Currency Wars

Great Depression Food Line (Photo credit: Kevin Burkett)

Yesterday, the G7 issued a statement about everyone’s favourite topic: Currency Wars.

The statement was seen as very weak and of no implication at all: “We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.” To compare what’s going on today with the “currency wars” of the 1930s may be wrong.

Economic historian, Niall Ferguson, recently highlighted in the Financial Times (via Credit Suisse), “Back in the 1930s, it was obvious who was waging a currency war. Before the Depression, most countries had been on the gold standard, which had fixed exchange rates in terms of the yellow metal. When Britain abandoned gold in September 1931, it unleashed a wave of competitive devaluations. Today, however, we live in a world of fiat money and mostly floating rates. The last vestige of the gold standard was swept away in August 1971, when
Richard Nixon suspended the convertibility of the dollar into gold. For one country to accuse another of waging a currency war in 2013 is therefore absurd. The war has been going on for more than 40 years and it is a war of all against all.”

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