The surprise suggestion by Treasury Secretary James A. Baker III that the United States "is prepared to consider" using the price of gold and other commodities to help monitor global economic health has been in back of his mind for a long time.
Baker felt he needed a way to make sure the exchange rate levels agreed upon by major nations are compatible with a stable and growing economy. Measuring exchange rates against a commodity-price standard, including gold, is one such way.
"But two years ago, when he started the international coordination process at the Plaza Hotel, can you imagine the snorts of disbelief if he had mentioned gold?" asked an insider.
"Just getting the other finance ministers to go to the Plaza, and agree that they would talk to each other on coordination on exchange rates was a tough thing to do."
Even Wednesday, despite the wide acceptance now of the underlying process of economic cooperation, Baker's suggestion that gold might be brought back into the international monetary system -- merely as an indicator, not as money -- caused lifted eyebrows in the financial community.
Baker knew that he might be touching off a sensation. He briefed President Reagan, and got his approval, on Tuesday. Privately, he discussed the idea with West German Finance Minister Gerhard Stoltenberg, French Finance Minister Edouard Balladur and British Chancellor of the Exchequer Nigel Lawson. There was no opportunity to tip off Japanese Finance Minister Kiichi Miyazawa.
The possibility that Baker might be trying to propel the world back onto a gold standard is a chilling thought to those who believe that gold-backed currencies are a drag on the world's economies. But it gave courage to gold proponents, such as Republican presidential candidate Jack Kemp, who want to restore gold as the basis of the monetary system.
As is well known, Reagan himself has an affinity for gold, as does the new chairman of the Federal Reserve Board, Alan Greenspan. But Reagan has suppressed his affection for gold since taking office. Greenspan -- who approves of the latest Baker proposal -- has let it be known that he, too, thinks a return to a gold standard is impractical.
Asked about the Baker proposal, IMF Managing Director Michel Camdessus said yesterday at a wind-up press conference that "gold will not be a major segment of our thinking in the international monetary system." Camdessus said merely that the commodities-gold indicator idea "is interesting" and would be studied further.
Baker will probably add later his public assurance that a gold standard is out of place in the modern world.
"A gold standard is too clumsy: It tries to use monetary policy as a discipline, without consideration for human beings," says a financial expert who knows how Baker thinks.
Why, then, did Baker create uncertainty by mentioning gold -- "a well-known four-letter word," as one observer put it?
"Gold is in there to make the thing communicable," says a source. Baker's basic idea, as he explained Wednesday, is that exchange rate stability without price stability is relatively meaningless. Two weeks ago, in a speech to the Institute of International Economics, he hinted at this when he said that the system of economic indicators being developed to guide the global economy was coming along, but needed "more discipline."
Baker decided that to achieve more discipline, an indicator covering commodity prices be added supplement an existing short list including exchange rates, interest rates and economic output levels.
"But commodity prices would not attract enough attention. Using gold, however, grabs your attention. Now, the suggestion of using a commodity standard will become part of the debate -- and ... it will eventually be accepted, just as the notion of target zones and economic indicators in general has been accepted," says a source outside the government."
Baker's game plan from the start contemplated the use of a variety of analytical economic indicators, including one for commodities.
When he succeeded Donald T. Regan at the start of 1985, Baker concluded that the Reagan administration's first-term policy of total devotion to free markets and freely floating exchange rates couldn't work in a global economy overwhelmed by capital movements.
Privately, he decided to aim for a managed system, including "target zones" for currencies, rather than the hands-off approach. The leading nations would undertake to keep currency relationships within acceptable ranges. But America's trading partners weren't ready. German Central Bank President Karl Otto Poehl said that target zones were too much like fixed rates: To defend those rates, the central banks would have to throw too much money into the exchange markets. Now, Poehl has come around.
Baker started with a Group of Five meeting at the Plaza Hotel on Sept. 22, 1985, seeking small, incremental steps. He said Wednesday that the Plaza Accord represented "a major turning point in our efforts to promote a sound world economy."
The Plaza meeting was successful in helping to push the dollar down into a more acceptable relationship with other currencies -- a direction in which it was headed, anyway.
That helped to create the momentum for the next step, an agreement among the heads of state at the Tokyo summit in June 1986 to undertake a mutual monitoring of how their economies are working -- a process known as surveillance -- by using economic indicators.
At a meeting of six major nations at the Louvre Palace in February 1987, another major step was taken: Although never acknowledged formally, they agreed to establish target zones for their currencies using performance indicators -- ones showing how the economies were shaping up, compared with expectations. The communique's euphemism for "target zones" was a commitment to stabilize exchange rates around then current levels.
Actually, the Louvre target-zone understanding was preceded by a commitment between the United States and Japan last October to keep the yen-dollar exchange rate in a narrow range. The Louvre accord was endorsed again by the Group of Five and Group of Seven last week.
"At each stage, there always has been some voice saying -- it can't be done, it won't stick," said a source yesterday. "At each stage of the evolution of the process, our partners, or at least some of them, felt they were being pressed beyond their limits. But it all got done, and it seems to be sticking."
Perhaps the real significance of Baker's move is that all of the parties have now accepted an exchange-rate targeting system, and the debate is over how to make it work.
John Williamson of the Institute for International Exchange, an expert on target zones and international coordination, said he would have preferred to see the use of an indicator showing domestic demand in each country, rather than a commodities price index, to make sure that the exchange rates are at correct and sustainable levels.
C. Fred Bergsten, director of the institute, said Baker's proposal "is a logical step to complete the system. And although I would prefer other indicators, several alternatives can be used together to get the best possible picture of the global outlook.