Opinion A Lower Dollar vs. Recession By William A. Niskanen oct, 27, 1987 fovemsonse > ‘See the article in its original context from October 27, 1987, Section A, Page 35 | Buy Reprints The New York Times Archives About the Archive This is a digitized version of an article from The Times's print archive, before the start of online publication in 1996. To preserve these articles as they originally ‘appeared, The Times does not alter, edit or update them. Occasionally the digitization process introduces transcription errors or other problems; we are continuing to work to improve these archived versions, ‘The string has finally run out for Secretary of the Treasury James A. Baker 3d. All good things do not come in a tidy package, and Mr. Baker must now choose between a lower dollar and a recession. The seeds of the collapse of the stock market and a probable recession were sown at the Louvre last February, when the major industrial countries apparently agreed to a reference range for the rates of exchange between the dollar and other key currencies. As measured against that objective, the Louvre Accord has been moderately successful. ‘To support the dollar, the United States has severely restricted growth in the money supply, thereby maintaining interest rates high enough to induce foreigners to keep on buying dollar- denominated assets. Foreign central banks have helped stabilize the dollar by soaking up about $90 billion in world currency markets. And Japan has taken measures to increase domestic demand. But the cost to the American economy has been enormous: higher interest rates, the loss of about one-third of the value of corporate equities and a substantial increase in the probability of a recession. Many observers have used the occasion of the market collapse to urge the Administration and Congress to reduce the deficit. However, this line of argument ignores the fact that both the stock market and the deficit increased through fiscal year 1986, and that most of the recent news about the deficit has been favorable. Reducing the deficit is the right prescription, but for another problem - a low savings rate. Asis often the case following a financial shock, the Treasury is now being advised to follow two contradictory policies. On Oct. 20, for example, The Wall Street Journal endorsed the United States-West German agreement to maintain the dollar around its existing level and to reinvigorate the Louvre Accord. To be blunt, that policy would compound the errors that led to Black Monday by sacrificing the economy (and the Republican Party) on the altar of a stable dollar. ‘The opposing advice is to back away from the Louvre Accord, either progressively or cleanly, to restore money growth and maintain a stable path of domestic demand, Advocates of this policy reportedly include Secretary of State George P. Shultz; the budget director, James C. Miller 3d; and the chairman of the President's Council of Economic Advisers, Beryl W. Sprinkel. Choosing between those policies will not be easy. Mr. Baker has a large investment in the Louvre Accord and, in general, in international policy coordination. And allowing the dollar to fall would increase the inflation rate and nominal interest rates. On the other hand, Mr. Baker is smart, flexible and responsive to the political interests of Vice President Bush. A clean break from the Louvre Accord would be the most desirable course; there is no way to maintain both a stable domestic economy and a stable exchange rate. Adirect rejection of the accord, however, is both unlikely and unnecessary. To keep a stable domestic economy, we should allow Mr. Baker to maintain a general commitment to the Louvre pact while substantially reducing the support level of the dollar. That would permit a resumption of money growth in the United States and would reduce either the probability or severity of a recession. It may already be too late to avoid a near-term recession, however. ‘The growth of the money supply declined from an annual rate of about 14 percent last winter to zero in the summer quarter. The stock market has declined about one-third since its August peak. Although such conditions usually lead to a recession within six to nine months, it is not too late to avoid their worst potential consequences. The Treasury should provide clear guidance to the Federal Reserve Board that stabilizing domestic demand is more important than stabilizing the dollar exchange rate. Both the Administration and Congress must resist the pressure to adopt trade protection and other supply-reducing policies - the types of policies that transformed a smaller stock market collapse in 1929 into the Depression.