Currency Wars_ The Making of the Next Global Crisis - James Rickards [40]
Now the gold bloc countries, which had benefitted from the first wave of devaluations in the 1920s, began to absorb the deflation that had been deflected by the United States and England. This led finally to the Tripartite Agreement of 1936, another in that seemingly endless string of international monetary conferences and understandings that had begun with Versailles in 1919. The Tripartite Agreement was an informal agreement reached among England, the United States and France, which acted for itself and on behalf of the gold bloc. The official U.S. version released by Treasury Secretary Henry Morgenthau on September 25, 1936, said that the goal was “to foster those conditions which safeguard peace and will best contribute to the restoration of order in international economic relations.” The heart of the agreement was that France was allowed to devalue slightly. The United States said, with reference to the French devaluation, “The United States Government . . . declares its intention to continue to use appropriate available resources so as to avoid . . . any disturbance of the basis of international exchange resulting from the proposed readjustment.” This was a “no retaliation” pledge from the United States—another sign that the currency wars were ending for now.
All three parties pledged to maintain currency values at the newly agreed levels against gold, and therefore one another, except as needed to promote domestic growth. The exception made for internal growth was highly significant politically and further evidence that, while currency wars may play out on an international stage, they are driven by domestic political considerations. In this regard, Morgenthau’s statement read, “The Government of the United States must, of course, in its policy toward international monetary relations take into full account the requirements of internal prosperity.” The UK and French versions of the agreement, issued as a series of three separate communiqués rather than a single treaty document, contained substantially similar language. This “internal prosperity” language was not gratuitous, since all three countries were still struggling with the effects of the Great Depression. They could be expected to abandon the agreement readily if deflation or high unemployment were to return in such a way as to require further inflationary medicine through the exchange rate mechanism or devaluation against gold. Ultimately the Tripartite Agreement was toothless, because growth at home would always trump international considerations, yet it did mark an armistice in the currency wars.
Switzerland, the Netherlands and Belgium also subscribed to the agreement after France had led the way. This completed the cycle of competitive devaluations that had begun with Germany, France and the rest of the gold bloc in the 1920s, continued with the UK in 1931, culminated with the United States in 1933 and now came full circle back to the gold bloc again in 1936. The temporary elixir of currency devaluation had been passed from country to country like a single canteen among thirsty soldiers. The more durable fix of cheapening currencies against gold in order to encourage commodity price inflation and to escape deflation had also now been shared by all.
One positive consequence of the currency devaluations by France and the new pledge of exchange rate stability in the Tripartite Agreement was the resumption of international gold shipments among trading nations. The era of suspension of gold exports and central bank hoarding of gold was beginning to thaw. The U.S. Treasury, in a separate announcement less than three weeks after the Tripartite Agreement,