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1. Introduction

The Plaza Accord is controversial.¹ One the one hand it is hailed as “perhaps the high-water mark of international economic co-operation over the past 40 years” (in the words of Beattie 2010). On the other it is impugned as having had little effect on currency values, as heightening instability rather than reducing it (by causing the dollar to overshoot in the opposite direction), and even as having been indirectly responsible for the Japanese crisis and lost decade (as recounted if not exactly endorsed in IMF 2011).

Exchange rate stabilization negotiations and agreements are always controversial. They are economically complex and politically fraught, since rhetoric is easy to offer while commitments are difficult to keep. They tap into deep-seated beliefs about whether markets produce desirable equilibria and, if not, whether intervention can improve observed outcomes. They prompt the question, debated by academics if not also practitioners, of whether international cooperation on monetary and financial matters is more likely to be productive or counterproductive.

One episode from 1985 is not exactly sufficient evidence for resolving these disputes. In this paper I therefore consider a number of earlier episodes when officials attempted to implement agreements to move exchange rates to desired levels and stabilize them there.² In 1925 the United States (or more precisely the Federal Reserve Bank of New York) sought to cooperate with the United Kingdom in reversing the postwar depreciation of sterling against the dollar and stabilizing the bilateral exchange rate at pre-World War I levels. In 1933 the major countries of the world, led by the U.S., UK and France, sought to stabilize exchange rates and avoid another round of competitive devaluations following earlier depreciation of first sterling and then the dollar against the gold-bloc currencies. In 1936 the Americans, British and French sought to facilitate depreciation and adjustment of the franc against sterling and the dollar while preventing the American and British currencies from becoming severely overvalued and at the same time avoiding another round of competitive devaluations that might neutralize efforts to realign the franc. And in 1971 the U.S. and its foreign partners sought a stabilization agreement under which the dollar would be adjusted downward by an amount adequate to correct U.S. balance-of-payments weakness while at the same time limiting the adverse impact on foreign economies that found themselves with a stronger dollar exchange rate as a result.

My analysis of these episodes can be thought of as an effort to put the Plaza Accord into a broader historical context. In each case I ask a series of questions about these agreements. First, what was the problem in foreign exchange markets that governments were trying to solve, to what extent was there a common diagnosis of that problem, and how widely was it shared? Second, what were the obstacles to a cooperative solution? Third, how successful were the representatives of different countries in achieving their goals? Fourth and finally, were there untended consequences, positive or negative, of their agreement?

In the conclusion I explore what light this historical analysis sheds on the Plaza Accord.

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