Jude Wanniski
November 27, 2000


From: "Angell, Wayne (Exchange)" <wangell@* * * * *.com>
To: "'Jude Wanniski'" <jwanniski@polyconomics.com>
Subject: RE: 1987
Date: Mon, 27 Nov 2000 17:03:54 -0500

I had forgotten how much Bob Woodward and I had talked regarding Greenspan and that did include the Crash of 87.

Yes, I know I have a responsibility to communicate with AG re. the risk of deflation.  If disinflation becomes too rapid, unexpected, and/or if deflation is unexpected and expected nominal interest rates fail to decline then asset values and economic growth are subject to downward adjustments. 

  -----Original Message-----
From: Jude Wanniski [SMTP:jwanniski@polyconomics.com]
Sent: Tuesday, November 21, 2000 9:26 PM
To: wangell@* * * * *com
Subject: 1987

I have a bunch of letters I wrote around the time of the 87 Crash, to  JBIII and to Manley, etc. All good material. I also talked to Woodward earlier today. He was very defensive, saying he knew my opinion about the Louvre accord, etc., but that none of the people involved in the market agreed with me. I told him I'd talked to you and you said he did interview you, but that you did not discuss the Crash of '87. I didn't ask about Mexico.

If you talk to Greenspan, I hope you bring up these discussions. I think the gold price has to rise or the general price level will be pulled down, including the stock market in nominal dollars. I'd hope you would engage him in a dialog on how we might fix the international monetary system... and if he agrees such a system would have to have a place for gold. We really have to know if he is going to be an asset or a liability as we try to influence the incoming administration.

October 1, 1987

The Hon. James A. Baker III
Secretary of the Treasury
Treasury Department
lSth and Pennsylvania Ave NW
Washington, D.C. 20220

Dear Jim:

Another milestone, an incredibly important one on the road to an
international monetary system that I believe will hold up for at least half
a century!! More than anything else you've done so far on the global debt
problem, this will bring relief to the Third World through declining
interest rates. It made me feel especially good for the President, that
you've made it possible for an agreement to be achieved during his
administration, which I know he would love, and which would futher solidify
his place in history as one of our greatest Presidents.

Mundell told the Times that this is a long way from a gold standard, but
that's his way of being politic. We're all thrilled with how far you've
brought us, especially knowing the courage it took for you to step out as
you did with this bold stroke. You will see, I think, that the war is over,
that what you did was slay the dragon, and all that remains is the mopping
up. All you need do is now invite discussion on what commodities should be
in the basket and what price range should be set around gold, for a
beginning. The idea is so powerful that once you finally let it out of the
bottle, it will assume an inevitability that will carryall in its path.

What we are ending is a long siege between the world's creditor classes and
debtor classes, a war in which neither side stood to gain over any long
run. The sides are exhausted and welcome your declaration of peace.
Conservative and liberal political parties around the world will do battle
on all other issues, but they are ready to lay down their arms on this one.
Bear this in mind and you will see how rapidly,you can move.

Cheers and more cheers,


* * * * *
October 16, 1987

Mr. James Baker III
Secretary of the Treasury
15th & Pennsylvania Ave NW
Washington, D.C. 20220

Dear Jim:

Enclosed is a private letter that goes only to my clients, not the press
corps or other government people on my mailing list. As you will see, after
three days in DC I came away persuaded that you are holding together the
world economy and if we can get through this test of your resolve, we will
be back riding the bull.

I did wobble a bit yesterday afternoon, when it seemed you were ready to
let the dollar pierce 1.80 DM and blame it on the Bundesbank for its
"tightening." But I'm still confident you see how much of the architecture
of your achievement -- from the Plaza, the Louvre, Venice and the IMF
speech -- depends on your defense of it. Please put out of your head any
tendency to think of reasons why you might retreat even a little bit. The
threat now is inflation, if the dollar breaks down and gold breaks up any
more than has happened so far. This means collapsing bond markets worldwide
and global recession.

The monetarists are wrong again, both here and in Bonn and Tokyo. The money
supply is high in Germany and Japan because the gold price has been falling
in their currencies, which increases
the demand for their currencies. The money supply is low because we have
been inflating for the past year, gold rising from $360 to $460, which
means demand for dollars has retreated. If the dollar went to 150 yen and
1.90 DM, our money supply would rise and the German and Japan aggregates
would fall. Which is what we have been predicting here.

Hang in there. On the other side of these last few monsters you have to
slay is a land of milk and honey!

Cheers, as always,


October 26, 1987

Mr. James Baker III
secretary of the Treasury
15th & Pennsylvania Ave., NW
Washington, DC 20220

Dear Jim:

Jack tells me you are irked at us for saying your handling of the DM
problem may have triggered the crash (along with Greenspan's comments in
Fortune that there was no floor to the dollar) . But a great many people
believe the confusion over your position did trigger the crash the way a
single snowflake can trigger an avalanche, or a single straw can break a
camel's back. We don't believe you caused the crash, but think that you
have been one of the few positive forces in the Administration this year.

My belief is that the markets continue to sink because of all the fears we
discussed in your office two weeks ago, that on taxes, trade and money U.S.
policy is steadily moving in a negative direction. Rumors continue to
ripple through the markets that you are working on a new range for the
dollar, which would be very bad indeed. A month from now you would be
fighting off a new assault amid speculation that you were dropping the
floor once again.

We believe the President should invite Kohl and Takeshita to Washington for
a mini-summit. The markets, now worrying about recriminations among our
trading partners over who's to blame for
this crisis, would be calmed seeing the big three get together. The
President should ask reaffirmation of the Louvre accord at the 1.80 DM 140
Yen ratios, thereby rejecting the inflationary implications of further
devaluations. He should offer the withdrawal of the trade bill and offer to
swallow the budgetary restraint package he seems to be committing himself
to anyway, in exchange asking that they cut marginal tax rates to expand
their economies in a non-inflationary way, thus reducing their trade
surpluses. This would reassert the President's leadership, and I can't
imagine any downside. Please consider it.

Sincerely, as always,


* * * * *
This to Reagan is from Kemp, reflecting our views.

October 27, 1987

The Honorable Ronald Reagan
President of the united States
The White House
Washington, D.C. 20500

Dear Mr. President:

The problems that have crystallized over the past two weeks have made us
all realize again how important strong leadership is to our country and the
world. The combination of events that have led up to the Gulf crisis, the
global stock market tumult, the contest over the Bork nomination, the
troubling news from Moscow have combined to create uncertainty and
despondency that have been aggravated by misinformation and rumor. I
congratulate you on your press conference, drawing the line against tax
increases that could only damage the economy. And I congratulate you and
Secretary Baker for reaffirmation of the Louvre accord to stabilize
exchange rates.

But Mr. President, rumors continue to run wild in the markets about
possible changes in the Louvre accord, about a deal with Congressional
Democrats on taxes and about the protectionist trade legislation -- all
similar to the mistakes made after 1929. Some of these rumors originate
inside the Administration, and the markets continue to roll. I believe the
time has come to make a dramatic move that will put to rest these rumors
and restore overall confidence in U.S. economic policy in all the world

You could counteract these difficulties with a significant new initiative.
This would be to invite Premier Takeshita and Chancellor Kohl, the leaders
of the most important economies of the Asian and European spheres, to a
"big three" meeting in Washington. It has become urgent that the world know
that you three see eye to eye on basic economic policy, that you are
together determined to pursue non-inflationary growth paths, and that you
will maintain friendly relationships each to the other at a time when
national instincts tend toward recriminations.

It is also important that the world see you reaffirming the Louvre
agreement, rejecting further dollar devaluation as a dangerous return to
the inflationary policies of the 1970s. Secretary Baker has tried
heroically this year to persuade Bonn and Tokyo to expand their economies,
as the best means of beginning to correct the trade imbalances that worry
so many in Congress. I believe, given the nature of the current climate,
that they might be persuaded to do more than they have thusfar, emboldened
to expedite their tax reforms, especially now that we have reduced our
budget deficit by one third in the past year. And certainly they would feel
greater comfort if you would again assure them of your resolve to prevent
protectionism from afflicting world commerce, by withdrawing White House
support from the terrible trade bill now in Congress and heading your way.

The urgency of this agreement for the markets and for our public is
sufficient to warrant this dramatic move on your part, showing you at your
best in Western leadership. A meeting such as this with the three important
leaders would have an electric effect on global economic confidence. I
think you should try for such a meeting this weekend and believe Chancellor
Kohl and Premier Takeshita would welcome the opportunity to turn back now
from the path that the western world took after 1929. As ever, you have my
profound respect and support.


Jack Kemp
Member of Congress

* * * * *
October 30, 1987

Letters Editor
New York Times
229 W.43rd st
New York, N.Y. 10036

Dear Editor:

The Times' reporters have jumped to the conclusion that the 91-point stock
market rally of October 29 was a "payoff" of the administration's decision
"to let the dollar fall...to head off a precipitous decline in the
economy," as Leonard silk put it. This is exactly the reverse of the Times
previous position, which is widely held, that the administration's threat
to the West Germans to let the dollar fall helped trigger the crash of
October 19.

The more likely reasons for the market rally was the good news on the
fiscal side. House Republicans and a sizable bloc of House Democrats
clearly signaled opposition to the destructive tax increases being pushed
by the Democratic leadership. And, as the Times reported, the
administration is considering Labor Secretary Brock's proposal to withdraw
support from the pending protectionist trade bill, which hangs ominously
over world markets. The report that 38 Senators have signed a pledge to
sustain a Presidential veto of the trade bill is further good news. This is
especially true when linked to reports that this free-trade resolve may
persuade Germany and Japan to expand their economies by cutting tax rates
and interest rates, the latter having the effect of preventing the dollar's

Crashes occur because of collapses of confidence in policy. In 1929, the
market crashed in the last week of October when it observed the U.S. Senate
turn from a free trade position to protectionism on the Smoot-Hawley tariff
bill, which had passed the House earlier in the year. The crash of '87
occurred when global markets lost confidence in the Reagan Administration's
ability to manage the economy at a high level of growth, fearing the
President would be trapped into signing bad tax and trade legislation and
that Treasury would retreat from its anti-inflationary defense of the
dollar, embodied in the Louvre accord on exchange rates. As the President
and Treasury Secretary Baker continue to assure global markets they are
holding to their anti-inflationary growth policies, and can defend them
against Congress, the markets will steadily recover.


Jude Wanniski

November 2, 1987

* * * * *

The Hon. James A. Baker III
Secretary of Treasury
15th & Pennsylvania NW
Washington, DC 20220

Dear Jim:

Peter Kilborn's piece this morning is yet another in his series that
invites world currency markets to believe that you really want the dollar
to sink. Now he's writing that you seem to be coming around to the
Feldstein view, the Herb stein view, which he says is also the Greenspan
view, that the dollar must fall by some amount, large or small, whether or
not inflation occurs.

It's clear you've been stuck on the horns of a dilemma, the way the
floaters have arranged the terms of the debate. Either you are for "the
dollar," which means high interest rates, which means recession. Or you are
for "the economy," which means low interest rates, which may mean "a little
bit of inflation." This is the traditional demand-side
inflation/unemployment tradeoff.

To get off these horns, you should change the terms of debate in moving
toward Wayne Angell's solution, which is consistent with your IMF speech,
i.e., downplaying the dollar/DM or dollar/yen rate as the central signal
and insisting your intent is to insure the dollar rate against commodity
prices -- that you can't let the Treasury find itself defending a dollar/DM
rate that is being driven by the Bundesbank, or this could lead to a
dollar/DM deflation. Angell's index is just about ready, and it would, if
published with your tentative support (and Greenspan's), shift away from
the tight-money, easy-money debate. What Angell believes, as do Mundell and
I, is that the guarantee of the dollar in these terms, regardless of what
foreign central banks decide to do with their currencies, will lower
domestic interest rates. The Fed has actually been doing a good job keeping
this commodity signal steady, but because it isn't public, the Fed doesn't
get the credit it should in the bond markets. The Angell index solves your
political problem of seeming to put the U.S. economy at risk because of
what the Germans are doing. It is a monetary signal to serve U.S.
interests, and if the Germans want to use it, fine and dandy.

Believe me, there is a lot of support for this idea at the Fed. Angell is
going to publish his index soon. You should give it at least a pat on the

Sincerely, as always,

Jude Wanniski

* * * * *
December 18, 1987

Mr. James A. Baker III
Secretary of the Treasury
15th & Pennsylvania Ave. N.W.
Washington, D.C. 20220

Dear Jim:

We keep hearing that you're being told that we can't set the Dollar/DM rate
because that would mean "tightening" by the Fed, which means higher
interest rates, which spells recession. This is false, the kind of nonsense
that Marty Feldstein and other quasi-monetarists are peddling.

Look. It's as simple as this. If we fix the Dollar/DM rate at where it is
at this moment, and instruct the Fed to defend that rate, whatever the Fed
does -- buying or selling bonds, adding or subtracting from bank reserves,
will necessitate a decline in interest rates.

Why? Because interest rates in Germany are lower than they are here. And
when we fix the dollar to the DM, interest rates in the two currency areas
have to converge until they are virtually identical. That is, U.S. long
bond interest rates must fall from 9 to 6%, which is roughly where the DM
long-bond is, or the DM bond must rise to 9%, or the two can meet in
between. There must be a convergence when the only difference between
currencies is in their color and in their name. This was true throughout
the Bretton Woods period and really for the 200 years of the gold standard.

If you think about this for a moment you will realize I must be right, by
simple logic. To defend the dollar, all the Fed has to do is drain bank
reserves and let it be known that it is doing so to defend the dollar/DM
rate. The greater scarcity of dollars will tend to put up interest rates,
but the increase in the integrity of the dollar assets will cause people to
rush into them, this second effect pushing interest rates down. The net
effect can be questioned, but the answer must be found in the convergence
of the DM and dollar currency areas.

Yes, they can still converge with the dollar rate rising to 10% from, 9%
and the DM rising to 10% from 6%. That's why it is important there be a
secondary signal, a gold signal, although at the moment I doubt we need
worry the Germans would inflate.

Marry Christmas, happy G-7,


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