Less than a year into the Treasury secretary's job, James A. Baker III is at ease in his up-front international role. It's one far different from the behind-the-scenes support role he played as President Reagan's chief of staff in the first term.
What's more, although foreigners have no say about the president's choice of Cabinet officers, the trade of jobs between Baker and former Treasury secretary Donald T. Regan is one of the more popular decisions the Reagan administration has made in the field of international finance.
"Baker is so smooth, where Don Regan was abrasive," a European official said. For example, when Baker urged during the private IMF/World Bank discussions here that the "enlarged access" of Third World countries to IMF funds be whittled back to near the old normal proportions, he didn't attempt to dictate terms. "He was flexible, half apologetic," the source said, "pointing out that he had to respond to Congress on issues like these." In the end there were technical downward adjustments made in the access limits, which were not enough to get anyone excited.
Perhaps the most striking success of the Baker regime is his dramatic reversal of U.S. policy on intervention in the foreign-exchange markets to help knock down an overvalued dollar.
"It's a pity that we couldn't get an agreement on this last September, when the dollar was soaring to a ridiculous 3.47 marks," says West German Bundesbank president Karl Otto Poehl.
But under Regan and former Treasury undersecretary Beryl Sprinkel, anti-intervention ideology held sway. The result, as the dollar climbed to new heights and U.S. exports continued to be priced out of world markets, was an extraordinary burst of protectionist sentiment. It threatened a political defeat of massive proportions on Capitol Hill for the administration.
No one reacts to possible negative consequences for President Reagan as decisively as Jim Baker. By the end of June, while still articulating the old no- intervention policy for the record, he sent Assistant Secretary David Mulford around the world to sound out the Germans, Japanese, British and French on a new coordinated intervention policy.
"They prepared it extremely well," Poehl said. "Word didn't leak out; we were able to meet in New York (two weeks ago at the Plaza Hotel), and the results are just about as good as could be expected."
The dollar has dropped about 10 percent against the German mark and a bit more against the Japanese yen, even though the actual amount of dollar-selling has been moderate. Poehl said that the central banks had spent something like $4 billion since the Sept. 22 meeting, and the markets are now on notice that they face more intervention at any time.
"It will be a great success if the dollar stabilizes around this level, or maybe goes lower a little bit," Poehl says.
But there is a big worry: both Poehl and Federal Reserve Board Chairman Paul Volcker, even though they have endorsed the Baker policy, fear that the dollar decline could take on a life of its own. It could plunge too rapidly, throwing the international economy into chaos.
The worst consequence of a dollar collapse would be a sudden withdrawal of the capital flowing into the United States, which is helping to finance the huge budget deficit. This would force the Federal Reserve Board to try to boost interest rates to stem the decline. This probably would abort a weak recovery and almost certainly add to inflation.
It's known that Volcker believes that trying to drive its own currency down is a tricky business for any nation, because it is difficult to see how far and fast the process will go.
The historical record proves that currency manipulation can be a slippery slope. The United States started to get some dollar devaluation in the big shift away from gold in 1971; by 1973 it couldn't stop the process. In 1977 the Treasury secretary at the time, W. Michael Blumenthal, talked the dollar down, with the result, Poehl recalls, that the Germans derisively referred to "Blumenthalers" -- the equivalent of cheap money.
Just this year the British were anxious to get the pound down modestly. Instead it dropped like a rock (as low as $1.05), and it took a big jump in interest rates to reverse the tide.
Many bankers at the meetings here think concerns about a dollar collapse may be exaggerated. Baker and his opposite numbers, they know, have a contingency plan for reversing the intervention process if the dollar plunges too far. But dangers or no, Baker gets plus marks. "He's brought the United States back into the 20th century," says a British friend.