Great Experiments in American Economic Policy: From Kennedy to Reagan

By Thomas Karier | Go to book overview

7
Global Shock Waves

By themselves, the monetarist and supply-side experiments of the 1980s were destined to affect U.S. economic relations with the rest of the world. Interest rates and budget deficits cannot be detonated without expecting some fallout on foreign investment and trade. Any hope that these international effects would be small and inconsequential was lost on May 5, 1981, when the U.S. Treasury announced a new policy with regard to the dollar. The Treasury decided to limit its intervention in currency markets to only rare "disorderly conditions," a policy that they claimed had been in place since February. Thus began the free-floating experiment of the 1980s. The value of the dollar would no longer be determined by civil servants in central banks and national treasuries, but by the free and unfettered market!

One of the more remarkable aspects of this experiment was its uncelebrated beginning, attributable no doubt to the widespread ignorance of foreign currency markets. The Treasury's announcement of its new commitment to nonintervention was buried on page 13 of the New York Times Business Section. The editors apparently gained a greater appreciation for the significance of Treasury intervention during the four years that the policy was in place because the end of the experiment was reported on the front page with several accompanying stories. A recklessly overvalued

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