Plaza Accord
Encyclopedia
The Plaza Accord or Plaza Agreement was an agreement between the governments of 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 five governments signed the accord on September 22, 1985 at the Plaza Hotel
in New York City
.
administration's plans for bringing down inflation. A broad alliance of manufactures, service providers and farmers responded by running an increasingly high profile campaign asking for protection against foreign competition.
Major players included grain exporters, car producers, engineering companies 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 justification for the dollar's devaluation was twofold: 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 70s by raising interest rates, but this resulted in the dollar becoming overvalued to the extent that it made industry in the U.S. (particularly the automobile industry) less competitive in the global market
.
s cheaper to its trading partners
, which in turn meant that other countries bought 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 bank
s. 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 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 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 import
s.
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. 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
. Yet it is postulated that it contributed to the Japanese asset price bubble
, which ended up in a serious recession, the so-called Lost Decade
.
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, West Germany
West Germany
West Germany is the common English, but not official, name for the Federal Republic of Germany or FRG in the period between its creation in May 1949 to German reunification on 3 October 1990....
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, and the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, to depreciate
Depreciation (currency)
Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears...
the U.S. dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
in relation to the Japanese yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...
and German Deutsche Mark by intervening in currency markets
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
. The five governments signed the accord on September 22, 1985 at the Plaza Hotel
Plaza Hotel
The Plaza Hotel in New York City is a landmark 20-story luxury hotel with a height of and length of that occupies the west side of Grand Army Plaza, from which it derives its name, and extends along Central Park South in Manhattan. Fifth Avenue extends along the east side of Grand Army Plaza...
in New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
.
Background
Between 1980 and 1985 the dollar had appreciated by about 50% against the yen, Deutsche Mark and British pound, the currencies of the next three biggest economies at the time. 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 the ReaganReagan
Reagan is an Irish surname, most commonly associated with Ronald Reagan, the 40th President of the United States. Reagan may also refer to:-Surname:*Nancy Reagan , widow of Ronald Reagan and First Lady from 1981 to 1989...
administration's plans for bringing down inflation. A broad alliance of manufactures, service providers and farmers responded by running an increasingly high profile campaign asking for protection against foreign competition.
Major players included grain exporters, car producers, engineering companies like Caterpillar Inc.
Caterpillar Inc.
Caterpillar Inc. , also known as "CAT", designs, manufactures, markets and sells machinery and engines and sells financial products and insurance to customers via a worldwide dealer network. Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas...
as well as high-tech companies including IBM
IBM
International Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...
and Motorola
Motorola
Motorola, Inc. was an American multinational telecommunications company based in Schaumburg, Illinois, which was eventually divided into two independent public companies, Motorola Mobility and Motorola Solutions on January 4, 2011, after losing $4.3 billion from 2007 to 2009...
. By 1985, their campaign had acquired sufficient traction for Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
to begin considering passing protectionist laws. The prospect of trade restrictions spurred the White House
White House
The White House is the official residence and principal workplace of the president of the United States. Located at 1600 Pennsylvania Avenue NW in Washington, D.C., the house was designed by Irish-born James Hoban, and built between 1792 and 1800 of white-painted Aquia sandstone in the Neoclassical...
to begin the negotiations that led to the Plaza Accord.
The justification for the dollar's devaluation was twofold: to reduce the U.S. current account
Current account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
deficit, which had reached 3.5% of the GDP
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
, and to help the U.S. economy
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
to emerge from a serious recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
that began in the early 1980s. The U.S. Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
under Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
had halted the stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
crisis of the 70s by raising interest rates, but this resulted in the dollar becoming overvalued to the extent that it made industry in the U.S. (particularly the automobile industry) less competitive in the global market
International finance
International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, global financial system, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes...
.
Effects
Devaluing the dollar made U.S. exportExport
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
s cheaper to its trading partners
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
, which in turn meant that other countries bought more American-made goods and services.
The exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
value of the dollar versus the yen declined by 51% from 1985 to 1987. Most of this devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
was due to the $10 billion spent by the participating central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s. Currency speculation caused the dollar to continue its fall after the end of coordinated interventions. Unlike some similar financial crises
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
, such as the Mexican
1994 economic crisis in Mexico
The 1994 Economic Crisis in Mexico, widely known as the Mexican peso crisis, was caused by the sudden devaluation of the Mexican peso in December 1994....
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
Balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
with Western Europe
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...
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 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 import
Import
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
s.
The recessionary effects of the strengthened yen in Japan's export-dependent economy
Economy of Japan
The economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...
created an incentive for the expansionary monetary policies
Expansionary monetary policy
In economics, expansionary policies are fiscal policies, like higher spending and tax cuts, that encourage economic growth. In turn, an expansionary monetary policy is monetary policy that seeks to increase the size of the money supply...
that led to the Japanese asset price bubble
Japanese asset price bubble
The was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
of the late 1980s. The Louvre Accord
Louvre Accord
The Louvre Accord was signed by the then G6 on February 22, 1987 in Paris, France. Italy had been an invited member, but declined to finalize the agreement...
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
International monetary systems
International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and...
. Yet it is postulated that it contributed to the Japanese asset price bubble
Japanese asset price bubble
The was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...
, which ended up in a serious recession, the so-called Lost Decade
Lost Decade (Japan)
The is the time after the Japanese asset price bubble's collapse within the Japanese economy, which occurred gradually rather than catastrophically...
.
External links
- Announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan, the United Kingdom, and the United States (Plaza Accord)
- U.S. Treasury - Exchange Stabilization Fund, Intervention Operations 1985-90
- Plaza Agreement, ANZ Financial Dictionary from Language of Money by Edna Carew