The Plaza Accord was a joint-agreement, signed on 22 September 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche mark by intervening in currency markets. The U.S. dollar depreciated significantly since the agreement until it was replaced by the Louvre Accord in 1987.
Between 1980 and 1985 the dollar had appreciated by about 50% against the Japanese yen, Deutsche mark, French franc and British pound, the currencies of the next four biggest economies at the time. In March 1985, just before the G7, the dollar reached its highest evaluation ever against the British pound, a valuation which would remain untopped for over 30 years. This caused considerable difficulties for American industry but at first their lobbying was largely ignored by government. The financial sector was able to profit from the rising dollar, and a depreciation would have run counter to Ronald 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 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 1975, 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[circular reference], which on the one hand, gave more spending power to domestic consumers, companies, and to the US government, it also would hamper US exports until the value of the dollar re-equilibrated. Notable industries that were unable to recover in the U.S. was the automobile industry.
The devaluation made U.S. exports cheaper to purchase for its trading partners, which in turn allegedly meant that other countries would buy more American-made goods and services.
The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987. Most of this devaluation was due to the $10 billion spent by the participating central banks. Currency speculation caused the dollar to continue its fall after the end of coordinated interventions. Unlike some similar financial crises, such as the Mexican and the Argentine financial crises of 1994 and 2001 respectively, this devaluation was planned, done in an orderly, pre-announced manner and did not lead to financial panic in the world markets. 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. The manufactured goods of the United States became more competitive in the exports 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.
The signing of the Plaza Accord was significant in that it reflected Japan’s emergence as a real player in managing the international monetary system. However, the recessionary effects of the strengthened yen in Japan’s export-dependent economy created an incentive for the expansionary monetary policies that led to the Japanese asset price bubble of the late 1980s. It is thus postulated that the Plaza Accord contributed to the Japanese asset price bubble, which progressed into a protracted period of deflation and low growth in Japan known as the Lost Decade.
- ^Margaret Thatcher Foundation. “Full Text Archive of the Plaza Agreement by Margaret Thatcher Foundation”. www.margaretthatcher.org. Archived from the original on 2018-12-03. Retrieved 2018-12-03.
- ^“Full Text Archive of Plaza Accord by University of Toronto”. www.g8.utoronto.ca. Archived from the original on 2018-12-03. Retrieved 2018-12-03.
- ^Funabashi, Yōichi (1989). Managing the Dollar: From the Plaza to the Louvre. Peterson Institute. pp. 261–271. ISBN 9780881320978.
- ^Brook, A, F Sedillot and P Ollivaud (2004). “Channel 1: Exchange Rate Adjustment”. OECD Economics Working Paper 390 – “Channels for Narrowing the US Current Account Deficit and Implications for Other Economies”. OECD Economics Department Working Papers (online ed.). Oxford; New York: OECD. p. 8, figure 3. doi:10.1787/263550547141.
- ^Tommy Wilkes, Saikat Chatterjee (2019-09-03). “Plotting sterling’s latest lurch – just how low did it go?”. Reuters. The all-time low was $1.0545 touched in March 1985, just before G7 powers acted to rein in the superdollar of the Reagan era in the so-called “Plaza Accord”.
- ^Michael J. Hiscox (2005). “The Domestic Sources of Foreign Economic Policies”. In John Ravenhill (ed.). Global Political Economy (First ed.). Oxford; New York: Oxford University Press. p. 65. ISBN 0-19-926584-4. OCLC 60383498.
- ^ M. Destler; C. Randall Henning (1993). Dollar Politics: Exchange Rate Policymaking in the United States. Institute for International Economics. pp. 105–130. ISBN 0-19-926584-4.
- ^Triffin dilemma
- ^World Insight: Lessons on Trade Deals. Yasuo Fukuda, former Prime-Minister of Japan. CGTN: “China raises tariffs in response to U.S. measures / Lessons on Japan-U.S. trade deal in the 1980s” on YouTube, Interview with CGTN host. / May 2019, minutes 28:23–32:29.
- ^“China seeks to learn from mistakes of 1985 Plaza Accord”. The Japan Times. 9 September 2006. Retrieved 27 September 2011.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.