Cooking the Books 2: Currency wars

“More than a dozen countries”, the Times (11 November) reported, “have been intervening in the foreign exchange markets to weaken their currencies and protect exporters, raising fears of a rerun of currency wars that damaged the world economy in the 1930s.”

The 1930s – that’s the spectre currently haunting those in charge of trying to run capitalism. Then, faced with the contraction of world trade, states tried to grab as much as was left by resorting to protectionism, export subsidies and devaluations. The conventional wisdom is that this only made things worse, deepening and prolonging the depression.

The World Trade Organisation (WTO), and its predecessor GATT, have made it difficult for states to adopt protective tariffs and export subsidies. So, all that’s left, to try to get the better of their rivals (and it’s a war of each against all), is to devalue their currencies.

Strictly speaking, since the collapse in 1971 of the Bretton Woods agreement, which had laid down fixed exchange rates between currencies, the sort of formal devaluation that the Labour governments of the 1960s were forced to carry out no longer occur. Currencies now “float”, which means that their exchange rate with other currencies is determined by supply and demand on foreign exchange markets.

Normally (if there’s a level playing field) what would happen is that the more a state exported the higher would be the demand for its currency due to those buying the exports having to acquire some to pay for these. This would lead to the currency’s exchange rate rising; which would make its exports more expensive. Similarly, a state with a balance of trade deficit would find its currency’s value fall; which would make its exports cheaper. So matters would be more or less self-regulating.

That’s the theory. The real world is rather different, since governments can influence the exchange rate of their currency by affecting the supply and demand for it. If they want to keep its exchange value low (so as to encourage exports by making them relatively cheaper) they can increase the supply on foreign exchange markets by themselves selling more there (printing more if necessary). Which is what has been happening:

The US points the finger at China but China is not the only state trying to grab a bigger share of world trade in this way. One of the main reasons why Britain didn’t join the euro was that this would have prevented it letting the pound float downwards to encourage exports. The US too has recently been increasing the supply of dollars (via “quantitative easing”) with this end partly in view as a means of putting pressure on China to upvalue the yuan.

The matter was the main item of the agenda of the G20 summit in Seoul in November, but all that was agreed was to adopt a pious declaration condemning “competitive devaluations” and wishing for “market-determined exchange rates”. Some sort of agreement may eventually be cobbled together. But maybe not. The competitive struggle for profits built-in to capitalism has already prevented agreement on a further round of tariff reductions, let alone on what to do about the threat of climate change.

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