professor of economics at Queens
College, N.Y.

Peter T. Kilborn, "Key Role Seen for Gold In New Economic Order," New
York Times, October 13, 1987.

Discussion of current, coordinated order, and question of meaning of
return of gold into discussions. As an example of joint management of
the dirty float: "Having agreed last February that the dollar's value
stay put, they [G-7] spent billions of their own currencies to buy
dolars from the market and keep its price up in the face of heavy
selling pressure. As a result the dollar has remained stable in
relation to the German mark and has slipped only about 7 percent
against the Japanese yen." However, " Japan and Germany in recent
weeks have been letting interest rates rise, to the fury of the
Reagan adminstration because their increases have contributed to
interest rate increases in the United States. and to turmoil in the
American stock and bond markets". "Mr. Baker added that he thought
that bringing gold back would make the system even better. During a
speech here at the end of September, he proposed that the seven
countries use commodity prices to guage how their economies are
performing especially regarding inflation. One of the commodities
would be gold. The remark brought disbelief from many economists. . .
some proponents of such a system -such as Robert A. Mundell . . . see
his proosal as a an important step in that direction. . . . Gold, Mr.
Baker said, by enabling countries to measure the value of their
respective currencies against something other than other currencies,
helps avoid the delusion that occurs when inflation is rising
everywhere while all currencies still seem stable. . . . John Kenneth
Galbraith [on the other hand] said Mr. Baker's speech last month was
a marvelous exercise in fantasy and obfuscation."

Roy Culpeper, "Secretary Baker's Other Bad Idea," Wall Street
Journal, October 26, 1987.

Commodity index is a bad idea 1) is preoccupied with inflation when
real object should be growth and 2) commodity prices are poor
indicater of inflation. What world needs is lower interest rates and
higher growth.

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