Re: (OPE-L) Re: James Baker's commodity index

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Fri Nov 19 2004 - 10:54:18 EST

At 10:19 AM -0500 11/19/04, Gerald_A_Levy@MSN.COM wrote:
>Rakesh wrote:
>>  In 1987, Reagan seemed ready to reappoint Paul Volcker as Fed
>>  Chairman, when Treasury Secretary James Baker convinced him to give
>>  the job instead to Greenspan.  Baker gloated ''We got the son of a
>>  bitch'' after maneuvering Paul Volcker out of the Fed.
>and then asserted the following:
>>  Greenspan was chosen--I am arguing--to run monetary policy in
>>  accordance with what can be called Baker's modified gold standard.
>That's quite a leap.
>To begin with, there weren't dramatic differences in monetary policy
>by Volcker and Greenspan.
>There are simpler explanations for the hostility of Baker to
>The 1981-83 recession, in which the rate of  unemployment briefly peaked
>at over 10%, was called the "Reagan recession" by opponents of  the
>administration and the "Volcker recession" (or the "Carter/Volcker
>recession") by supply-side spinsters (although the expression "Volcker
>recession"  was coined by Tobin., I believe).
>After the  recession someone had to take the blame and, who better, from
>an administration standpoint than Paul Volcker? One has to recall that,
>although Volcker had been an Undersecretary of the Treasury under
>President Nixon, he was appointed to the Chair of the Fed by President
>Carter and Pres. Reagan then inherited him.  Clearly he wasn't as much
>of an ideologue as administration spokespeople and supply-siders. That,
>by itself,  was another good reason for Reagan -- influenced by Baker --
>not to re-appoint Volcker as Chair of the Fed. With a variety of scandals
>hanging over the administration -- most notably, "Iran-Contra" -- they
>were in a circle the wagons mode and wanted people they could
>trust and control completely. (Something similar is happening with the
>current re-shuffling in the White House.)  Thus, less than a month after
>Volcker departed Reagan nominated arch-reactionary Robert Bork to
>the Supreme Court.
>It has also been suggested that Baker feared that Volcker would allow
>the discount rate to increase before the 1984 election. Indeed, Volcker
>was "summoned to a meeting with President Ronald Reagan and James
>A. Baker III, Reagan's Chief of Staff, in the White House library in the
>summer of 1984. Baker bluntly told Volcker, with Reagan looking on,
>that the administration did not want any increases in interest rates that
>might hurt Reagan's re-election chances" (AP story, 8/15/04).  The
>Woodward book also describes how Reagan used appointments of
>members to the  Fed Board of Governors in order to pressure
>Volcker into lowering interest rates (from 2000 article by David R.
>Francis, "Silent political issue: nominations to the Fed board").
>Volcker, it was claimed, was not a "team player" and had to be

For whatever reasons Volcker was forced out, Baker must have been
confident that Greenspan would conduct monetary policy in reasonable
agreement with his suggested modified gold standard. So in light of
your valid criticism I would weaken my thesis to the above.

>Even if one accepts _none_ of the above, there is _no_ credible evidence
>that Greenspan was chosen  _because_ he would  run monetary policy in
>accordance with Baker's modified gold standard."
>Nor is there _any_ credible evidence that there has been a "modified
>gold standard."

This is not true. While Alan Blinder emphasizes that the secret
determinants of Greenspan's policy making will die with him, there is
in fact journalistic and econometric evidence that Greenspan does not
follow Friedman's money creation rule and does not target inflation
and does not care one whit about the level of employment but does
take steps to ensure the stability of the dollar in terms of a basket
of commodities in which gold figures prominently.

But at this stage you are certainly correct that I have not provided
hard evidence for this idea about how Greenspan is conducting
monetary policy.

>_Even if_  gold is included  in a group of commodities identified as
>"leading economic indicators"  this doesn't prove -- or even suggest --
>the existence of a (modified) gold standard.  By the same reckoning,
>there could be said to be a modified oil standard! Or a modified grain

Yes there is not a gold standard but a basket of commodity standard
in which gold is probably first among equals.

>In developing monetary policy, the Fed looks at a number of
>economic indicators -- such as capacity utilization, costs of
>production, raw material costs,  etc.  They, and other
>economists, also look at some branches of production and
>micro statistics: e.g. new home construction, automobile sales,

This is what it is supposed to do. Moreover, even if one aims to keep
the dollar stable in terms of a basket of commodities, one still has
to determine what the causes of deviations are and what steps to take
to maintain that stability. In answering these latter questions,
Greenspan doubtless has to take a total economic view.

>  If they wanted to include gold as one such commodity
>that they tracked changes of prices in then ... no big deal.
>It proves nothing.  It especially doesn't prove that gold is
>commodity money or that gold is quasi-commodity money
>or that there is a regime of quasi-commodity money or that
>there is a "standard" of quasi-commodity money.
>If the belief that a "modified gold standard" has gotten a
>"chilly reception here on OPE-L" it is because it is too
>speculative ... too conspiratorial.  Show us the proof.

There would have to be econometric evidence, and there is some I
believe; the archival records will not be forthcoming as Blinder has
already pointed out.


>In solidarity, Jerry

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