Post by JustJohn or JJ on Aug 13, 2015 6:34:45 GMT -7
The Economic Times
Currency wars: Dollar vs yuan vs euro through the ages
By MC Govardhana Rangan, ET Bureau | 13 Aug, 2015, 08.45AM IST
China's devaluation of its currency Yuan by 3.5 per cent in two days brings to fore the `Currency Wars' theory put forth by American lawyer James Rickards in a 2011 book.
"Three super currencies - the dollar, the euro, and the yuan - issued by the three largest economies in the world - are the superpowers in a new currency war, Currency War III, which began in 2010 as a consequence of the 2007 depression. The main battle lines being drawn are a dollar-yuan theatre across the Pacific, a dollar-euro theatre across the Atlantic, and a euro-yuan theatre in the Eurasian landmass," wrote Rickards.
ET looks at all the three wars in the past century:
CURRENCY WAR I:
It ran from 1921 to 1936, i.e., between two world wars. It was the end of the classical gold standard that thrived between 1870 and 1914, which provided price stability. The post war debt burden on the UK, France and reparation to be paid by the Germans were roots of the currency war.
Britain and France could not repay their debts to the US, leading to a freeze of credit and trade. Germany started in 1921 with hyperinflation with Reichsbank printing currency to fund deficit and pay reparations; that forced France to devalue the Franc in 1925 to remain competitive, while Britain and the US returned to pre-war gold rate which made them uncompetitive; England could not sustain, so broke with gold standard in 1931 and the US devalued in 1933 to gain advantage lost to the UK in 1931.In 1936, France broke from the gold standard. During the depression, the US suspended gold shipments and the price of gold was set at $35 an ounce. A tripartite agreement between the US, the UK and France ended the competitive devaluation.
PEACE PERIOD:
Between the Second World War and 1971, there was an era of peace with high growth across nations in the West and the IMF monitored the Bretton Woods system of currency market.But the seeds were sown in 1965 with US President Lyndon Johnson's `guns and butter' programme of war with Vietnam and `great society.'
CURRENCY WAR II:
The sterling was devalued in 1967 as the float of the currency around the world was at four times the overall UK gold reserves. So any demand for sterling to be redeemed at prevailing rates would have emptied the vaults. The surge in inflation led to France pulling out of the `gold pool' and the pressure on the US to redeem gold at $35 an ounce was running at 30 tons an hour since market rates in London were at $45 an ounce.On August 15, 1971, US President Richard Nixon shut the gold window and banned conversion by foreign central banks and also imposed a surtax of 10 per cent on all imports - a simultaneous tariff protection and currency war.
Just like the 1939 tripartite agreement, the Smithsonian Agreement was signed in December 1971 to facilitate an orderly and agreed devalued dollar. It was short lived. Then in 1972, sterling was devalued; and in June that year, Germany imposed capital controls. The US also fell into a recession. In 1973, IMF declared Bretton Woods `dead.'
BRIEF BATTLES:
By 1985, US recovery and craze for assets led to USD appreciating 50 per cent making it uncompetitive. In an era of free exchange to depreciate, the US forced G-7 to sign an accord at New York's Hotel Plaza allowing USD devaluation. The Plaza Accord worked between 85 and 88 when it fell 40 per cent to the franc and 50 per cent to the yen. When it took a toll on other economies, there was the G-7 plus Canada and Italy meet at Louvre in Paris in 1987 to prevent dollar depreciation.
Then there were minor currency crises such as the sterling in 1992 when George Soros broke it, Mexican peso in 1994, Asian and rouble crises in 1997-98.
CURRENCY WAR
Started with China running huge surplus with the US before credit crisis due to managed currency with the US threatening to name it a `currency manipulator.' After Lehman blew up, the US debased currency through QE. That led to the US dollar depreciating vis-a-vis other currencies, including yuan.
Japan's Shinzo Abe devalued the yen to revive the economy, and so did European Central Bank's Mario Draghi to revive the Eurozone, flooding the market with liquidity .
Now, China is attempting to devalue the yuan to regain competitiveness. It has set off other Asian countries such as S Korea, Thailand, and even India thinking about competitive devaluation.
Just like the past two currency wars, this one may also have no clear winner, but can create enough chaos. Probably , one has to await an accord to end this latest war, but that may be years away .
