Currency Wars_ The Making of the Next Global Crisis - James Rickards [51]
This time the method of devaluation was different. There were no longer any fixed exchange rates or gold conversion ratios to break. Currencies traded freely against one another and exchange rates were set by the foreign exchange market, consisting mostly of large international banks and their corporate customers. Part of the dollar’s strength in the early 1980s stemmed from the fact that foreign investors wanted dollars to invest in the United States because of its strong economic growth. The strong dollar was a vote of confidence in the United States, not a problem to be solved. However, domestic politics dictated another fate for the dollar, a recurring theme in the currency wars. Because the market was pushing the dollar higher, it would require government intervention in the exchange markets on a massive scale if the dollar was to be devalued. This kind of massive intervention required agreement and coordination by the major governments involved.
Western Europe and Japan had no appetite for dollar devaluation; however, memories of the Nixon Shock were still fresh and no one could be sure that Baker would not resort to import surtaxes just as Connally had in 1971. Moreover, Western Europe and Japan were just as dependent on the United States for their defense and national security against the communist bloc as they had been in the 1970s. On the whole, it seemed better to negotiate with the United States on a dollar devaluation than be taken by surprise again.
The Plaza Accord of September 1985 was the culmination of this multilateral effort to drive the dollar down. Finance ministers from West Germany, Japan, France and the United Kingdom met with the U.S. Treasury secretary at the Plaza Hotel in New York City to work out a plan of dollar devaluation, principally against the yen and the mark. Central banks committed over $10 billion to the exercise, which worked as planned over several years. From 1985 to 1988, the dollar declined over 40 percent against the French franc, 50 percent against the Japanese yen and 20 percent against the German mark.
The Plaza Accord was a success if measured solely as an exercise in devaluation, but the economic results were disappointing. U.S. unemployment remained high, at 7.0 percent in 1986, while growth slowed considerably to only 3.2 percent in 1987. Once again, the quick fix had proved chimerical and, once again, there was a high price to pay in the form of inflation, which took off with a lag after the Plaza Accord, shooting back up to 6.1 percent in 1990. Devaluation and currency wars never produce either the growth or the jobs that are promised, but they reliably produce inflation.
The Plaza Accord was deemed too successful by the parties and occasioned one last adjustment to put the brakes on the dollar’s rapid decline from the heights of 1985. The G7, consisting of the Plaza Accord parties plus Canada and Italy, met at the Louvre in Paris in early 1987 to sign the Louvre Accord, meant to stabilize the dollar at the new, lower level. With the Louvre Accord, Currency War II ended, as the G7 finance ministers decided that, after twenty years of turmoil, enough was enough.
By 1987, gold was gone from international finance, the dollar had been devalued, the yen and mark were ascendant, sterling had faltered, the euro was in prospect and China had not yet taken its own place on the stage. For now, there was relative peace in international monetary matters, yet this peace rested on nothing more substantial than faith in the dollar as a store of value based on a growing U.S. economy and stable monetary policy by the Fed. These conditions largely prevailed through the 1990s and into the early twenty-first century, notwithstanding two mild recessions along the way. The currency crises that did arise were nondollar crises, such as the sterling crisis of 1992, the Mexican peso crisis of 1994 and the Asia-Russia financial crisis of 1997–1998. None of these crises threatened the