The Crash: Panic Grips The Globe

A crisis spotlights Washington's failures

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Moneymen in the U.S. and Europe found a personal villain: U.S. Secretary of the Treasury James Baker. Some came close to implying that he turned a serious stock-price decline into an all-out crash single-handedly. That would be a wild exaggeration, but he surely did not help.

What Baker did was get into a complicated but unnerving spat with West German financial authorities, who two weeks ago permitted the fourth rise in German interest rates in three months. What was so bad about that? Washington would like West Germany, Japan and other major countries to reduce interest rates for two reasons: 1) to avoid competing against the U.S. for international capital needed to cover the federal budget deficit; 2) to stimulate their domestic economies so they will import more U.S. products and not be so dependent on export sales that swell the American trade deficit. Baker might have been justified in criticizing the German interest-rate boost; he was not the only moneyman to consider it unnecessary as well as unwise. The boost was supposed to combat inflation, but West Germany is a country with almost no inflation.

Baker, however, went much further than merely criticizing the Germans. In a series of statements beginning Thursday, Oct. 15, and continuing through a TV interview on Sunday, he repeatedly asserted that the U.S. would not accept the German interest-rate boost quietly. Moneymen immediately read his comments to mean that Washington would no longer abide by the February Louvre accord under which the U.S., West Germany, Japan and four other nations try to keep the values of their currencies within a narrow trading range. Indeed, the New York Times quoted an unnamed "senior Administration official" as announcing an "abrupt shift in policy," implying the U.S. would seek to retaliate against the Germans not just by letting the dollar fall but by actively driving it down. For investors around the world, many of whom assumed the unnamed official must have been Baker, that raised horrifying specters: chaos in the currency markets and a breakdown of the slender degree of international financial cooperation achieved under the Louvre agreement (named after the Paris museum, which also houses the French Finance Ministry offices in which the accord was negotiated). U.S. Economist Pierre Rinfret accuses Baker of "initiating economic warfare against the Germans and then threatening to bomb his own currency."

Treasury sources vehemently deny that Baker intended any such thing. All he wanted to say, they insist, was that Washington would not let the West Germans push the U.S. into raising its own interest rates; they point out that his statements never even mentioned the dollar specifically. And the unnamed senior official? It was not Baker, Treasury people insist; in fact, Baker would like to get his hands on whoever it was. Perhaps, but such statements cannot inspire confidence in the degree of policy coordination within the Reagan Administration.

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