The Plaza Accord was a joint agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French franc, the German Deutsche Mark, the Japanese yen and the British pound sterling by intervening in currency markets. The U.S. dollar depreciated significantly from the time of the agreement until it was replaced by the Louvre Accord in 1987. Some commentators believe the Plaza Accord contributed to the Japanese asset price bubble of the late 1980s. The French government was strongly in favor of currency intervention to reduce it, but US administration officials, such as Treasury Secretary Donald Regan and Under Secretary for Monetary Affairs, Beryl Sprinkel, opposed such plans, considering the strong dollar a vote of confidence in the US economy and supporting the concept of free market above all else.

In March 1985, just before the G7, the dollar reached its highest valuation ever against the British pound, a valuation which would remain untopped for over 30 years. This caused considerable difficulties for the American industry, but at first, their lobbying was largely ignored by the government. The financial sector was able to profit from the rising dollar, and a depreciation would have run counter to the Reagan administration's plans for bringing down inflation. A broad alliance of manufacturers, service providers, and farmers responded by running an increasingly high-profile campaign asking for protection against foreign competition. Major players included grain exporters, the U.S. automotive industry, heavy American manufacturers like Caterpillar Inc., as well as high-tech companies including IBM and Motorola. By 1985, their campaign had acquired sufficient traction for Congress to begin considering passing protectionist laws. The negative prospect of trade restrictions spurred the White House to begin the negotiations that led to the Plaza Accord.

The devaluation was justified to reduce the U.S. current account deficit, which had reached 3.5% of the GDP, and to help the U.S. economy to emerge from a serious recession that began in the early 1980s. The U.S. Federal Reserve System under Paul Volcker had halted the stagflation crisis of the 1970s by raising interest rates. The increased interest rate sufficiently controlled domestic monetary policy and staved off inflation. By the mid-1970s, Nixon successfully convinced several OPEC countries to trade oil only in USD, and the US would, in return, give them regional military support. This sudden infusion of international demand for dollars gave the USD the infusion it needed in the 1970s. However, a strong dollar is a double edged sword, inducing the Triffin dilemma which, on the one hand, gave more spending power to domestic consumers, companies, and to the US government, and on the other hand, hampered US exports until the value of the dollar re-equilibrated. The U.S. automobile industry was unable to recover.

Meeting at the Plaza Hotel

At the 17 January 1985 G5 meeting attended by James Baker, a small amount of currency intervention to depreciate the dollar was agreed upon and subsequently took place. US intervention was small in those months, but the German authorities intervened heavily to sell dollars in foreign exchange markets in February and March. In April at an OECD meeting, the US announced its potential interest in a meeting between the major industrial countries on the subject of international monetary reform, and preparations for the Plaza meeting began, with preparatory meetings by G5 deputies in July and August. On 22 September 1985, the finance ministers and central bank governors of the United States, France, Germany, Japan and Great Britain met at the Plaza Hotel in New York City and agreed on the announcement that "some further orderly appreciation of the non-dollar currencies is desirable" and they "stand ready to cooperate more closely to encourage this when to do so would be helpful". The following Monday, when the meeting was made public, the dollar fell 4 percent in comparison to the other currencies. As a consequence, the US Congress refrained from enacting the protectionist trade barriers which had been called for before the Accord.

The Plaza Accord was successful in reducing the U.S. trade deficit with Western European nations, but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan. This deficit was due to structural conditions that were insensitive to monetary policy, specifically trade conditions. American manufactured goods became more competitive in the export market, but were still largely unable to succeed in the Japanese domestic market due to Japan's structural restrictions on imports. The Louvre Accord was signed in 1987 to halt the continuing decline of the U.S. dollar.

Following the Louvre Accord, there have been a few other interventions in the dollar's exchange rate, such as by the first Clinton Administration in 1992–95. However, since then, currency interventions have been few among the G7. In 2000, the European Central Bank supported the over-depreciated euro. The Bank of Japan intervened for the last time in 2011, with the cooperation of the US and others, to dampen the strong appreciation of the yen after the 2011 Tōhoku earthquake and tsunami. In 2013, the G7 members agreed to refrain from foreign exchange intervention. Since then, the US administration has demanded stronger international policies against currency manipulation (to be differentiated from monetary stimulus). Jeffrey Frankel disagrees on the timing, pointing out that between the 1985–86 years of appreciation of the yen and the 1990s recession came the bubble years of 1987–89, when the exchange rate no longer pushed the yen up. Economist Richard Werner says that external pressures such as the accord and the policy of the Ministry of Finance to reduce the official discount rate are insufficient in explaining the actions taken by the Bank of Japan that led to the bubble.

See also

  • Currency war
  • Dodge Line, yen to dollar equalization efforts, March 7, 1949
  • Endaka
  • International Monetary and Economic Conferences
  • Tripartite Agreement of 1936

References

  • Announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan, the United Kingdom, and the United States (Plaza Accord)
  • Reverse Plaza Accord