The Making of Exchange Rate Policy in the 1980s

This paper, written for an NBER conference on "American Economic Policy in the 1980s," discusses the dollar from the standpoint, not of what moved the exchange rate or what policies might have been better, but rather of why the political system adopted the policies that it did. The first half is a chronology of major exchange rate developments during the decade. The second half analyzes the actors and interest groups involved, their views on exchange rate policy, and the system within which they interacted. The strong dollar policy of the first Reagan Administration was less the result of the power of a particular economic ideology or interest group, than it was the result of Treasury Secretary Donald Regan's tenacious defense of the desirability of the side-effects of the President's economic program. The more pragmatic response of his successor, James Baker, to the problems of the trade deficit was to sanction the depreciation of the dollar from 1985 to 1987. But here again, the success of the Plaza strategy was less the result of a skillful and deliberate manipulation of policy tools to satisfy important interest groups, than it was the outcome of a mutually-reinforcing convoy of three bandwagons: bandwagons of the markets, the media, and the makers of policy.