Treasury Secretary James A. Baker III predicted today that the major industrial nations will achieve greater stability of currency exchange rates as a result of the decision at the Tokyo summit last month to coordinate their economic policies.
Baker, who recently has called for further declines in the dollar, made no such plea today in speaking to an American Bankers Association conference for international commercial bankers.
Instead, he implied his acceptance of the current level of the dollar against major currencies, at least for the time being.
Baker noted that exchange rates have moved considerably since finance ministers agreed in September to lower the value of the dollar.
But he warned that unless other industrial countries such as West Germany and Japan boost their economic growth rates, helping to cut back excessive global trade surpluses and deficits, "increased reliance will need to be placed on exchange rates" to adjust those imbalances.
The dollar has declined about 30 percent against major currencies since the accord at the Plaza Hotel in New York in September, when the United States, West Germany, Japan, France and Britain agreed to coordinate policies and to intervene to push the dollar down.
Baker said the American commitment to the process, begun at the Plaza and formalized at Tokyo, "reflects the reality that the time is long past when the United States could, in setting domestic policies, relegate external considerations to a second order of importance."
He said this means that the United States must follow through on promises to slash the budget deficit, keep monetary growth in a "non-inflationary growth" pattern, and "avoid the folly of protectionism."
These assurances were warmly welcomed by foreign bankers at the conference, some of whom recalled that during the early days of the Reagan administration their complaints about the overvalued dollar, the budget deficit, and high U.S. interest rates were dismissed.
West German Central Bank President Karl Otto Poehl, who yesterday laid out his own plan for direct action to stabilize exchange rates for a six-month "pause," applauded Baker's remarks. "He's talking about stability, too," Poehl said.
Meanwhile, Federal Reserve Board Chairman Paul A. Volcker, asked during a break about Poehl's proposal, said, "I'm never opposed to a little stability, but it takes a lot of work over a long period of time. But I can't describe international monetary reform to you over a cup of coffee."
Baker conceded that the effort by the major industrial nations to follow through on the Tokyo commitment to achieve better policy coordination will not be easy, but said that the success of the Plaza accord in bringing down the value of the dollar and a subsequent coordination of interest-rate reductions were good omens.
Deputy finance ministers of the seven summit nations -- the five at the Plaza plus Canada and Italy -- will meet soon to frame an agenda for discussions by Baker and his counterparts during the International Monetary Fund annual meeting in September.
Baker said, "Countries may not always be able or willing to agree on the specific level for their currencies. But they can tell when currency values need to change, and the appropriate direction of change. The Plaza accord demonstrates that the major industrial countries could go this far.
"The Tokyo arrangements institutionalize the practice of discussing exchange rates on a regular basis. One result should be greater stability of exchange-rate expectations," Baker said.
On a related issue, Baker repeated his insistence that the debt initiative he launched in October in Seoul "is now being actively implemented." But he acknowledged that "some concern" had been expressed over the absence of the increased commercial bank financing he proposed.
Baker urged international bankers present -- most of them the top officials in their institutions -- "to take a direct interest" in making the plan work.
But Citibank Chairman John S. Reed, while warmly endorsing Baker's debt initiative, saw "a period of hesitation" on the part of commercial banks while they await reforms in the borrowing countries and new leadership at the World Bank. "It's a two-edged sword," he admitted.
Reed said that although "there is need for a certain greasing of the wheel," commercial banks "shouldn't take on too much more debt" in the Third World.
Instead, he argued that the debtor countries must encourage a recapture of the capital that has escaped their countries for safer havens, and arrange more conversion of debt to equity, which he said is the only acceptable form of debt relief.
Reed said that a sizable conversion of debt to equity had taken place in Chile, and that a similar deal is quietly being arranged in Mexico. In the debt-for-equity transfer, he said, government debt would be bought at a discount, then traded at the central bank for local currency, which then would be invested in the debtor country.
But a Mexican banker said debt-equity conversions could have only a small effect in relieving the debt burden, echoing Baker's observation that "the market for swaps is clearly limited."