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The Plaza Accord was a joint–agreement signed on September 22, 1985, at the
Plaza Hotel The Plaza Hotel (also known as The Plaza) is a luxury hotel and condominium apartment building in Midtown Manhattan in New York City. It is located on the western side of Grand Army Plaza (Manhattan), Grand Army Plaza, after which it is named, ...

Plaza Hotel
in
New York City New York, often called New York City to distinguish it from New York State New York is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of ...

New York City
, between
France France (), officially the French Republic (french: link=no, République française), is a List of transcontinental countries, transcontinental country spanning Western Europe and Overseas France, overseas regions and territories in the Ame ...

France
,
West Germany West Germany is the common English name for the Federal Republic of Germany (FRG; german: Bundesrepublik Deutschland , BRD) between its formation on 23 May 1949 and the German reunification through the accession of East Germany on 3 October 19 ...
,
Japan Japan ( ja, 日本, or , and formally ) is an island country An island country or an island nation is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the land of an in ...

Japan
, the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, and the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, to depreciate the
U.S. dollar The United States dollar (symbol A symbol is a mark, sign, or word that indicates, signifies, or is understood as representing an idea, Object (philosophy), object, or wikt:relationship, relationship. Symbols allow people to go beyond wha ...
in relation to the French
franc The franc is any of various units of currency. One franc is typically divided into 100 centimes. The name is said to derive from the Latin inscription ''francorum rex'' (Style of the French sovereign, King of the Franks) used on early France, F ...

franc
, the German
Deutsche Mark The Deutsche Mark (, "German mark"), abbreviated "DM" or "D-Mark" (), was the official currency of West Germany from 1948 until 1990 and later the unified Germany from 1990 until the adoption of the euro in 2002. In English, it is commonly call ...

Deutsche Mark
, the
Japanese yen The is the official currency of Japan. It is the third most traded currency in the , after the and the . It is also widely used as a third after the and the . The concept of the yen was a component of the late-19th century government's ...
and the British
Pound sterling The pound sterling (symbol: Pound sign, £; ISO 4217, ISO code: GBP), known in some contexts simply as the pound or sterling, is the official currency of the United Kingdom, Jersey, Guernsey, the Isle of Man, Gibraltar, South Georgia and the ...
by intervening in
currency markets The foreign exchange market (Forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) market for the trading of currency, currencies. This market determines Exchange rate ...
. The U.S. dollar depreciated significantly from the time of the agreement until it was replaced by the
Louvre Accord The Louvre Accord (formally, the Statement of the G6 Finance Ministers and Central Bank Governors) was an agreement, signed on February 22, 1987, in Paris Paris () is the Capital city, capital and List of communes in France with over 20,000 ...
in 1987. Some commentators believe the Plaza Accord contributed to the
Japanese asset price bubble The was an economic bubble An economic bubble is a situation in which asset prices are much higher than the underlying fundamentals can reasonably justify. Bubbles are sometimes caused by unlikely and overly optimistic projections about the fut ...
of the late 1980s.


Background

The tight monetary policy of
Federal Reserve The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series ...

Federal Reserve
's Chairman
Paul Volcker Paul Adolph Volcker Jr. (; September 5, 1927 – December 8, 2019) was an American economist. He served two terms as the 12th Chair of the Federal Reserve The chair of the Board of Governors of the Federal Reserve System is the head of the Fed ...
and the expansionary fiscal policy of President
Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician who served as the 40th president of the United States The president of the United States (POTUS) is the and of the . The president directs the of ...

Ronald Reagan
's first term in 1981-84 pushed up long-term interest rates and attracted capital inflow, appreciating the dollar. The
French government The Government of the French Republic (french: Gouvernement de la République française ) exercises executive power ''Executive Power'' is Vince Flynn's fifth novel, and the fourth to feature Mitch Rapp, an American agent that works for t ...
was strongly in favor of currency intervention to reduce it, but US administration officials such as Treasure Secretary
Donald Regan Donald Thomas Regan (December 21, 1918 – June 10, 2003) was the 66th United States Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, which is concerned with ...
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. At the 1982 G7 Versailles Summit the US agreed to a request by the other members to a study of the effectiveness of foreign currency intervention, which resulted in the Jurgensen Report at the 1983 G7 Williamsburg Summit, but it was not as supportive of intervention as the other leaders had hoped. As the dollar's appreciation kept rising and the trade deficit grew even more, the second Reagan administration viewed currency intervention in a different light. In January 1985
James Baker James Addison Baker III (born April 28, 1930) is an American attorney, statesman, and political figure. He served as White House Chief of Staff The White House chief of staff position is the successor to the earlier role of the Secretary to t ...

James Baker
became the new Treasure Secretary and Baker's aide
Richard Darman Richard Gordon "Dick" Darman (May 10, 1943January 25, 2008) was an American American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the United States The United States of Amer ...

Richard Darman
became Deputy Secretary of the Treasury.
David Mulford David Campbell Mulford (born June 1937) was the United States Ambassador to India from January 23, 2004 to February 2009, and served as Vice-Chairman International of Credit Suisse from 2009 to 2016. He is currently a distinguished visiting fellow ...

David Mulford
joined as the new Assistant Secretary for International Affairs. From 1980 to 1985, the dollar had appreciated by about 50% against the Japanese yen, Deutsche Mark,
French franc The franc (; ; sign: F or Fr), also commonly distinguished as the (FF), was a currency of France France (), officially the French Republic (french: link=no, République française), is a country primarily located in Western Europe, cons ...
, 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 valuation 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 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 International Business Machines Corporation (IBM) is an American multinational technology company headquartered in Armonk, New York, with operations in over 170 countries. The company began in 1911, founded in Endicott, New York, as the C ...

IBM
and
Motorola Motorola, Inc. () was an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational sta ...

Motorola
. By 1985, their campaign had acquired sufficient traction for
Congress Congresses are formal meetings of the representatives of different countries A country is a distinct territorial body or political entity A polity is an identifiable political entity—any group of people who have a collective identity, ...

Congress
to begin considering passing
protectionist Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. Proponents argue that protectionist policies sh ...
laws. The negative prospect of trade restrictions spurred the
White House The White House is the official residence and workplace of the president of the United States. It is located at 1600 Pennsylvania Avenue Northwest, Washington, D.C., NW in Washington, D.C., and has been the residence of every U.S. preside ...
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 Gross domestic product (GDP) is a monetary Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the ...
, 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 The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central bank A central bank, reserve bank, or monetary authority is an institution that manages the and of a or formal monetary union, and ove ...
under
Paul Volcker Paul Adolph Volcker Jr. (; September 5, 1927 – December 8, 2019) was an American economist. He served two terms as the 12th Chair of the Federal Reserve The chair of the Board of Governors of the Federal Reserve System is the head of the Fed ...
had halted the
stagflation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
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 The Organization of the Petroleum Exporting Countries (OPEC, ) is an intergovernmental organization An intergovernmental organization (IGO) is an organization composed primarily of sovereign states (referred to as ''member states''), or o ...

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 James Addison Baker III (born April 28, 1930) is an American attorney, statesman, and political figure. He served as White House Chief of Staff The White House chief of staff position is the successor to the earlier role of the Secretary to t ...

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 The Organisation for Economic Co-operation and Development (OECD; french: Organisation de Coopération et de Développement Économiques, OCDE) is an intergovernmental economic organisation with 38 member countries, founded in 1961 to st ...

OECD
meeting the US announced their 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. Then finally on 22 September 1985, the finance ministers and central bank governors of the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
,
France France (), officially the French Republic (french: link=no, République française), is a List of transcontinental countries, transcontinental country spanning Western Europe and Overseas France, overseas regions and territories in the Ame ...

France
,
Germany ) , image_map = , map_caption = , map_width = 250px , capital = Berlin Berlin (; ) is the Capital city, capital and List of cities in Germany by population, largest city of Germany by both area and population. Its 3,769,495 inh ...

Germany
,
Japan Japan ( ja, 日本, or , and formally ) is an island country An island country or an island nation is a country A country is a distinct territory, territorial body or political entity. It is often referred to as the land of an in ...

Japan
and
Great Britain Great Britain is an island An island (or isle) is an isolated piece of habitat that is surrounded by a dramatically different habitat, such as water. Very small islands such as emergent land features on atoll An atoll (), ...

Great Britain
met at the
Plaza Hotel The Plaza Hotel (also known as The Plaza) is a luxury hotel and condominium apartment building in Midtown Manhattan in New York City. It is located on the western side of Grand Army Plaza (Manhattan), Grand Army Plaza, after which it is named, ...

Plaza Hotel
in
New York City New York, often called New York City to distinguish it from New York State New York is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of ...

New York City
and came to an agreement 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.


Effects


Trade deficit

While for the first two years the US deficit only worsened, it then began to turn around as the elasticities had risen enough that the quantity effects began to outweigh the valuation effect. The
devaluation In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Production ( ...
made U.S.
export An export in international trade International trade is the exchange of capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase ...

export
s cheaper to purchase for its trading partners, which in turn allegedly meant that other countries would buy more American-made
goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...

goods
and
services Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of Faculty (academic staff), university faculty * Civil service, the body of employees of a governm ...
. The Plaza Accord failed to help reduce the U.S.–Japan trade deficit, but it did reduce the U.S. deficit with other countries by making U.S. exports more competitive. And thus, the US Congress refrained from enacting protectionist trade barriers.


Objective failure

Joseph E. Gagnon describes the Plaza's result being more due to the message that was sent to the financial markets about policy intentions and the implied threat of further dollar sales than actual policies. Intervention was far more pronounced in the opposite direction following the 1987
Louvre Accord The Louvre Accord (formally, the Statement of the G6 Finance Ministers and Central Bank Governors) was an agreement, signed on February 22, 1987, in Paris Paris () is the Capital city, capital and List of communes in France with over 20,000 ...
when the dollar's depreciation was decided to be halted. The Plaza Accord was successful in reducing the U.S.
trade deficit The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports An export in international trade International trade is the exchange of capital, g ...
with
Western Europe Western Europe is the western region of Europe Europe is a continent A continent is any of several large landmasses. Generally identified by convention (norm), convention rather than any strict criteria, up to seven geographical r ...

Western Europe
an 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 Manufacturing is the creation or production of goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distr ...
of the United States became more competitive in the exports market, though were still largely unable to succeed in the
Japanese domestic market Japanese domestic market (JDM) refers to Japan Japan ( ja, 日本, or , and formally ) is an in . It is situated in the northwest , and is bordered on the west by the , while extending from the in the north toward the and in the sou ...
due to Japan's structural restrictions on
import An import is the receiving country in an export An export in international trade International trade is the exchange of capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distincti ...

import
s. The Louvre Accord was signed in 1987 to halt the continuing decline of the U.S. dollar. Following the subsequent 1987 Louvre Accord, there were 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. The
European Central Bank The European Central Bank (ECB) is the prime component of the Eurosystem The Eurosystem is the monetary authority In finance Finance is the study of financial institutions, financial markets and how they operate within the financia ...

European Central Bank
supported in 2000 then over-depreciated euro. The
Bank of Japan A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporations that provide services as intermediaries of financial markets. Broadly speaking, there are three major types of financial in ...

Bank of Japan
intervened for the last time in 2011, with the cooperation of the US and others to dampen strong appreciation of the yen after the
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. 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 Currency intervention, also known as foreign exchange market intervention or currency manipulation, is a monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable ...
(to be differentiated from monetary stimulus). 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 An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation state A n ...
. However, the recessionary effects of the strengthened yen in Japan's economy created an incentive for the expansionary monetary policies that led to the
Japanese asset price bubble The was an economic bubble An economic bubble is a situation in which asset prices are much higher than the underlying fundamentals can reasonably justify. Bubbles are sometimes caused by unlikely and overly optimistic projections about the fut ...
of the late 1980s. Some commentators blame the Plaza Accord for the Japanese asset price bubble, which progressed into a protracted period of deflation and low growth in Japan known as the Lost Decade, which has effects still heavily felt in modern Japan.Archived a
Ghostarchive
and th
Wayback Machine
Jeffrey Frankel Jeffrey Alexander "Jeff" Frankel (born November 5, 1952 in San Francisco, California) is an international macroeconomist. He works as the James W. Harpel Professor of Capital Formation and Growth at Harvard University, Harvard University's Kennedy S ...
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. The rising Deutsche Mark also didn't lead to an economic bubble or a recession in Germany.


See also

*
Currency war Currency war, also known as competitive devaluation In macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics Economics () is the social science that studies how peopl ...
*
Dodge Line Image:Hayato Ikeda meets Joseph Dodge.jpg, Hayato Ikeda meeting Dodge (right) in 1948 The Dodge Line was a financial and monetary contraction policy drafted by Joseph Dodge for Japan to gain economic independence after World War II. It was announce ...
, yen to dollar equalization efforts March 7, 1949 * Endaka *
Post–World War II economic expansion The post–World War II economic expansion, also known as the postwar economic boom or the Golden Age of Capitalism, was a broad period of worldwide economic expansion An economic expansion is an increase in the level of economic activity ...
* Toshiba–Kongsberg scandal


References


External links


Announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan, the United Kingdom, and the United States (Plaza Accord)
* *{{webarchive , url=https://web.archive.org/web/20090223213440/http://www.anz.com/edna/dictionary.asp?action=content&content=plaza_agreement , title=Plaza Agreement, ANZ Financial Dictionary from Language of Money by Edna Carew
Reverse Plaza Accord
1985 in economics 1985 in Japan Economic history of Japan Economic history of the United States Economy of West Germany Foreign exchange market Group of Seven International macroeconomics Treaties concluded in 1985 Treaties of France Treaties of Japan Treaties of the United Kingdom Treaties of the United States Treaties of West Germany United States–Asian relations United States–European relations