By stages, the Reagan administration has backed off its previously held view that "markets know best" when it comes to setting the proper value of the dollar and other currencies.
Just two years ago, in his annual economic report to Congress, President Reagan said: "I am . . . firmly opposed to any attempt to depress the dollar's exchange value by intervention in international currency markets."
But in this year's State of the Union message, Reagan asked Treasury Secretary James A. Baker III to begin a study of the international monetary system and "to determine if the nations of the world should convene to discuss the role and relationship of our currencies."
The primary signal that the United States had abandoned the policy that West German central banker Karl Otto Poehl and other Europeans refer to as "benign neglect" came last Sept. 22, when Baker convened the finance ministers of Japan, West Germany, Britain and France, along with the central bankers of the five countries (which comprise the Group of Five) at the Plaza Hotel in New York.
There, Baker agreed with the others to do precisely what Reagan had ruled out in 1984: depress the value of the dollar through coordinated intervention. The result has been a cheaper dollar. It is now down about 30 percent, on the average, from its overblown value a year ago, and should begin to reduce (not eliminate) the U.S. trade deficit later this year.
But the question asked everywhere after the Plaza meeting is whether the United States is trying to introduce a new era of coordinated international economic policy, and perhaps tinker with some form of fixed rates.
Senior officials scoff at a published report that they are moving toward a permanent means of regulating the world economy, to encourage greater stability in exchange markets. "That's off the wall," said an administration source.
There is also strong resistance within the administration -- echoed by the German government -- to the increasingly popular notion of using "target zones" to manage exchange rates. In that system, governments would agree that rates could fluctuate only within a predetermined range. "But in the real world, where there are huge capital movements, you cannot defend target zones against the market," said a German official.
Nonetheless, there is growing support for target zones from an unlikely coalition that includes some New Right politicians, including Rep. Jack Kemp (R-N.Y.), who see target zones as a first step back to a fixed-rate, gold-based system; the Democratic majority of the Joint Economic Committee, which last week endorsed target zones as the best compromise between fixed and floating rates; and academics, who believe that floating rates have outlived their usefulness.
At the end of June, Kemp and Sen. Bill Bradley (D-N.J.) will hold another privately sponsored international conference in Zurich to promote the idea of some sort of new fixed-rate regime, and they will hope to induce luminaries such as Baker and Federal Reserve Board Chairman Paul A. Volcker to take part.
So far, except for France, no big nation has endorsed target zones, but all major governments, prodded by Baker, are cautiously exploring less-rigid ways in which they can work more closely on basic economic policy. The best sign that such cooperation is feasible came 10 days ago, when the United States, Japan and West Germany moved in unprecedented fashion to lower interest rates so as to stimulate global economic growth.
The complicated maneuver by the Federal Reserve and other central banks had been set in motion at a G-5 meeting in London on Jan. 18, at which the officials agreed that the time was right for a reduction in global interest rates.
Nonetheless, they couldn't agree to move together at that time. First, there was the need to overcome the traditional German concern of setting off new inflation. Then, Volcker worried that lower interest rates, as urged by Baker, might cause the already declining dollar to crash.
So the Group of Five agreed -- but did not announce -- that their central bankers would jointly lower interest rates when they concluded it was safe. The right moment arrived the week before last, with plunging oil prices having eradicated all fears of inflation for the foreseeable future.
U.S. Treasury officials scarcely can conceal their jubilation. "Coordination breeds coordination," one senior official said. "What we did on exchange rates on Sept. 22 has now spread to the interest-rate side. It gives us confidence that these things can move."
His caveat is that the deal on interest rates, however welcome, is only a marginal plus mark. The deal uniquely served the international objective of dampening the Third World debt crisis, while boosting economic growth without adding to budget deficit strains in Germany and Japan. And it will be a stimulant here without adding to Volcker's fear of a precipitate drop in the dollar.
But international concerns won't always dovetail so conveniently with national interests that politicians place first. For the next few years, the Reagan administration will be content to build on the G-5 process "as a crude approximation of a mechanism that could possibly handle this international economic policy coordination," said an official involved.
The next step may be broadening the Group of Five to include Italy and Canada -- over the objection of the Germans, who think the larger the group, the less effective it is for quiet, informal agreements. There is also some thought being given to splitting the G-5 (or G-7) into subgroups with prime responsibility for different economic issues, and with overlapping jurisdictions.
The details are still fuzzy. But the goal is to get a more predictable and coherent economic policy, not a total junking of the floating-exchange-rate system. Reagan's planners say even this limited objective will be slow in evolving.