sent America's trade deficit soaring. During Mr Reagan 's first term officials cared little about the strong dollar or the rising external imbalances. Like the current Bush team they argued that a bigger external deficit simply reflected the attractiveness to outsiders of investing i America. The tone was defiant, even boastful. In Europe theyre calling it the American miracle," Mr Reagan said in early 1985. Day by day we are shattering accepted notions of what is possible Within months, however, the mood in Washington had changed sharply. By the summer of 1985, the domestic political pressures from a strong dollar and rising trade deficit were becoming hard to contain Congress was in a militant, protectionist mood Japan was the scapegoat, blamed for hollowing out American manufacturing industry. Almost 100 trade bills were drawn up in 1985, each one of them protectionist James Baker, Mr Reagan's new Treasury secretary realised that something had to be done to stem the protectionist tide. Over months of secret diplomacy he put together a plan to secure international economic co-operation and currency intervention to push the dollar down on September 22nd 1985, finance ministers from the worlds five biggest economies-America Japan, West Germany france and Britain-announced the plaza accord at the eponymous New York hotel Each country made specific promises on economic policy America pledged to cut the federal deficit Japan Controlled crash promised a looser monetary policy and a range of financial-sector reforms, and germany proposed tax Dollar against the yen and the D-mark cuts. All countries agreed to intervene in currency D/5 markets as necessary to get the dollar down. Perhaps not surprisingly, not all the promises were kept (least of 320 all America's on deficit-cutting), but even so the plan turned out to be spectacularly successful. By the end of240 1987, the dollar had fallen by 54% against both the d- mark and the yen from its peak in February 1985(see chart 8). 4L⊥⊥⊥⊥⊥⊥⊥⊥⊥季 19808284868890 Keep it up Source: Thomson Datastream This sharp drop led to a new fear: of an uncontrolled dollar plunge. So in 1987 another bis.s international plan, the Louvre Accord, was hatched to stabilise the dollar. Again specific policy pledges were made (america to tighten fiscal policy, Japan to loosen monetary policy). agai the participants promised currency intervention if major currencies moved outside an agreed, but unpublished, set of ranges. Heavy foreign-exchange market intervention in 1987 did stabilise the dollar. Meanwhile America' s external deficit began to shrink sharply helped by the big depreciation but even more by relatively faster growth abroad. In the late 1980s, domestic demand slowed in America but remained strong in Germany and boomed in bubble-era Japan. By 1990 America's current account deficit was down to 1%of GDP. A year later, after America's modest 1991 recession, it was in surplus. The story of the Reagan era helps explain why the current Bush team is keeping so calm about America's external imbalances. serious as they seemed at the time the excesses of the midsent America's trade deficit soaring. During Mr Reagan's first term, officials cared little about the strong dollar or the rising external imbalances. Like the current Bush team, they argued that a bigger external deficit simply reflected the attractiveness to outsiders of investing in America. The tone was defiant, even boastful. “In Europe they're calling it the American miracle,” Mr Reagan said in early 1985. “Day by day we are shattering accepted notions of what is possible.” Within months, however, the mood in Washington had changed sharply. By the summer of 1985, the domestic political pressures from a strong dollar and rising trade deficit were becoming hard to contain. Congress was in a militant, protectionist mood. Japan was the scapegoat, blamed for hollowing out American manufacturing industry. Almost 100 trade bills were drawn up in 1985, each one of them protectionist. James Baker, Mr Reagan's new Treasury secretary, realised that something had to be done to stem the protectionist tide. Over months of secret diplomacy, he put together a plan to secure international economic co-operation and currency intervention to push the dollar down. On September 22nd 1985, finance ministers from the world's five biggest economies—America, Japan, West Germany, France and Britain—announced the Plaza Accord at the eponymous New York hotel. Each country made specific promises on economic policy: America pledged to cut the federal deficit, Japan promised a looser monetary policy and a range of financial-sector reforms, and Germany proposed tax cuts. All countries agreed to intervene in currency markets as necessary to get the dollar down. Perhaps not surprisingly, not all the promises were kept (least of all America's on deficit-cutting), but even so the plan turned out to be spectacularly successful. By the end of 1987, the dollar had fallen by 54% against both the D￾mark and the yen from its peak in February 1985 (see chart 8). Keep it up This sharp drop led to a new fear: of an uncontrolled dollar plunge. So in 1987 another big international plan, the Louvre Accord, was hatched to stabilise the dollar. Again specific policy pledges were made (America to tighten fiscal policy, Japan to loosen monetary policy). Again the participants promised currency intervention if major currencies moved outside an agreed, but unpublished, set of ranges. Heavy foreign-exchange market intervention in 1987 did stabilise the dollar. Meanwhile, America's external deficit began to shrink sharply, helped by the big depreciation but even more by relatively faster growth abroad. In the late 1980s, domestic demand slowed in America but remained strong in Germany and boomed in bubble-era Japan. By 1990 America's current￾account deficit was down to 1% of GDP. A year later, after America's modest 1991 recession, it was in surplus. The story of the Reagan era helps explain why the current Bush team is keeping so calm about America's external imbalances. Serious as they seemed at the time, the excesses of the mid-