Doug Henwood wrote:
> By law, the Treasury controls dollar policy. It's the only area where
> the Fed is required to march to the elected government's music.
>
> But that's figuring dollar policy narrowly - interventions, which are
> rare (and on which the Fed and Treasury actually make a profit,
> despite market declarations of their futility). The early-80s dollar
> strength was determined by larger forces, like high interest rates
> and a perception that Reagan's U.S. was a great place to invest. If
> you were a portfolio manager, where would you park your money, in a
> U.S. committed to deregulation and disinflation or a France committed
> to regulation, nationalization, and reflation? The relative fates of
> the dollar and the franc in the early 1980s were at least as much
> symptoms as they were causes of anything - symptoms of capital
> movements.
>
> But that couldn't last forever: the high dollar was savaging U.S.
> exports, and Reagan had won the policy battles on a world scale. So
> the Plaza agreement was a nice psychological catalyst for a shift in
> currency values that was in line with the fundamentals.
>
>
Doug, it sounds like you take a kind of Marxian line on exchange rates -- that policy is mostly futile, that rates are determined by fundamentals. But a lot of policymakers seem to think their actions have a big effect on exchange-rate outcomes. One of Gowan's sources for the anti-Mitterand dollar policy is a book published by the Instiute for International Economics called "Dollar Politics" which is pretty insiderish and which seems to take it for granted that policymakers can use exchange rates as an instrument of diplomacy. (Not that insiders necessarily know what's going on better than us outsiders do.)
If the Plaza agreement was only a psychological catalyst for a shift in currency values that was in line with the fundamentals, as you say, why was it attempted? Were the G7 finance ministers misinformed about how exchange rates are determined? (Again, not that that would be impossible.)
I agree that Reagan's America was a better place to invest than socialist France. But don't you think that if the German Bundesbank had decided to ignore the high dollar and reflate with France, investors would have been less able to act on their preference for Reagan's America? And then Reagan would not have won the "policy battles on a world scale" quite as much as he ended up doing?
And finally, how did the Plaza agreement work? Was it an agreement on currency interventions or interest rates or what?
Seth