The Monetarists Are Back
Jude Wanniski
October 29, 1987


The stock market crash has brought the monetarists out of the woodwork, working to dynamite everything Jim Baker III has done since the September 1985 Plaza meeting on international monetary coordination. Milton Friedman says recession is on the way and we must sink the dollar and pump up the money supply. His student, Michael Darby, Asst. Secy, of Treasury for economic policy, has been telling JBIII for months that "money is too tight," which was one of the spurs behind JBIII"s threat to the Bundesbank October 15, that triggered the global stock market crash. Fed Chairman Greenspan, who helped set this stage by telling Fortune magazine earlier in the week that he saw no floor to the dollar, is also under monetarist influence.

Martin Anderson, a quasi-monetarist who was Reagan's chief economic advisor in the 1976-80 era, and served in the White House in RR's first term, is at the Hoover Institution in Palo Alto, Friedman's base, and is very close to Greenspan and White House chief-of-staff Howard Baker Jr. He's the most important link between the monetarists and the policymakers, and has been buzzing in JBIII's ear as well. The common aim is to sink JBIII's Louvre agreement completely, and it has been amazing that JBIII has permitted CEA Chairman Beryl Sprinkel and OMB Director Jim Miller, both monetarists, to be publicly critical of the Louvre accord, while criticizing Miller for defending RR's anti-tax stance. (Sprinkel has now been urged by Howard Baker to stay on and has been given Cabinet rank, increasing his clout vis-a-vis JBIII. This too came from Howard Baker.) We hear George Shultz, a longtime Friedmanite and foe of monetary coordination, has also been talking down the Louvre accord in Europe. Today's Wall Street Journal leader quoting monetarists Alan Meltzer and William Niskannen on the need to destroy the Louvre accord is a clear reflection of this power play. The article asserts that the Fed must either raise interest rates to defend the dollar, which brings recession, or stay easy, which sinks the dollar and boosts inflation. On the same page is the news that "Bond prices fell despite a decline in short-term interest rates and signs of further Fed easing. The drop was sparked by the dollar's fall." In other words, one story says a stronger dollar requires higher interest rates, the other that a weaker dollar has pushed interest rates higher!

The sinking dollar so far partly reflects credible rumors of an exchange-rate realignment. Fed policy thus far has not been outrageously easy or we would have seen gold rise far more than the $20 climb (4%) of the last two weeks. The Bundesbank has not tightened, which means the dollar could make a comeback if JBIII and the G-7 could get together and reaffirm the Louvre at the old exchange rates. The French are calling for a G-7 meeting to reaffirm. Jack Kemp has written the President urging a meeting of heads of state to reaffirm the Louvre and negotiate fiscal expansion in Germany and Japan by offering a guarantee of no protectionist legislation in the U.S.

JBIII, wrapped up in the deficit negotiations, has to engineer a comeback of the dollar and resist the calls for a further devaluation coupled with easier money. What a great time for JBIII to drop some gold on the market. A retreat from the Louvre accord in the face of this monetarist surge would put upward pressure on gold and further downward pressure on the dollar and bonds, dragging down the stock market too. We're counting on the G-7 to hang in there, with help from the good guys at the Fed. But this is something else to watch and worry about.