Treasury Chief Woos Partners Without Skilled Deputy : Baker: Summit’s Monetary Master

The old joke was that Treasury Secretary James A. Baker III never left home without him, for Richard G. Darman was his American Express card.

But this week, Baker traveled halfway around the world without Deputy Treasury Secretary Darman, the bright, puckish strategist who has been at his side since the beginning of the Reagan Administration, and he emerged from the economic summit meeting with a stunning victory of his own.

Baker persuaded U.S. allies to support a complex scheme to help reduce trade imbalances when exchange rates get out of whack.

The accord, aimed at solving a dispute among the seven summit participants that threatened to divert attention from world economic progress of the last year, includes Italy and Canada in a new group of finance ministers and central bankers that will have an enhanced role in supervising each summit nation’s economic performance.

Placatory Skills

On the surface, it doesn’t sound like much. And it is still too early to determine how the new “surveillance” plan will work in practice to smooth out wild swings in the exchange rate.

But without Baker’s political skills at compromise, the high-visibility gathering of the leaders of seven industrial democracies could have been marred by the kind of discord that often undermined past summits.

“We had no assurance,” Baker said, “that we would necessarily (reach agreement on a strong economic statement). There was no lock on that when we arrived in Tokyo.”

Italian Prime Minister Bettino Craxi threatened to walk out of the meeting if the existing Group of Five--representing economic officials from the United States, Japan, West Germany, Britain and France--were not expanded to include Italy and Canada.

But other European economic officials were not eager to admit new members to their exclusive and powerful club.

Driving Down the Dollar

Last September, the so-called G-5 masterminded a much-heralded agreement to bring down the value of the dollar, a move aimed at helping to shrink the U.S. trade deficit, which reached $148.5 billion last year. With Baker using the G-5 to reverse the Reagan Administration’s longstanding opposition to currency market interventions, the previously obscure group took on an importance in global monetary affairs that it had never before achieved.

In the wake of September’s accord, Italy was forced to sell an estimated $3 billion worth of lira reserves to keep its currency in line with the soaring West German mark.

The Italians and the Canadians were determined not to be blind-sided again by such agreements, even though the other European summit nations had doubts about including them in the high-level meetings. What Baker accomplished was to forge a compromise creating a new Group of Seven but retaining a role for G-5, as well.

“The G-5/G-7 question was very sensitive because it had to do with attendance at important meetings and that sort of thing,” Baker said. “But nevertheless, it was a very smooth operation.”

Following U.S. Lead

Other summit participants agreed. So while Baker opposed Japanese and German efforts to jointly intervene to prevent the dollar from falling further, officials of both nations acknowledged that the dangers of trade protectionism in Congress require them to follow the U.S. lead on currency matters.

In return, Baker delicately avoided pressing the U.S. case for Germany and Japan to stimulate their domestic economies through tax cuts and lower interest rates.

As a result, said a State Department official who did not expect a summit agreement on the matter, the monetary issue was settled much more quickly than he anticipated.

Without Darman, who was a key architect of the original U.S. proposal, Baker relied on just two key aides in negotiating a compromise with the other summit participants--Assistant Secretary of the Treasury David C. Mulford and his top public affairs official, Margaret Tutweiler.

Baker’s first task was to win the support of other Administration officials for the plan. Secretary of State George P. Shultz was Treasury secretary under President Richard M. Nixon when the United States, in 1973, abandoned any effort to restore a fixed exchange rate system and allowed the dollar to float freely in response to market forces. He continues to support floating exchange rates.

And Reagan’s chairman of the Council of Economic Advisers, Beryl W. Sprinkel, is a determined, if uninfluential, opponent of currency intervention.

Shultz Abstained

Baker won that bureaucratic battle before the summit began with a position that disavows any scheme to establish firm exchange rate “target zones” that would require automatic currency market intervention.

Not completely mollified by the settlement, Shultz continued to talk subtly of the need for free currency markets, but he nonetheless committed himself in Tokyo to “keep my cotton-pickin’ hands off” economic policy.

And with Shultz preoccupied with summit debate over Libyan terrorism, the way was open for Baker to move ahead on his own.

Where was Darman while all this was going on in Tokyo? He was back in Washington, behind closed doors, trying to squeeze a version of Reagan’s tax revision plan out of a reluctant Senate Finance Committee.

“Has Darman been demoted? Is tax reform dead?” frustrated White House reporters shouted at Baker at the end of his last public briefing here.

Hours before the Finance Committee unanimously approved a tax bill in Washington, Baker didn’t want his other victory to go unnoticed.

“Tax reform,” he said with a smile, “is far from dead.”