From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Tue Nov 16 2004 - 11:10:01 EST
From Harry Cleaver's website: http://www.eco.utexas.edu/Homepages/Faculty/Cleaver/357lsect3biblio.html 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. Summary 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 indicators. 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 market. 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. Summary 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 coordination. 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.
This archive was generated by hypermail 2.1.5 : Wed Nov 17 2004 - 00:00:01 EST