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The Secret Plan To Fix The Dollar
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The Secret Plan To Fix The Dollar

Planet Money

The Secret Plan To Fix The Dollar

The Secret Plan To Fix The Dollar
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In 1985, David Mulford, far right, watches James Baker announce the Plaza agreement. i

David Mulford, far right, watches James Baker announce the Plaza agreement in 1985. Mario Cabrera/AP hide caption

toggle caption Mario Cabrera/AP
In 1985, David Mulford, far right, watches James Baker announce the Plaza agreement.

David Mulford, far right, watches James Baker announce the Plaza agreement in 1985.

Mario Cabrera/AP

There’s a global currency war brewing, and the U.S. thinks China isn’t playing fair. But, so far, the U.S. hasn’t been able to do much to change China’s currency policy.

It didn’t used to be this way. It used to be that the U.S. could convince the world to follow its lead on currency issues. It used to be that one U.S. official could get a few people in a room, and they could change the course of the global economy.

That’s basically what happened on September 22nd, 1985.  It was a secret plan.  And the U.S. official responsible for the secret meeting was David Mulford, undersecretary for international affairs at the U.S. Treasury.

Here was the problem Mulford was trying to solve:  Japan was growing fast. Really fast. They were selling all sorts of things to the rest of the world that the U.S. used to sell.  The U.S. was upset about this. (To apply to this story to today, just replace “Japan” with “China.”)

Mulford went to four other rich countries and said the world needed to find a way to let Japan grow, but not so fast, and not in a way that hurt everybody else. And everyone — even Japan — agreed to get together and make a plan.

Mulford says he thought the plan would work, on one condition:

Provided it is kept absolutely secret until the moment that we do it. Because it is only with element of surprise, as well as the size of the operation, that we would shock the markets when we acted.

On September 22nd, 1985, finance ministers from the US, Germany, Japan, the UK and France sat around a big wooden table at the Plaza Hotel in New York, overlooking Central Park.

Here’s what they decided: They would sell a lot of dollars, out of the blue, all at once. This would lower the value of the dollar, strengthen the Japanese yen, and make American exports cheaper.

And it would have an immediate effect.  Gary Dorsch was working as a trader for a firm on the Chicago Mercantile Exchange. He, like traders all over the world, remembers that night well:

It was pretty eye popping.  We were in a state of shock.  And when the market opened up, there was plenty of pandemonium.

The plan worked. In fact, it worked too well. The dollar fell, and fell some more. In two years, the dollar fell around 40% from its peak.

On February 22nd, 1987,  the same countries all got together again.  And they announced another plan that essentially undid everything they had done at the Plaza. Instead of selling dollars, they bought dollars. The idea was to stop the dollar from falling.

So was the Plaza agreement successful?

Ted Truman, who was an economist at the Federal Reserve says the agreement — and the deal that undid it just two years later — made the U.S. look foolish. “It was not a happy ending,” he says.

But Mulford chooses to remember it differently:

My mother one day was flying from Tuscon to Chicago.  She sat next to a fellow.  And when she said, ‘I have a son at the treasury,’ and she mentioned my name, he jumped up and said, “This guy who saved America by depreciating the dollar and keeping us competitive and saving jobs.” There was a lot of emotion involved in those issues in those days.  And there is today.

Governments always want to control the global economy to their advantage. The U.S. wanted to in the 1980s, the same as today. And for long time a handful of other countries could act together to make big, economic moves. They’d get together and decide how it should work.

But the Plaza agreement was a kind of turning point.  It started to look like those days were over.  The economy is now too big, moves too fast with too many powerful players.

Today, everyone in America wants us to sell more to the rest of the world. We want China to adjust its currency.  But there’s no secret room where a handful of men can sit together and make it happen.

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