Final Report of Macroeconomics

BỘ GIÁO DỤC VÀ ĐÀO TẠO
TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG
REPORT ON MACROECONOMICS
CURRENCY WARS
Lecturer: Phạm Văn Quỳnh
Class: K61MF2
Name of member: Nguyễn Thành Tài - 2215027065
Đoàn Tân - 2215027083
Tiền Tâm Đan - 2215027019
Ngô Lê Quỳnh Như 2215027040
Lê Gia Huynh – 2215027057
Ho Chi Minh City, 2024

CURRENCY WARS PROLOGUE
PROLOGUE
According to Wikipedia, currency is a means of exchanging goods and services

accepted for payment within a region or between a specific group of people. Currency
can take the form of paper money or metal coins (fiat money) issued by the State (central
bank, Ministry of Finance, ...), commodity money (rice, salt, gold), substitute money
(coupons, reward points, ...) or cryptocurrency issued by a network of computers
(typically Bitcoin). In the view of M. Freidman and modern economists, "money is the
means of payment" and can perform the functions of intermediaries of exchange, units of
calculation and can accumulate wealth. Economists before C. Marx interpreted money
from its highest form of development, thus failing to clarify the nature of money. On the
contrary, C. Marx studied money from the history of the development of production and
exchange of goods, from the development of forms of commodity value, thus finding the
origin and nature of money. Thus, in modern society, money has always played an
important role, being a special commodity separated from the commodity world as a
uniform common parity for other goods, expressing social labor and expressing relations
between those who produce goods.
The term Currency War is well known when it is the title of the famous book
published in 2008, penned by author Song Hongbing. It was a war with neither bombs
nor gunfire, but the consequences were brutal. It can be said that these are retaliatory
measures of the economies involved, economic conflicts between economies, which, in
macro eyes, will lead to instability in the global economy. In recent years, the phrase
CTTT has been mentioned more when China has "devalued" its currency. Looking back
at history, no one wants another war, because the consequences of the previous two wars
have haunted many countries.
Because of the attractiveness of currency, under the facilitation of Mr. Pham Van
Quynh, our team decided to choose the topic "Currency Wars", applying macro theories
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CURRENCY WARS PROLOGUE
to delve into exploiting and analyzing 2 currency wars in world history, the I (1921-
1936) and the II (1967-1987).
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CURRENCY WARS TABLE OF CONTENTS
TABLE OF CONTENTS
PROLOGUE.......................................................................................................................i
TABLE OF CONTENTS.................................................................................................Iii
LIST OF TABLES AND CHARTS..........................................................................Micro
PICTURE BIBLIOGRAPHY........................................................................................Vii
CONTENT..........................................................................................................................1
CHAPTER 1. OVERVIEW............................................................................................1
1. Reasons for choosing the topic...............................................................................1
2. Research objectives................................................................................................2
3. Research questions.................................................................................................2
4. Practical significance of the topic..........................................................................2
5. Essay structure.......................................................................................................2
CHAPTER 2. THEORY OF CURRENCY WARS........................................................4
1. Currency wars........................................................................................................4
1.1. Definition.........................................................................................................4
1.2. Purpose............................................................................................................5
1.3. The fall of the currency...................................................................................5
2. The impact of currency wars on the world economy.............................................6
CHAPTER 3. CURRENCY WARS FROM A MACROECONOMIC PERSPECTIVE

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1. Macroeconomic theoretical foundations................................................................8
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2. Analyze the causes and effects of currency wars from a macroeconomic

perspective....................................................................................................................9
2.1. Cause...............................................................................................................9
2.1.1. Currency wars occur due to a country's trade deficit................................9
2.1.2. Currency wars occur due to high unemployment in a country...............12
2.1.3. Currency wars occur due to a country's policy of hoarding foreign

currency................................................................................................................13
2.2. Action............................................................................................................14
2.2.1. The impact of currency wars on the initiating country and the countries
involved................................................................................................................14
2.2.2. The impact of currency wars on the world economy.............................15
CHAPTER 4. HISTORY OF CURRENCY WARS....................................................16
1. First Currency War (1921-1936)..........................................................................16
1.1. Premise..........................................................................................................16
1.1.1. Gold Standard (1870 – 1914).................................................................16
1.1.2. The Formation of the Federal Reserve System (1907-1913)..................19
1.1.3. World War I and the Treaty of Versailles (1914–1919).........................21
1.1.4. Conclude.................................................................................................23
1.2. Cause.............................................................................................................23
1.3. Analysis of developments..............................................................................25
1.4. Consequence..................................................................................................34
2. Second Currency War (1967–1987).....................................................................35
2.1. Cause.............................................................................................................35
2.2. Analysis of developments..............................................................................36
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2.2.1. The end of Bretton Woods......................................................................39
2.2.2. The Rise of the Dollar Emperor..............................................................45
2.3. Consequence..................................................................................................47
3. The germ of currency wars in the present............................................................48
CHAPTER 5. CONCLUDE.........................................................................................54
1. Currency wars......................................................................................................54
2. Lessons learned for Vietnam................................................................................56
BIBLIOGRAPHY..............................................................................................................a
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CURRENCY WARS DIRECTORY
LIST OF TABLES AND CHARTS
Table 1. Summary of aspects of currency wars.................................................................48
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CURRENCY WARS DIRECTORY
PICTURE BIBLIOGRAPHY
Figure 1. The trade deficit between China and the US in 2015..............................17

Figure 2. Children in Germany play with piles of money like lego puzzles...........27
Figure 3. Precursors as mountain-high in a German bank in 1920.........................28
Figure 4. Prices of basic commodities plummeted..................................................47
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CURRENCY WARS CONTENTS CHAPTER 1
CONTENT
CHAPTER 1. OVERVIEW
1.1. Reasons for choosing the topic.

Issues surrounding currencies have always been a hot topic for economists around
the world. Currency is the most fundamental and important measure, and once currency
fluctuations occur, it can have far-reaching effects on the economy. In economic
fluctuations, it is impossible not to mention currency devaluation. It is a completely
common phenomenon in the forex market. However, if a series of countries
simultaneously get involved, trying to reduce the value of their currencies at the same
time, it is a sign of a currency war to come.
There have been many economic studies related to competitive devaluation but
almost only cover one to two contents, not exhaustive. Moreover, each era has different
problems, especially in the current context, international currencies appear as integration
and competition, so the causes of currency wars will have distinctive characteristics from
previous wars. Not only that, for the issue of competitive devaluation to have more depth
and clarify their impact on competition between countries, it is necessary to put it from a
macroeconomic perspective that some articles or studies ignore. In addition, although
there are many measures proposed when affected by the trade conflict between the US
and China, they are not really effective, so from the measures that international measures
have taken to prevent currency wars, it is necessary to be carefully selected and in line
with Vietnam's action orientations in case it is faced with currency wars.
For these reasons, this essay can be a fairly comprehensive account of the currency
wars that occurred and their connection, and collect opinions and arguments from
economists and politicians to talk about the possibilities of a currency war in the present
day From there, based on the proposed solutions to prevent the currency war in the world
applied to Vietnam in the most appropriate way.
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1.2. Research objectives.

 Learn aspects of currency wars: definition, causes, impact.
 Analyze aspects of currency wars from a macroeconomic perspective.
 Learn about currency wars in the world, thereby drawing lessons for
Vietnam.
1.3. Research questions.

Question 1: What are currency wars?
Question 2: What causes currency wars?
Question 3: What impact do currency wars have on the world economy?
Question 4: What currency wars have there been in the world?
Question 5: What lessons have been learned for Vietnam from the currency wars?
1.4. Practical significance of the topic.

 Synthesize the basics of currency in general and currency wars in
particular.
 Analyze aspects of currency wars from a macroeconomic perspective,
thereby helping to study macroeconomics more effectively.
 Draw lessons learned for Vietnam in preventing and dealing with currency
wars from previous currency wars.
1.5. Essay structure.

The essay is built with a structure of 5 chapters as follows:
Chapter 1: Overview.
Chapter 2: The Theory of Currency Wars.
Chapter 3: Currency Wars from a Macroeconomic Perspective.
Chapter 4: History of Currency Wars.
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CHAPTER 2. THEORY OF CURRENCY WARS

2.1. Currency wars.
2.1.1. Definition.
Currency war, also known as competitive devaluation, is a term used to describe
competitive currency devaluation Currency wars occur when countries simultaneously
devalue their currencies in hopes of increasing the attractiveness of domestic goods
leading to increased exports, increased production and reduced unemployment. The
"simultaneous" factor in monetary policy changes here is very important, as it is very
normal for a currency to depreciate when trading on a free market. Without the
"simultaneous" factor, it is unlikely that a currency war will break out.
In late September 2010, Brazilian Finance Minister G. Mangega warned: "We are
now witnessing an international currency war, a mass devaluation of currencies." And
that was the first time the term "currency war" was mentioned by economic executives.
At that time, Brazil was considered one of the victims of low interest rates in the United
States, causing capital to flow into emerging markets, making Brazilian exports
expensive. Since then, experts have repeatedly used the phrase "currency war" to describe
serious disagreements in discussions between leaders of major exporting economies such
as China, Germany and Japan, and countries trying to boost exports such as the United
States or countries in the eurozone.
However, 3 years earlier, in 2007, people interested in economics, especially in

Asia, knew the term "currency war", when it was the title of the famous book (sold about
200,000 official copies) by Chinese author - Song Hongbing. The content of the book is
about the monetary policy of Western nations, where the author claims that central banks
and policies are manipulated by a group of banks and private financial institutions.
In recent years, the concept has become even more talked about, as economies
race to loosen currencies to stimulate growth. Before China's recent yuan devaluation was
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criticized for letting the yen depreciate by 28% against the dollar over 2 years, helping its
exporters soar profits.
Although the term "currency war" has only appeared in recent years, the nature of
currency devaluation races has been going on since the 30s of the twentieth century,
before the Great Depression of the global economy. At that time, countries abandoned the
gold standard system - fixing the value of the currency to the price of this precious metal.
2.1.2. Purpose.
Countries engage in currency wars to gain comparative advantage in international
trade. By devaluing their currency, they make their exports cheaper in foreign markets.
Businesses export more, gain more profits, and create new jobs. As a result, the country
benefited from stronger economic growth.
Currency war also encourages investment in the nation's assets. The stock market
became less expensive for foreign investors. Direct foreign investment increased as
domestic businesses became cheaper. Foreign companies can also buy natural resources.
2.1.3. The fall of the currency.

The exchange rate determines the value of a currency when exchanged between
countries. A country in a currency war deliberately lowers the value of its currency.
Countries with fixed exchange rates usually only make announcements. Other countries
fix their rates to the U.S. dollar because it is the global reserve currency.
However, most countries adopt flexible exchange rates. They must increase the
money supply to reduce the value of their currency. When supply is more than demand,
the value of the currency drops.
A central bank has many tools to increase the money supply by expanding credit.
The central bank does this by lowering interest rates on internal bank loans, which affects
loans to consumers. Central banks can also add credit to national banks' reserves. This is
the concept behind open market operations and quantitative easing.
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A country's government can also influence the value of its currency with an
expansionary fiscal policy. The government does this by spending more or cutting taxes.
However, expansionary fiscal policies are mainly used for political reasons, not to engage
in a currency war.
2.2. The impact of currency wars on the world economy.

 Currency devaluation can reduce productivity in the long run, as imports of
equipment and machinery become too expensive for local businesses. If the
devaluation of the currency is not accompanied by real structural reforms,
productivity will eventually suffer.
 The magnitude of currency depreciation may be greater than desired, which
may eventually cause rising inflation and capital outflows.
 A currency war could lead to greater protectionism and erect trade barriers,
which would hamper global trade.
 Competitive devaluation can cause an increase in currency volatility, lead
to higher hedging costs for companies and may discourage foreign
investment.
 Unemployment skyrocketed. Evidenced by the First Currency War (1921-
1936): creating one of the worst depressions in world history - the Great
Depression. Unemployment soared and industrial production collapsed,
creating periods of very weak to negative growth. Unemployment is up to
25% - 30% in industrialized countries; Production in industrialized
countries fell to negative 15%-20%.
 Causing socio-political disturbances: Governments of developed capitalist
countries such as the US, UK, France, Germany, Japan... were in disarray
(in the United States, during that recession, Democrats won majorities in
both the Senate and House of Representatives, the Democratic president
replaced the Republican president), especially the Nazis and Japanese
militarists came to power, plunging the world into World War II.
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 The world's major economies race into the abyss, disrupting trade,
declining output, and spawning poverty, creating extreme political trends.
In the U.S. 11,000 out of 25,000 banks fail; Within 2 months, the value of
50 stock markets fell by 1/2, leading to a decline in consumption.
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CHAPTER 3. CURRENCY WARS FROM A MACROECONOMIC

PERSPECTIVE
3.1. Macroeconomic theoretical foundations.
Although in currency wars, countries compete to devalue their currencies en masse
to reduce the value of their currencies to gain an advantage over their opponents, the
essence of currency wars stems from the internal problems of each country. When a
country has declined economic growth, high unemployment, and a stagnant financial and
banking system, it is difficult for a country to promote growth again based solely on
internal tools. To assess a country's economic growth, the most important indicator often
used is its gross domestic product (GDP).
Expenditure Approach - GDP is calculated as the sum of all expenditures on

services and final goods. GDP is made up of four basic factors: people's spending (C),
business investment (I), government spending on goods and services (G), and net exports
(X exports minus M imports). We can express it through the following equation:
GDP = C + I + G + (X - M)
In an economy that is slow to develop and still exists conditions such as high
unemployment, weak system, it will lead to factors such as C, I, G being stagnant or
declining. Therefore, improving exports (increasing net exports: X - M) becomes the
remaining option to save the situation, and currency devaluation is the fastest way to do
it.
In addition, when performing currency devaluation, a country interferes with the

exchange rate between its currency and its foreign currency. The exchange rate between
two currencies is the rate at which one currency will be exchanged for another. For
example, the exchange rate between Vietnamese dong and US dollar on 18/03/2022 is
23.620, i.e. 23620 Vietnamese dong will be exchanged for 1 US dollar.
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3.2. Analyze the causes and effects of currency wars from a macroeconomic
perspective.
3.2.1. Cause
Currency warfare describes the devaluation of currencies by countries to maintain
competitiveness in the import and export market when a country decides to devalue its
currency, directly affecting competitors. In other words, the direct cause of currency wars
is the simultaneous devaluation of their currencies by the countries involved.
Currency devaluation is a term used to describe the act of devaluing the local
currency (also known as currency devaluation ) of countries, which is mainly caused by
the expectation of countries to pursue export growth policies to improve the trade balance
in many aspects (in favor of the budget, in favor of foreign-invested enterprises,
restoring the equilibrium of the long-term current balance), due to high unemployment
and the will of countries to maintain a low exchange rate to help hoard foreign currencies,
in case of future financial crises. And a country's currency devaluation policy is directly
aimed at promoting competition to gain an advantage over competitors in the
international arena, putting pressure on competitors when the country's exports applying
the currency devaluation policy will be cheaper than the domestic goods of the rival
country, causing these countries to depreciate their local currencies to maintain
competitiveness.
It can be concluded that the direct cause of a currency war is the currency
devaluation policy of countries, and the indirect causes are solutions to the internal
problems of countries, namely export growth policies to improve the trade deficit, reduce
high unemployment and improve the finances of a particular country.
3.2.2. Currency wars occur due to a country's trade deficit.

A trade deficit is an unfavorable trade deficit, meaning that a deficit in the trade
balance occurs when the value of a country's tangible exports (i.e. exports of goods) is
lower than the value of its tangible imports. Such a trade deficit may not be a direct
concern, if it is offset by a surplus created at some part of the balance of payments. When
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a country consistently experiences trade deficits, the negative consequences can affect
economic growth and stability. Therefore, countries will come up with several solutions
to limit the trade surplus rate, including currency devaluation.
The goal of currency devaluation is to increase the competitiveness of domestic

goods and thereby improve the balance of current payments. When the local currency
depreciates, it will increase the nominal exchange rate, leading to an increase in the real
exchange rate, which will stimulate exports and limit imports, improving the trade
balance. When the exchange rate increases (devaluation), the export price becomes
cheaper when measured in foreign currency, the increase in import prices in local
currency is called the price effect. When the falling exchange rate made the price of
exports cheaper, it increased export volumes while limiting import volumes. This
phenomenon is called the mass effect.
However, whether the trade balance deteriorates or improves depends on the price
effect and the quantity effect of which is superior.
In the short term, when the exchange rate rises while domestic prices and wages
are relatively rigid, it will make export goods cheaper and imports more expensive:
export contracts have been signed at the old exchange rate, domestic enterprises have not
mobilized enough resources to be ready to conduct more production than before to meet
export demand Exports increased, as did domestic demand. In addition, in the short term,
demand for imported goods does not quickly decrease due to consumer sentiment. When
devaluing, the price of imported goods increases, however, consumers may be concerned
about the quality of domestic goods without worthy substitutes for imported goods,
making the demand for imported goods cannot be reduced immediately. Therefore, the
number of exports in the short term does not increase rapidly and the number of imports
does not decrease sharply. Therefore, in the short run the price effect often outweighs the
quantity effect, causing the trade balance to deteriorate.
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In the long term, falling domestic prices have stimulated domestic production and
domestic consumers have enough time to access and compare the quality of domestic
goods with imported goods. On the other hand, in the long term, enterprises have time to
gather enough resources to increase production volumes. Currently, output begins to
expand, the quantity effect is superior to the price effect, causing the trade balance to
improve.
Devaluation is not always harmful, in fact it also has good effects for the economy
such as: increasing exports, reducing imports; increase capital imports, reduce capital
exports; increase imports of services (tourism), reduce exports of services (tourism) and
thus increase the supply of foreign currency, maintaining exchange rate stability in the
long term. However, this devaluation will put some other countries at a disadvantage
because the price of the devaluation country's goods can be relatively cheap in the
international market, to the detriment of competitors. This leads other countries to
depreciate their currencies to relieve pressure and maintain competitiveness in
international markets. And this is the beginning of a currency war.
Form 1. The trade deficit between China and the US in 2015.

In China, for example, in the past, a kilogram of rice in China cost 10 yuan, and $1
= 20 yuan. Thus, 1 USD will buy 2kg of rice in China. Because of the economic
downturn, China devalued its currency, 1 USD = 40 yuan. Thus, now with the amount of
1 USD, we can buy 4kg of Chinese rice. This shows that China's domestic rice prices
have not changed. But in overseas markets, Chinese goods will be cheaper before
currency depreciation. Thanks to the price advantage, Chinese goods will be boosted for
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export to other markets. When export demand is large, China will solve production and
employment problems. Thereby solving the problem of declining GDP. In fact, China has
thrown its burden on countries that have no price advantage. Suppose that in the United
States, if Chinese goods are cheaper than domestic, people will start to prefer Chinese
goods. This puts production pressure on domestic enterprises. To increase
competitiveness, countries are forced to depreciate their currencies as well. This leads to
a currency war ensuing.
3.2.3. Currency wars occur due to high unemployment in a country.

Unemployment in economics is a condition in which workers want to get a job but
cannot find a job or are not employed by organizations, companies and communities. The
unemployment rate is the percentage of unemployed workers out of society's total labor
force. High unemployment will negatively affect economic growth and easily push
countries to the brink of inflation, affecting the income and living standards of workers
and adversely affecting social order, even causing political upheaval.
Therefore, a country with high unemployment will have to have appropriate

policies and solutions to solve this problem, and one of the solutions that countries can
apply to reduce unemployment is currency devaluation. Monetary devaluation policies
affect the increase in the supply of foreign currency, helping to expand the size of the
economy. Through currency devaluation, i.e. a decrease in the exchange rate, one
country's exports will be cheaper than another's domestic goods. Businesses will benefit
from this policy because the supply of foreign currency increases, production and exports
are boosted, businesses will need more workers for the production process, thereby
creating more jobs for people, unemployment is reduced.
Although currency devaluation has a certain positive effect when it comes to

solving high unemployment in a country, this policy will directly affect the
competitiveness of the countries involved in the international arena when commodity
prices are significantly changed. At that time, countries directly or indirectly affected by
this policy will not sit idly by and take "retaliatory" moves to minimize the negative
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impact of the currency devaluation policy. So, in addition to the engine of export growth,
high unemployment in a country is also a starting point for a currency war.
3.2.4. Currency wars occur due to a country's policy of hoarding foreign

currency.
State foreign exchange reserves, often referred to as foreign exchange reserves or
foreign currency reserves, are the amount of foreign currency held by a central bank or
monetary authority of a country or territory. This is a type of State property that is stored
in the form of foreign currency (usually hard currencies such as US Dollar, Euro,
Japanese Yen, etc.) for the purpose of international payments or to support the value of
the national currency. Foreign exchange reserves are an important foundation to help
stabilize a country's macroeconomy, the increase in foreign exchange reserves helps the
SBV have more room and suitable solutions in managing monetary policy, facilitating
flexible management and exchange rate stability, improve the value of copper coins...
Every country has specific policies to maintain and strengthen foreign exchange reserves
as it serves as an armor to protect the national economy from the negative effects of
possible financial crises in the future, and currency devaluation is one of the policies that
can be applied. However, currency devaluation is not an optimal measure to increase
foreign exchange reserves. For many countries with artificially weak or strong currency
rates, deciding whether to devalue their currencies is not a pleasant choice. Protecting
exchange rate pegs makes these countries' already meager foreign exchange reserves
increasingly depleted, while hindering economic growth by making export prices more
expensive. But currency devaluation fuels inflation by causing import prices of goods to
escalate, while raising the cost of paying off foreign currency debts. For some countries
in debt crisis, currency devaluation is also a "force majeure" option in exchange for
support from the International Monetary Fund (IMF).
Take, for example, Ukraine, whose economy is exhausted by the conflict with
Russia, during February to June 2022, had to increase its monthly intervention in
currency markets from $300 million to $4 billion. When foreign exchange reserves ran
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out, the government in Kiev allowed the local currency Hryvnia to slide nearly 25%
against the dollar in July. Between December last year and January this year, Ukraine's
central bank spent more than $3 billion a month defending its peg, leading to speculation
that the country would have to devalue its currency again sooner or later. Viktor Szabo of
Abrdn Investment Management said that "devaluation is not the best policy for Ukraine
at the moment but will only bring more inflation and increase the suffering of the
people."
As analyzed above, the long-term currency devaluation policy will boost exports,
thereby earning more foreign currency to contribute to the country's foreign exchange
reserves. Therefore, without discussing the degree of effectiveness that currency
devaluation policies can bring to the strengthening of foreign exchange reserves, we can
conclude that the will of countries, especially countries with weak currency exchange
rates, to increase their foreign currency reserves is also a reason for the decision to
devalue. Thus leading to a currency war.
3.3. Action.
3.3.1. The impact of currency wars on the initiating country and the
countries involved.
For warring parties, currency wars cause financial collapse: The impact of
currency wars is reflected in the increase in import prices, so domestic prices often
increase after currency devaluation is carried out. This effect will be greater if imports
account for a large proportion of domestic consumption and if exporters set domestic
prices as high as those exported to foreign countries. The increase in domestic prices will
affect the price-wage relationship. If wages are adjusted for the level of inflation, then in
this case wages will increase. Thus, it will lead to escalating inflation that adversely
affects savings, investment, economic development, income distribution and political
stability.
Governments will also disrupt trade, creating political extremes: The value of
money can wing or destroy a country's economy. If it is too high, it will make the
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country's exports uncompetitive. If it is too low, it will make imports too expensive and
spark high inflation rates. At a certain point, the value of a country's currency is at a
stable level, but overnight when another country depreciates its currency, it will suddenly
become too high for the original country's currency, thereby pressuring domestic goods.
Faced with that situation, governments are caught in a spiral of retaliation when
simultaneously devaluing their currencies deliberately if they do not want to be grasped
by rivals. That gives national governments a headache to solve many other problems
arising from currency devaluation. At the same time, sudden fluctuations in currency
value often create panic in currency markets, place additional burdens on warring
governments, and negatively impact countries not directly involved in the war.
3.3.2. The impact of currency wars on the world economy.

Currency wars also cause great damage to international trade and trade of the
whole world.
The most serious consequence: the most dangerous consequence that can occur in
a currency war is that it will stall economic growth and tip the global economy into
recession. China's growth has been decelerating in recent years, while U.S. growth has
shown signs of slowing. If the yuan continues to weaken, this could hurt European
manufacturers competing with Chinese products, leading to stagnant economic growth.
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CHAPTER 4. HISTORY OF CURRENCY WARS

4.1. First Currency War (1921-1936)
4.1.1. Premise
Currency wars are like most wars in that they have no obvious antecedents or
causes. The three most important premises of the First Currency War were the Gold
Standard from 1870 to 1914, the formation of the Federal Reserve System in 1907 to
1913, World War I and the Treaty of Versailles in 1914 to 1919. A brief summary of
these three stages will help readers understand the economic conflicts that ensued.
4.1.2. Gold Standard (1870 – 1914)

Britain established a gold-backed paper currency at a fixed exchange rate in 1717,
which lasted in various forms (except for some hiatus due to war) until 1931. Similar
monetary mechanisms can all be called the "Gold Standard", although the concept does
not have a uniform definition. The Gold Standard system can take many forms, from the
use of real gold coins to gold-backed notes in varying amounts.
The classical gold standard for 1870-1914 has a unique place in the history of gold
as currency. This was a period of almost no inflation; or only positive deflation in
countries with developed economies; The result of technological innovations increases
productivity and living standards without increasing unemployment.
The first Gold Standard was not conceived at international conferences as in the
twentieth century, nor was it imposed from the top down by multilateral organizations.
The gold standard in the old days seemed like a club voluntarily joined by nations. Once
joined, member states behave according to generally understood, though not documented,
rules. Not all, but many countries participate in this system, and they all liberalize the
capital account, market forces prevail, government intervention is minimal, exchange
rates are stable.
Some countries adopted the Gold Standard long before 1870, such as the United
Kingdom from 1717 and the Netherlands from 1818, but it was not until after 1870 that
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many countries adopted the same system, from which the "Gold Standard" formed its
own characteristics. New members included Germany and Japan in 1871, France and
Spain in 1876, Austria in 1879, Argentina in 1881, Russia in 1893 and India in 1898. In
fact, the United States has followed the Gold Standard since 1832, when it began minting
1-ounce gold coins with a $20 conversion value at the time; however, the United States
did not officially adopt the Gold Standard in paper money conversion until the Gold
Standard Act in 1900. Therefore, it can be considered that the United States is the last
major country to join the classical gold standard.
Within the countries that adopted the Gold Standard in the last three decades of the
nineteenth century, irregular capital flows were rare, exchange rate interventions were
rare, international trade grew at a record, there were almost no balance-of-payments
problems, etc Capital, means of production and workers move easily, inflation is low,
long-term prospects in industrial production and income growth are positive,
unemployment remains relatively low.
An important part of the appeal of the Gold Standard is its simplicity. In this
system there is not necessarily a central bank (although the central bank can perform
certain functions), and in fact even the United States did not have a central bank during
the Gold Standard. When participating in a "gold standard club", a country simply
declares that its paper currency is worth a certain amount of gold, and that it is willing to
buy or sell gold at that price in exchange for issued paper money, in any number from
other member states. For international finance, the benefit of this system lies in the fact
that when the value of two currencies is pegged to a certain volume of gold, the exchange
rate between those two currencies is also "pegged" to each other.
During the Classical Gold Standard, the world benefited from the stability of
currencies and prices, without the need for mutual supervision or central bank planning.
Despite government intervention, this intervention is carried out in a transparent and
16
stabilizing manner rather than manipulating the market. An additional benefit of the Gold
Standard is its self-return to equilibrium, not only in terms of day-to-day open market
operations, but even when larger events such as changes in mining output and gold
production are considered. If the supply of gold grows faster than society's productivity,
the level of commodity prices will temporarily increase. However, this will lead to
increased costs for gold producers, which in turn reduces gold production and ultimately
re-establishes price stability in the long run. Conversely, if economic productivity
increases rapidly due to new technology, commodity prices will fall temporarily,
meaning that the purchasing power of the currency increases. This causes gold holders to
sell gold, gold producers to extract more, eventually the supply of gold increases and
returns to price stability. In both cases, temporary shocks in the supply and demand of
gold lead to changes in the behavior of market participants, which will re-establish long-
term price stability.
However, this self-balancing process operates without central bank intervention.

Facilitating that process are arbitrage traders, buying "cheap" gold in one country and
selling "expensive" gold in another (after taking into account factors such as exchange
rates, the time value of the currency, transportation costs, and gold refining costs).
Moreover, not all claims are immediately paid in physical gold. Most international trade
transactions are financed by commercial papers and letter credits, which pay for
themselves when buyers receive goods and sell goods for cash without any physical gold
transfers.
The classical gold standard embodies the era of prosperity before World War I
(1914-1918). Attempts to repurpose prewar gold prices were marred by mountains of
debt and policy mistakes that turned the Gold Exchange Standard system of the 1920s
into a deflation and depression machine. Since 1914, the world has lost sight of the pure
gold standard in international finance.
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4.1.3. The Formation of the Federal Reserve System (1907-1913)

The second premise of the currency war was the formation of the Federal Reserve
System in the United States in 1913. This panic began when several banks in New York
(including one of the largest, the Knickerbocker Trust) made unsuccessful attempts to
manipulate the copper market. When news of the Knickerbocker's involvement in the
aforementioned scheme broke, a rush to the bank to withdraw money occurred. The
failure of the Knickerbocker Trust was just the beginning of a splash of widespread
mistrust, leading to another stock market crash, multiple bank withdrawals, and finally a
full-blown liquidity crisis, threatening the stability of the entire financial system.
The aftermath of the famous chaos of 1907 was that the private banks involved in
the rescue agreed that the United States needed a government-established central bank
capable of issuing money or equivalent financial instruments to rescue the private
banking system when required. Banks need a government-funded institution that can lend
them an unlimited amount of cash with various types of collateral. The United States
needs a central bank that acts as an unlimited lender of last resort to private banks to deal
with future crises.
The political objections to the two national banks were due to a loss of confidence
in centralized financial power, as well as a belief that the issuance of paper money would
create asset bubbles, leading to inflation made easier by bank credit. From 1836 to 1913,
nearly 8 decades of unprecedented prosperity passed with economic innovation and
growth, America had no central bank. Understanding that the public still did not trust the
institution, supporters of the idea, led by J. P. Morgan, John D. Rockefeller, Jr., and Jacob
H. Schiff (from Kuhn, Loeb & Company) understood that a campaign needed to mobilize
and educate the masses to gain the necessary support. The group's political sponsor was
Republican Senator Nelson W. Aldrich of Rhode Island, chairman of the Senate Finance
Committee, and a supporter of the 1908 bill to establish the National Monetary
Commission. Over the course of several years, the committee hosted numerous studies,
sponsored events, speeches, and affiliated with prestigious professional associations of
18
economists and political scientists, all with the goal of promoting the idea of establishing
a powerful central bank. In 1910, Aldrich presided over a meeting attended by several
representatives of Wall Street bankers, and Abram Piatt Andrew, who had just been
appointed Deputy Secretary of the Treasury. The group worked for a week to draft
Aldrich's bill, which would be the first draft of the Federal Reserve System.
It took another three years to pass the Federal Reserve Act, which is the official
name of the Aldrich bill, the result of the Jekyll Island plan. This act was passed with an
overwhelming majority in the National Assembly on December 23, 1913, officially
taking effect in November 1914. The Federal Reserve Act of 1913 encompassed many of
the ideas initiated by Aldrich and Warburg to counter opposition to the central banking
model in the United States. This new institution will not bear the name of the central
bank, but will be called the Federal Reserve System. It is also not an individual
institution, but rather a collection of regional reserve banks, governed by a Federal
Reserve Board, whose members are nominated by the President and approved by the
National Assembly, rather than elected by the banks.
Monetary policy (conducted through open market operations) will be most

influenced by the Federal Reserve Bank of New York, as the Fed deals primarily with
major banks and financial institutions in New York. The Federal Reserve Bank of New
York is governed by a board of directors and governors elected by shareholders, not
politicians, who are controlled by major banks in New York. As a result, there appears to
be an "Fed inside the Fed" dominated by New York banks and sticking to their goals,
including granting easy credit to rescue packages when needed.
4.1.4. World War I and the Treaty of Versailles (1914–1919)

The final premise of the First Currency War was the continuation of World War I,
the Paris Peace Conference and the Treaty of Versailles.
World War I ended not with a surrender by either side, but with an armistice, or
ceasefire. In an armistice, it is expected that the parties can pause hostilities and sit at the
19
peace bargaining table. Negotiating a lasting peace was the goal of the Paris Peace
Conference of 1919. Britain and France understood that it was time to calculate the costs
of the war, and they saw the Paris peace as a good opportunity to impose those costs on
defeated countries such as Germany and Austria.
The size and content of Germany's war reparations were among the biggest
headaches at that year's Paris Peace Conference. First, Germany was forced to cede some
territories and their industrial potential. On the other hand, the greater the concessions,
the less likely Germany would be to pay the financial reparations it was also forced to
pay. France looks at the German gold stockpile, which had reached 876 tons in 1915, the
fourth largest in the world after the United States, Russia and France.
While one was merely concerned with how much reparations the Germans could
afford to pay the Allies, the reality is that the big picture is much more complicated, with
both the victors and losers of World War I in debt. As author Margaret MacMillan wrote
in Paris 1919, both Britain and France lent Russia large sums of money, which Russia
failed to repay after the October Revolution. Other debtors such as Italy are also
insolvent. But Britain owes the United States $4.7 billion, France $4 billion and Britain
$3 billion. In general, no debtor is able to repay their debts, and the entire credit and trade
system is frozen.
Thus, the problem was not only German reimbursement of Allied expenses, but
also a messy network of mutual loans owed to each other within the Allies. What needs
to be done now is to get credit flowing and trade again. The best solution would be to ask
the country with the strongest financial resources — the United States — to start the
process with new loans and guarantees, in addition to previous ones. This new flow of
liquidity, along with free-trade zones, will help spur the growth needed to combat the
debt burden. Another method proposed by many parties is to write off all debts to "start
over". However, in reality, none of these solutions have occurred. The strong powers, led
by Britain and France, demanded that weak countries (mainly Germany) pay their war
costs in cash, gold and kind.
20
Calculating compensation as well as the mechanism for paying those amounts is

almost an impossible task. France, Belgium and Britain wanted to calculate based on
actual war losses, but the United States favored the ability of the vanquished to pay.
However, the statistics on the German economy are very dire and opaque, so it is difficult
to obtain reliable calculations of their ability to repay their debts. Conversely, the
assessment of damages (as suggested by France, Belgium and the United Kingdom) is
also difficult to complete in the short term. Even within the Allies there were fierce
debates, no less than those with Germany, about whether war reparations should be
limited to actual losses (which were supported by France and Belgium) or to include
financial costs such as pensions and soldiers' salaries. In the end, the Treaty of Versailles
gave no exact figure for war reparations. This is the result of not being able to calculate a
number (technical factor) nor being able to agree on that number (political factor). Any
number high enough for France and England to please was too high for the Germans and
vice versa. Instead of agreeing on a specific amount of war compensation, expert panels
were set up to continue studying the issue and publish conclusions in the following years
as a basis for the actual amount of compensation. This practice lasted a while, but the
problem was actually delayed, then further messed up in the 1920s with the Gold
Standard and efforts to restart the international monetary system.
4.1.5. Conclusion
World War I and the Treaty of Versailles introduced a new element that had never
been a major problem in the Gold Standard: enormous, mutually overlapping and
insolvent national debts that posed enormous obstacles to the normalization of capital
flows. The formation of the Federal Reserve System and the role of the Federal Reserve
Bank of New York signaled the emergence of the United States on the international
monetary stage as a powerful partner. The potential for the Fed to regenerate system-wide
liquidity by printing more local currencies (U.S. dollars) has begun to emerge. In the
early 1920s, expectations for the Gold Standard, tensions with unpaid war reparations,
21
and concerns about the Fed's ability led to the creation of a new international monetary
system and the course of the First Currency War.
4.2. Cause
In 1919, the Treaty of Versailles formally ended World War I (1914–1918) signed
between Germany and the Allied nations. The Peace Treaty was drafted by Georges
Clemenceau, Prime Minister of France, along with the United States and Great Britain,
the three victors.
After several bloody battles from 1914 until mid-1918, the French army was
broke. However, thanks to the support of British and U.S. troops, France continued its
war effort. Finally, when Germany's situation became chaotic, France celebrated its
victory and wished for a peace conference to completely eliminate the threat and obtain
war reparations.
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This peace treaty imposed strict terms on defeated Germany. The peace treaty
stipulated that Germany must return to France Alsace-Lorraine, a piece of land to
Belgium, a similar piece in Schleswig to Denmark – depending on the result of a
referendum – that Chancellor Otto von Bismarck had taken in the previous century after
defeating Denmark in the Second Schleswig War. The peace treaty returned some lands
to Poland, some depending on the result of the referendum, which Germany had taken
from the partitions of Poland. The heaviest clause was the invisible Treaty of Versailles
to disarm Germany with the purpose, at least for a time, of halt Germany's path to
hegemony in Europe. The peace treaty limited Germany to a maximum of 100,000

volunteers, which meant no conscription, and banned the possession of aircraft and tanks.
The General Staff must be abolished. The Navy was reduced to a symbolic force,
prohibited from building submarines or ships of more than 10,000 tons. In addition, the
treaty stipulated the amount of reparations that Germany had to pay to the victors,
including several amounts, the first of which included $5 billion to be paid during 1919–
1921 (which could deliver several kinds of items – coal, ships, timber, cows, etc. in lieu
of compensation).
Form 2. Children in Germany play with piles of money like lego puzzles.
23
Germany acted first in 1921 with a bout of hyperinflation initially calculated by

the Reichsbank to increase competitiveness, but eventually prolonged and completely
destroyed an economy weighed down by war reparations. And this was also the
beginning of the First Currency War (1921-1936). In the face of the chaotic situation of
the German economy in particular and European countries at that time, other countries
also in turn "retaliated", specifically the time of devaluation of the local currency of
France was in 1925, the UK (1931), the US (1933) ,...
It can be concluded that the direct cause of the First Currency War originated in
Germany when the Central Bank of the country printed money massively, creating a
hyperinflation to enhance competitiveness to improve the economy that was badly
damaged after World War I, which was deeply caused by Germany The losing country
should be forced by the victors, Britain, France and the United States, to sign the Treaty
of Versailles on many terms unfavorable to Germany, forcing it to brace itself to restore
its economy and pay its war debts to the victors. This action prompted countries such as
Britain, France and the United States to take "retaliatory" actions against Germany by
repeatedly devaluing their currencies, and this was also the beginning of the 15-year First
Currency War from 1921.
Form 3. Precursors as mountain-high in a German bank in 1920.
24
4.2.1. Analysis of developments.

The First Currency War broke out in a very special way in 1921 immediately after
the gunfire of World War I, and lasted without a complete end until 1936. This war was
divided into several phases, spanning all 5 continents and even having a great influence
on the twenty-first century today.
Germany acted first in 1921 with a bout of hyperinflation initially aimed at

increasing competitiveness, then prolonging and completely destroying an economy
weighed down by war reparations. In 1925, France continued with the devaluation of the
franc before returning to the Gold Standard, thereby gaining an export advantage over
countries such as Britain and the United States, which returned to the Gold Standard at
pre-war exchange rates. Britain renounced the Gold Standard in 1931, regaining the
advantages lost to France in 1925. Germany was boosted in 1931 when U.S. President
Herbert Hoover announced a postponement of reparations. This forbearance later became
debt cancellation as a result of the Lausanne Conference in 1932. From 1933 and with
Hitler's ascension, Germany increasingly went its own way, withdrawing from the world
trading system and becoming an independent economy, although it still had some links
with Austria and Eastern Europe. This was followed by a devaluation of the currency
against American gold in 1933, regaining some of the competitive advantage in export
costs lost to Britain in 1931. Finally, it was the turn of France and England to devalue
again. In 1936, France abandoned the Gold Standard and became the last major country
to escape the effects of the Great Depression, while Britain devalued its currency again to
regain some of the advantage lost to the United States after President F.D. Roosevelt's
dollar devaluation announcement in 1933.
With successive cycles of currency devaluation and debt insolvency, world

economies are plunged into a race to the bottom, on which trade is stalled and prosperity
is devastated. The destabilizing and self-destructive nature of the international monetary
system during this period made the First Currency War a stark warning to the world
today, when we are also facing mountains of insolvent debt.
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The currency war began in 1921 when the German central bank (Reichsbank)
began destroying the value of the German Mark by massively printing money, leading to
galloping inflation. This process was led by the then head of the Reichsbank, Dr. Rudolf
von Haven Stein (who was a former lawyer turned banker), and inflation occurred mainly
when the Reichsbank bought German government bonds to provide money for the
government to cover the budget deficit and continue spending. This is the largest and
hardest hit currency devaluation in a developed economy.
When inflation began to rise in late 1921, this was not considered a risk at all.
Germans understand that prices are rising, but do not immediately speculate that their
currency is collapsing. German banks have liabilities almost as much as their assets, so
are mostly "insured." Many businesses own illiquid assets such as land, plants, equipment
and inventory, with nominal values increasing as currencies depreciate, so they are also
protected. Some of these companies have debts that are "evaporating" because the debt
money is now worthless, from which they seem to be debt forgiven and get rich. Many
large German corporations (the forerunners of today's global corporations) had operations
outside Germany, which helped them earn foreign currency and "blinded" the parent
company from the worst effects of the collapse of the mark.
When the local currency depreciates, the usual market reaction is capital flight.
Those who could convert German Mark money into Swiss francs, gold or any other store
of value rushed to do so and moved their savings abroad. Even the German bourgeoisie
did not immediately realize how bad the situation was, since the damage caused by the
depreciating currency was offset by gains on the stock market. Not many people realize
that those gains are valued in marks, a coin that becomes worthless not long after.
Finally, public employees or unions were initially protected because the government
raised their salaries in proportion to inflation. Those hardest hit are middle-class
pensioners who don't qualify for a raise, and people who save at banks instead of
investing in stocks. These people are completely knocked down financially, many have to
26
sell their belongings in order to have money to buy food to live on. Property-related
crime increased, followed by frequent riots and looting.
In 1922, inflation became hyperinflationary when the German central bank

capitulated and frantically printed more money to meet the demands of paying civil
servants and union workers. A dollar became so expensive that American tourists
couldn't spend it because German shopkeepers couldn't arrange enough millions of
German Marks to rot money for customers. The demand for paper money was so great
that the central bank had to hire many private printers and use many special logistics
units to find enough paper and ink for the continuous printing of money.
At the height of economic turmoil, France and Belgium invaded the industrial
region of the Ruhr Valley in 1923 to ensure that the benefits of their war reparations
claims were maintained. This invasion allowed the two countries to reap a war in kind,
namely coal and German manufactured goods. German workers in this area responded by
going on strike, going on strike, sabotaging production. Germany's central bank agrees
and encourages this response by printing more money to raise wages and unemployment
benefits.
Germany finally struggled to combat galloping inflation in November 1923 by

introducing a new currency called the Rentenmark, which initially circulated alongside
the old mark. The Rentenmark is secured by mortgages on real estate as well as the
ability to collect taxes on those properties. Very soon after the Rentenmark was launched,
the old Mark completely collapsed, at which point 1 Rentenmark was exchanged for 1
trillion Marks. The Rentenmark itself was only a temporary solution, later replaced by the
new German mark, which was directly backed by gold. By 1924, the old Mark that had
suffered from hyperinflation had been wiped out.
In fact, hyperinflation in Germany also achieved a series of important political

goals, which had repercussions in the 1920s and 1930s that followed. Hyperinflation
united the German people against "foreign speculators", while forcing the French to send
27
troops into the Ruhr valley, creating a pretext for German rearmament. Hyperinflation
has also made Britain and the United States more sympathetic to Germany in easing some
of its strictest demands regarding war reparations under the Treaty of Versailles. While
the collapse of the mark had no direct relation to the value of reparations, Germany had
the opportunity to explain that its economy was being badly damaged, thereby obtaining
some deduction in reparations. The devaluation also strengthened German industry, who
held real assets instead of financial ones.
In the period immediately following the inflation, from 1924 to 1929, German
industrial production grew faster than any major economy, including the United States. In
the past, countries often abandoned the gold standard only during wartime, a good
example being the case of Britain halting the exchange of paper money for gold during
and immediately after the War with Napoleon (1803-1815). Now, Germany has abolished
the Gold Standard in peacetime, although this was only a difficult period of peace after
the Treaty of Versailles. The German central bank has demonstrated that in a modern
economy, currencies that are not tied to gold can be devalued for purely political
purposes, and those goals can be achieved with such devaluation actions. This lesson
must have been remembered by many major industrial nations.
At the same time that inflation in Germany was escalating out of control,
representatives of the major industrial nations met at the Genoa Conference in the spring
of 1922 to consider the possibility of a return to the Gold Standard for the first time since
before World War I. Before 1914, most major economies adopt a true Gold Standard.
However, that Gold Standard was forgotten with the outbreak of the war, along with the
need to print money to finance war expenses. Now in 1922, with the Treaty of Versailles
and the definite (though unclear) war reparations, the world is again looking for an
anchor of the Gold Standard. It was from the Genoa Conference that a new gold
exchange standard was formed, with more important, flexible, controlled differences by
central banks themselves than the classical gold standard.
28
Despite a return to the adjusted Gold Standard, currency wars continued and
intensified. In 1923, the French franc collapsed, though not as badly as the German Mark
a few years earlier. Serious flaws in the Gold Exchange Standard system began to appear
from the moment it was introduced. The most obvious is the instability caused by surplus
countries holding too many foreign currency reserves, followed by unpredicted demand
for gold from deficit countries. In addition, Germany — potentially Europe's largest
economy — lacks the gold to support the sufficient money supply for international trade
it needs for economic regrowth.
An attempt was made to correct this defect in 1924 with the Dawes Plan, where
German reparations were partially reduced, and the country received a number of new
loans so that it could acquire the gold and hard currency reserves needed to support the
German economy. The combination of the Genoese Conference of 1922, the new and
stable currency (the Rentenmark of 1923) and the Dawes Plan of 1924 finally stabilized
German finances, enabling the country to develop both industrially and agriculturally
without incurring inflation.
The Gold Exchange Standard system is self-balancing, with a fatal weakness. In

the pure gold standard, the supply of gold is the basis for issuing money, carrying out
economic growth or contraction, while in the gold exchange standard, foreign currency
reserves also play a similar role. This means that central banks can make interest rate and
monetary policy decisions regarding foreign currency reserves as part of the adjustment
process. It was in the adjustments caused by this policy, rather than the operation of gold,
that this system eventually collapsed.
In addition, the Fed's decision to raise interest rates in 1928 (instead of reduce)
stemmed from internal calculations, especially the fear of asset bubbles in US stock
prices, which quickly ruined the smooth running of the system. The treatment of the
postwar banknote-to-gold ratio to pre-war gold prices posed post-1919 dilemmas. The
first solution was to shrink the supply of paper money to reach the low price of gold as
before the war. This option is heavily deflationary, and a general sharp decline is needed
29
to return to pre-war gold prices. The other option is to reprice gold in an upward direction
to match the new price, corresponding to the previously increased money supply. Rising
gold prices mean constant currency devaluation. As such, the choice here is between
deflation and currency devaluation.
By 1923, both France and Germany were facing the problem of wartime inflation
and devaluation of their currencies. Of the three European powers, only Britain took the
necessary steps to shrink the money supply in order to restore the gold standard to pre-
war levels. This was done at the insistence of Winston Churchill, then Minister of
Finance. However, this had a devastating effect on the UK economy: overall prices fell
by about 50%, business failure rates were high, millions of people were unemployed.
The 1920s were a prosperous time in the United States, and the French and
German economies thrived through the middle of the decade. Instead, global finance soon
went awry. Economists typically calculate the start of the Great Depression as Black
Monday, October 28, 1929, when the Dow Jones Industrial Average fell 12.8% in just
one day. In fact, however, Germany had been in recession for the previous year, and
Britain had never recovered from the depression of 1920–1921. Black Monday only
marked the bursting of the asset bubble in mighty America.
The years immediately following the stock market crash of 1929 were truly
catastrophic, in terms of unemployment, decline in production, business failures and
human suffering. The financial panic of 1931 was equivalent to a global rush of bank
withdrawals, which began in May with the announcement of losses amounting to the loss
of the entire equity of Credit Anstalt (Vienna, Austria). In the weeks that followed, a
wave of banking chaos spilled over Europe, and bank holidays were declared in Austria,
Germany, Poland, Czechoslovakia and Yugoslavia. Germany temporarily suspended
foreign debt payments and imposed capital controls. Chaos soon spread to Britain, and by
July 1931 a massive withdrawal of gold had taken place. When too much gold flowed out
and with the threat of the collapse of the major banks in London, Britain abandoned the
Gold Standard on September 21, 1931. Immediately, the value of the pound fell
30
dramatically against the US dollar, to a drop of about 30% in just a few months. Many
other countries, such as Japan, the Nordic countries and the Commonwealth countries,
also left the Gold Standard and benefited short-term from the devaluation of their
currencies. These gains hurt the French franc and the currencies of countries that still
maintain the Gold Exchange Standard such as Belgium, Luxembourg and the
Netherlands.
1932 was the worst year of the Great Depression in America. The unemployment
rate is up to 20%; Investment, manufacturing, and prices are all collapsing at double-digit
levels compared to the beginning of the recession. In November 1932, Franklin D.
Roosevelt was elected president of the United States to replace Herbert Hoover, whose
last presidency was completely overwhelmed by the stock market bubble, then the
bursting of the bubble and then the Great Depression. However, it was not until March
1933 that Roosevelt was officially sworn in, and during the 4-month period between the
end of the election and the new President being sworn in, the situation continued to
deteriorate with bank collapses, and rushes to banks to withdraw people's money.
Millions of Americans take cash home from banks and put it in cupboards or under
carpets, and laggards can lose all their savings. When the new president took office,
Americans had lost almost all faith in existing institutions.
On March 6, 1933, just two days after taking office, Roosevelt used his emergency
authority to declare a nationwide bank closure (or "bank holiday") — a confidence-
building act. Initially, the order lasted until March 9, after which it was extended
indefinitely. Next, the enactment of the Banking Emergency Law of March 9, 1933 was
more important than examining banks in an attempt to regain trust in the banking system.
The act allows the Fed to lend to banks up to 100 percent of the face value of any
government-issued securities, and 90 percent of the face value of any short-term checks
or vouchers held by banks. When banks reopened on March 13, 1933, depositors lined up
in front of the gates again, but not to withdraw money. Although little has changed in
banks' balance sheets, the announcement of a closed several days to check the books as
31
well as the Fed's right to lend money to banks to pay people has restored confidence in
the bank. Having solved the problem of withdrawing money at banks, the United States
faces another more headache - deflation of imports into the United States from all over
the world through the exchange rate route.
When Britain and other countries abandoned the Gold Standard in 1931, their
export costs immediately fell relative to their competitors. This means that these
competitors must find ways to reduce costs in order to maintain the competitiveness of
their goods in international markets. The United States could have chosen to devalue the
dollar against the pound sterling and other currencies, but doing so would lead to future
retaliatory devaluation of the dollar, with no one benefiting as a result. If gold leaves
private owners, and if people expect more paper money devaluations, they will be more
inclined to spend paper money instead of holding onto an increasingly depreciating asset.
Thus, in this context, President Roosevelt issued Executive Order 6102 on April 5, 1933
forcing the American people to surrender their gold to the government and exchange
paper money at a price of $20.67 per ounce. Banning the hoarding and possession of gold
is an integral part of the plan to devalue the dollar against gold and encourage people to
spend more.
After a series of swift moves, the US president confiscated private gold, banned
gold exports and regulated the gold mining industry. As a result, the government's gold
reserves increased. According to the statistics of the time, the people surrendered more
than 500 tons of gold to the Treasury in 1933. The government gold depot at Fort Knox
was created in 1937 to store the gold deposited by the people, simply because the
Treasury warehouse was running out of space. As a final blow, Congress passed the Gold
Reserve Act of 1934, approving a new gold price at $35 an ounce and nullifying all gold
clauses in contracts. Finally, the Gold Reserve Act of 1934 also established an exchange
stabilization fund under the Treasury, financed by profits from gold expropriation, which
the Treasury could use at its discretion to intervene in currency market exchange rates
and other open-market operations.
32
The British break with gold in 1931 and the devaluation of gold by the Americans
in 1933 had the expected effects. Both the British and American economies showed
immediate benefits from their devaluation : prices stopped falling, the money supply
increased, credit expansion began, industrial production rose and unemployment fell. The
Great Recession was far from over, however, another path was opened, at least for those
countries that had devalued their currencies against gold and against the currencies of
others.
At that time, the Gold Standard, which had benefited from the first wave of
devaluation in the 1920s, began to get caught up in the deflation that the United States
and Britain had deflected. This eventually led to a Tripartie Agreement in 1936. It is an
informal treaty signed between Britain, the United States and France, which comes into
force between the parties and on behalf of the bloc of nations under the Gold Standard
system. At the heart of the treaty was that France was allowed to dump to a negligible
extent. Regarding the devaluation of this French currency, the US stated "The US
Government ... The goal statement continues to use the appropriate resources available to
avoid... Any disturbance in the fundamentals of international exchange could stem from
the proposed readjustment," signaling that the currency war is coming to an end.
4.2.2. Consequence.
The First Currency War is considered one of the worst recessions in world history
– the Great Depression. This war continued until the end of World War 2. Unemployment
soared and industrial production collapsed, creating periods of very weak to negative
growth. Unemployment is up to 25% - 30% in industrialized countries; production in
industrialized countries dropped to negative 15% - 20%; in the U.S. 11,000/25,000 banks
fail; within 2 months the value of 50 major stock markets decreased by 1/2; leading to a
decline in consumption... leading to socio-political turmoil: Governments of developed
capitalist countries such as the US, UK, France, Germany, Japan... were in disarray (in
the United States, during that recession, Democrats won majorities in both the Senate and
House of Representatives, the Democratic president replaced the Republican president),
33
especially the Nazis and Japanese militarists came to power, plunging the world into
World War II. For the warring parties, the currency war also causes the collapse of
financial systems, governments also disturb, disrupting trade, creating extreme political
trends. In addition, major economies around the world race into the abyss, causing trade
disruptions, declining output and creating poverty. That precarious situation adds fuel to
the fire for extreme political trends with consequences that couldn't be clearer.
The Bretton Woods Conference, 730 delegates from 44 countries met in Bretton
Woods, New Hampshire, in 1944, which is considered an important milestone in the
establishment of the world's new monetary and financial system, which agreed fixed
exchange rates for major currencies and allowed central banks to intervene in the
currency market. avoid the risk of a recurrence of the economic crisis. The countries
agreed to create a financial system known as Bretton Woods — including the
International Monetary Fund, the World Bank, and a fixed exchange rate system built
around the dollar pegged to gold.
Since at that time the United States accounted for more than half of the world's
production potential and held almost all of the world's gold, the leaders decided to peg
world currencies to the dollar at a gold exchange of $35 per ounce and until its collapse
in 1971, It has helped prevent a recurrence of the devaluation strategy. The dollar has
since become the major international currency, and countries have adopted pegging their
currencies to the dollar.
4.3. Second Currency War (1967–1987)

4.3.1. Cause.
As World War II drew to a close, the Allied economic powers planned to build a
new world monetary and financial system. In 1944, at the Bretton Woods conference,
countries met and agreed on the norms, institutions, and laws that would guide the global
monetary system for nearly thirty years. Despite the persistence of the Bretton Woods
system until the 70s of the twentieth century, the seeds of the Second Currency War were
sown around the mid-end end of the 60s. It can be said that the beginning of this currency
34
war dates back to 1967, while its harbinger stems from the landslide election victory of
Lyndon B. Johnson and his "gun and butter" statement. The gun symbolizes the war in
Vietnam and the butter symbolizes the Great Society social programs, including the fight
against poverty. This policy has weighed on the US economy, resulting in rapid inflation
and a severe dollar depreciation.
In 1967, the Second Currency War broke out with Britain as the starting country.
The pound was sharply devalued, as the amount of money issued at that time was up to 4
times the UK's gold reserves, meaning that if the holder of the pound demanded to
exchange it for gold, the British treasury would be empty. Faced with soaring inflation,
France also decided to withdraw from the exchange rate stabilization agreement with the
UK and the US. The move puts the U.S. under enormous pressure.
4.3.2. Analysis of developments.

Although the United States has maintained a military force in Vietnam since 1950,
the first large-scale deployment of combat troops took place in 1965, escalating the cost
of the war. The Democratic Party's landslide victory in the 1964 election resulted in a
new Congress being convened in January 1965, and Johnson's State of the Union Address
made it clear that the month marked the launch of the Great Society program on a full-
scale scale.
The combination of costs for the escalation of the war in Vietnam and for the
Great Society program in early 1965 marked a real turning point for successful U.S.
postwar economic policies. However, it took several years for Americans to clearly see
the costs in terms of those costs. Before that, the United States had built up a reserve of
domestic economic strength and political goodwill internationally, and now that hoard is
beginning to gradually dry up.
At first, it seemed that the United States could afford both "guns and butter". The
Kennedy-era tax cuts, signed by President Johnson, brought prosperity to the economy.
GDP grew by 5 percent in the first year of tax cuts, and growth averaged over 4.8 percent
35
a year during the Kennedy-Johnson era. But almost from the start, inflation rose rapidly
as both the budget and trade ran deficits, stemming from Johnson's policies. Year-on-year
inflation almost doubled from an acceptable 1.9% in 1965 to a worrying 3.5% in 1966.
After that, inflation was like a horse for 20 years. It wasn't until 1986 that the inflation
rate returned to just over 1%. Over an incredible five-year period from 1977 to 1981,
progressive inflation reached more than 50%, causing the value of the dollar to fall in
half.
The first perception of American citizens is that prices are rising; But what's really
going on is that the currency is collapsing. Higher prices are a symptom rather than a
cause of a currency crash. The arc of the Second Currency War was actually the arc of
inflation of the US dollar and its depreciation.
While U.S. policies and inflation were at the heart of the Second Currency War,
the shots were fired not in the U.S. but in Britain, where the sterling crisis had simmered
since 1964 and simmered in 1967 with the first official currency devaluation since
Bretton Woods. While the pound sterling is less important than the U.S. dollar in the
Bretton Woods system, it is still an important trade and reserve currency. In 1945, out of
the total global reserves (the sum of all central banks' foreign currency reserves), sterling
accounted for an even larger proportion than the US dollar. This position gradually
disappeared and by 1965, only 26% of global reserves were in British pounds. Britain's
balance of payments has also gradually weakened since the early 60s, and worsened
around the end of 1964.
The instability of the pound is caused not only by short-term trade imbalances but
also by the global imbalance between the total sterling reserves outside the UK and the
US dollar and gold reserves available in the UK to compensate for that external
imbalance. Around the mid-60s, the amount of British pounds outside the UK was
reported to be four times more than domestic reserves. This situation represents extreme
instability and puts Britain at risk of rushing to withdraw money at banks if holders of the
pound try to exchange pounds for dollars or gold massively.
36
Three more minor sterling crises occurred between 1964 and 1966 but were
eventually resolved. However, the fourth crisis that occurred in mid-1967 officially
announced the death of this currency. A multitude of factors combined fixed its timing,
including the closure of the Suez Canal during the 6-Day War (1967) between Arab
countries and Israel and the expectation that Britain might be required to devalue its
currency in order to join the European Economic Community (EEC). At that time,
inflation was as high in Britain as it was in the United States. In the UK, inflation is
deemed necessary to combat rising unemployment, but its effects on the value of the
currency are negative. After an unsuccessful attempt to fend off the ongoing selling
pressure on the pound, the pound was officially devalued against the US dollar on
November 18, 1967, from $2.80 to $2.40 per pound, i.e. a 14.3% devaluation .
The first serious crack in the Bretton Woods system came after 20 years of success
in maintaining a fixed exchange rate and price stability. U.S. officials have worked hard
to prevent sterling devaluation, fearing that the dollar will be the next currency to come
under pressure. Their fears quickly became reality. The United States experienced the
same problem including the trade deficit and inflation, which knocked the pound down,
however with a significant difference. According to the Bretton Woods system, the value
of the dollar is not tied to the value of another currency, but to the value of gold.
Therefore, devaluation of the dollar means the repricing of gold in dollar terms with an
upward trend. Buying gold is a sensible trade if you expect a dollar devaluation, so
speculators turned their attention to the London gold market.
Since 1961 the United States and other leading economic powers have operated
the London Gold Pool, essentially an open market business for gold pricing, in which
participants combine their gold reserves and dollars to maintain the market price of gold
at the Bretton Woods level of $35 per ounce. The London Gold Pool consists of the
United States, the United Kingdom, Germany, France, Italy, Belgium, the Netherlands
and Switzerland, with the United States contributing up to 50 percent of the reserves and
the other 50 percent divided equally among the other seven countries. The London Gold
37
Pool partly responded to the outbreak of the gold buying chaos in 1960, an event that
temporarily dragged the price of gold in the market up to $40 an ounce. The London
Gold Pool is both a buyer and a seller: they will buy when prices are extremely low and
resell when prices go up to maintain the price of $35 an ounce.
4.3.3. The end of Bretton Woods.

Public aggression against the Bretton Woods system's dominance of the dollar
pegged to gold began even before the devaluation of the pound in 1967. In February
1965, French President Charles de Gaulle gave an inflammatory speech in which he
announced that the dollar had been settled as the top currency in the international
monetary system. He has called for a comeback
of the classical gold standard, which he described as "an undisputed monetary

foundation, one that is not subject to the imprint of any one country. In fact, no one can
imagine a system standard other than gold." In January 1965, France converted $150
million of its reserves into gold and announced plans to convert another $150 million as
soon as possible. Spain followed France's lead and converted $60 million of its reserves.
They turned into gold. Excluding the aforementioned $35 per ounce gold price,
but in June 2011 gold prices, these swaps would be worth about $12.8 billion for France
and $2.6 billion for Spain; then depleted America's gold reserves.
The dollar-for-gold swap comes as U.S. businesses are buying up European

companies and expanding their European operations with overvalued dollars, something
De Gaulle called "appropriation." De Gaulle felt that if the U.S. had to use gold instead of
paper money, this practice of devouring European businesses would have to stop.
However, there was strong opposition to the Pure Gold Standard system in the late 60s,
since, like in the 30s, it entailed devaluing the dollar and other currencies against gold.
The biggest beneficiaries of rising prices are gold-producing countries, such as South
Africa and Russia. These geopolitical reasons caused enthusiasm for a new version of the
classic Gold Standard to wane.
38
Despite harsh criticism from France, the United States has an ally in the London
Gold Pool: Germany. This is important because Germany runs a sustainable trade surplus
and is accumulating gold both from the IMF as part of its activities to support the pound
and through its participation as a regular buyer in the Gold Pool. If Germany suddenly
demanded that its dollar reserves be converted into gold, a dollar crisis worse than the
pound would be inevitable. However, Germany secretly assured the United States that it
would not convert dollars for gold, revealed in a letter from Karl Blessing, chairman of
the Deutsche Bundesbank, to William McChesney Martin, chairman of the Board of
Governors of the Federal Reserve System.
However, Germany was not the only country with the potential to exchange
dollars for gold, and the immediate consequence of the pound devaluation in 1967 was
that the US was forced to sell more than 800 tons of gold at low prices to maintain an
equilibrium between the dollar and gold. In June 1967, just a year after withdrawing from
NATO military control, France also withdrew from the London Gold Pool. Other
members continued to run, but this was a failure: demands for gold from dollar holders
became a plague. By March 1968, the amount of gold flowing out of reserves had
reached 30 tons per hour.
The London Gold Exchange temporarily closed on March 15, 1968 to halt the
bleeding, and remained closed for two weeks, an eerily blind imitation of the American
bank holiday of 1933. A few days after the shutdown, the U.S. Congress rescinded the
gold reserve requirement to back up the dollar. This freed up the U.S. supply of gold that
could be ready to be sold at $35 an ounce when needed. All of this is of no benefit at all.
By the end of March 1968, the London Gold Pool collapsed. After that, the transfer of
gold was considered into a two-layer mechanism: the market price was decided in
London and the international settlement price according to the Bretton Woods system – $
35 per ounce. The result is a "gold window," which indicates the ability of countries to
swap dollars for gold at $35 and sell gold on the open market for $40 or more.
39
This two-layer system creates speculative pressure towards the open market while
the $35 price is only available at central banks. However, U.S. allies have reached a new
informal agreement under which no one can take advantage of the gold window by
buying gold at cheaper official prices. The combination of the collapse of the Gold Pool,
the creation of the two-layer system, and short-term tightening measures by the United
States and Britain helped stabilize the international monetary system in late 1968 and
1969, but the end of the Bretton Woods system seems to be quite clear. If the price of
gold is too low, the problem is not a lack of gold but an excess of paper money in relation
to gold. This excess is reflected by rising inflation in the United States, Britain and
France.
In 1969, the IMF addressed the cause of the "gold shortage" and created a new
form of international reserve asset called Special Drawing Rights (SDRs). SDRs are
entirely created by the IMF from a "vacuum", with no material support whatsoever, but
are allocated to members according to their IMF quotas. SDRs were quickly referred to
as "paper gold" because they were an asset that could be used to balance the balance of
payments deficit, similar to gold or other reserve currencies.
The entire period from 1967 to 1971 is most accurately described as a period of
turmoil and instability in international monetary affairs. The devaluation of the pound in
1967 was in some ways a shock, even if its instability had been diagnosed years earlier
by central bankers. But the following years were marked by a series of devaluations,
revaluations, inflation, SDRs, the collapse of the London Gold Pool, currency swaps,
IMF loans, double-tier gold prices and other situational solutions. At the same time, the
world's leading economies were experiencing internal problems such as student
rebellions, workers' protests, anti-war protests, sexual revolutions, the Prague Spring, the
Cultural Revolution and the continued rise of counterculture problems. All of these
events are embedded in the rapid change of science and technology, the ubiquity of
computers, the fear of a thermonuclear war, and the admiration of putting a man on the
40
Moon. The whole world seems to be standing on a shaky platform at once, which has
probably never been seen since 1938.
Through all of this, however, one thing seems safe. The value of the U.S. dollar
remains the same at 1/35th of an ounce of net gold, and the U.S. seems prepared to
defend this value, despite the ever-increasing supply of dollars and the fact that swaps are
limited to a handful of foreign central banks. The banks showed respect for the princely
agreement not to insist on conversion.
On Sunday, August 15, 1971, President Richard Nixon presented a live TV

announcement on the New Economic Policy, which included immediate wage and price
controls, a 10% tariff on imports, and the closure of the yellow window. From now on,
the dollar will no longer be exchanged for gold at the request of foreign central banks.
This policy was conceived in secret and announced unilaterally, without consulting the
IMF or other key members of the Bretton Woods system. The economic policy itself was
not a shock to America's trading partners—in fact, the devaluation of the dollar against
gold, which the New Deal did—was a long time coming, and pressure on the dollar
skyrocketed in the weeks leading up to the speech. Switzerland exchanged dollars for
more than 40 tons of gold in July 1971. France's dollar-for-gold exchange turned the
country into a gold powerhouse, second only to the United States and Germany, and this
continues today.
What shocked Europe and Japan the most about the New Deal was not the
devaluation of the dollar but the 10 percent tariff on all goods imported into the United
States. The elimination of the Gold Standard did not immediately change the relative
value of currencies—the British pound, French franc, and Japanese yen all had
established rates against the dollar, and the German Mark and Canadian dollars were
floating before Nixon's statement. But what Nixon really wanted for the dollar was to
devalue it immediately against all major currencies, which would then float so that the
dollar could sink into further devaluations in foreign exchange markets. However, this
would take time and negotiations to formalize, and Nixon did not want to wait. His 10%
41
tariff had an immediate economic impact comparable to a 10% devaluation Tariffs are
like a shot to the heads of America's trading partners
In late August, Japan announced that it would float the yen against the dollar.
Unsurprisingly, the yen immediately rose 7% against the dollar. Adding in the 10 percent
tariff, that figure rises to 17 percent when calculating the U.S. dollar-in-dollar cost for
Japanese imports, which is good news for U.S. steel and auto manufacturers. Switzerland
has created "negative interest rates" by charging fees on bank deposits in Swiss francs, in
order to prevent money from flowing in and help prop up the dollar.
There is another issue on which the United States seems willing to show
flexibility, and European countries are also very concerned. Although the United States
announced that it would no longer exchange dollars for gold, it did not change the price
of gold officially; i.e. 1 USD is still considered equivalent to 1/35th of an ounce of gold,
although USD cannot be exchanged for gold on demand. An increase in the price of gold
will equate to a depreciating dollar as well as other currencies that appreciate. This, in a
rather symbolic way, is important to European countries and will be seen by them as
America's defeat in the currency war despite U.S. indifference to the situation. Germany
and France will also benefit because they are hoarding huge amounts of gold, and the
dollar's depreciation against gold means that the value of their gold reserves in dollar
terms will multiply.
In December 1971, the Smithsonian agreement was introduced, requiring the

dollar to depreciate by about 8% against other currencies. The range of fluctuations in the
value of currencies is widened to 2.5% of the fixed exchange rate. Less than two years
later, the United States was in the midst of its worst recession since World War II, with
declining GDP, soaring unemployment, an oil crisis, a collapsing stock market and
rocket-rate inflation. As with the major international monetary conferences of the 20s and
30s, the benefits of the Smithsonian Treaty were short-lived.
42
The pound was devalued again on June 23, 1972, this time in a floating form
instead of following the Smithsonian rate. The pound immediately fell 6% and fell
another 10% by the end of 1972. On June 29, 1972, Germany imposed currency controls
in an attempt to prevent chaotic purchases of the mark. Until July 3, both the Swiss franc
and the Canadian dollar were floating. The devaluation of the pound eventually led to the
disastrous failure of the dollar, as investors sought safety with the German Mark and
Swiss Franc. As a result, the U.S. economy fell into its worst recession since World War
II.
Up to this point, all manner of things like exchange rate bands, floating, etc. and
other tools invented to maintain the surface of the Bretton Woods system have failed.
There is nothing left to solve this problem except to put all major currencies into a
floating exchange rate system. Finally, in 1973, the IMF announced the end of the
Bretton Woods system, officially ending gold's role in international finance and allowing
the value of currencies to fluctuate relative to each other at whatever level governments
or markets desired. One monetary era ended and another began.
The era of floating exchange rates, which began in 1973, combined with the end of
the link between the U.S. dollar and gold put a temporary end to the tragedies of
devaluation that had dominated international currency affairs since the 20s. There will no
longer be scenes of central bankers and finance ministers suffering about breaking rates
or abandoning the Gold Standard. Now, markets bring currency prices up or down every
day as they see fit. Governments also intervene in markets at any time to balance what
they perceive as overruns or chaos, but this usually has only limited or temporary effects.
4.3.4. The Rise of the Dollar Emperor.

In response to the dying out of the Bretton Woods system, key countries in
Western Europe embarked on a 30-year quest for monetary unity, culminating in the
creation of the EU and the Euro, officially announced in 1999. Despite expectations for
growth and employment stemming from the devaluation of the dollar, the United States
endured three more recessions between 1973 and 1981. In total, the dollar's purchasing
43
power declined by 50% between 1977 and 1981. Oil prices quadrupled during the
recession between 1973 and 1975 and have continued to double from that level in 1979.
The average annual gold price jumped from $40.80 an ounce in 1971 to $612.56 an
ounce in 1980, including a short-term jump to $850 an ounce in January 1980.
A new term, "stagflation," has been used to describe the unprecedented

combination of high inflation and stagnant growth in the United States. The economic
nightmare from 1973 to 1981 was the stark contrast to the export-driven growth that the
devaluation of the dollar was about. As for inflation, the U.S. has adopted a tactic of
"tying and tightening to stop the bleeding." The U.S. raised the Fed rate to a peak of 20%
in June 1981, and the shock therapy worked. Thanks in part to Volcker, deputy secretary
of the Treasury from 1969 to 1974, annual inflation plummeted from 12.5% in 1980 to
1.1% in 1986. Gold followed, with the average price falling from $612.56 in 1980 to
$317.26 in 1985. Inflation was defeated and gold was conquered. The Dollar Emperor is
back.
In addition, falling inflation and a stronger dollar are due to fair credit, made
possible by tax cuts and deregulation policies of the Ronald Reagan administration. The
president officially took charge in January 1981, at a time when confidence in the U.S.
economy had been shattered by recessions, inflation and rising oil prices during the
Nixon-Carter era. Although the Fed was completely independent of the White House,
Reagan and Volcker built a strong dollar together, implemented a low-tax policy that was
supposed to be a booster for the U.S. economy, and led the United States into one of the
strongest periods of growth in history. Volcker's tightening monetary policies and
Reagan's tax cuts helped GDP grow continuously, reaching 16.6% within 3 years, from
1983 to 1985. The U.S. economy has never experienced such growth in any 3-year period
since.
A strong dollar does no harm but appears to boost growth, combined with other
pro-growth policies. However, unemployment remained high for years after the last of
three recessions ended in 1982. Trade deficits with Germany and Japan are growing as a
44
stronger dollar has led Americans to buy German cars and Japanese electronics, among
other goods.
Currencies were freely traded with each other and exchange rates were set by the
exchange market, which included most major international banks and corporate clients.
Part of the dollar's strength in the early '80s stemmed from the fact that foreign investors
wanted dollars to invest in the U.S. due to the country's strong economic growth. A
strong dollar is a vote of confidence for America, not a problem that needs to be solved.
However, domestic political views have assigned a different fate to the dollar, something
that is repeated in currency wars. Because the dollar is appreciating in the market, in
order to depreciate it, it is imperative that the authorities intervene in exchange markets
on a large scale! This kind of far-reaching intervention requires the unanimity and
cooperation of the major governments involved.
Western Europe and Japan have no appetite for dollar devaluation. Moreover,
Western Europe and Japan are still as dependent on the United States for defense and
national security as they were in that situation in the 70s. The Plaza Accords of
September 1985 were the result of multilateral efforts to devalue the dollar. The finance
ministers of West Germany, Japan, France and Britain met with U.S. Treasury secretaries
at the Plaza Hotel in New York to draw up a plan to devalue the dollar, mainly against
the Japanese yen and the German mark. Central banks have pledged more than $10
billion for the deal, which will be implemented as planned within a few years. Between
1985 and 1988, the dollar fell 40% against the French franc, 50% against the Japanese
yen and 20% against the German mark.
The Plaza Accord was considered extremely successful and was last amended to
prevent the rapid decline of the dollar in 1985. In addition, the signatories to the Plaza
Treaty, plus Canada and Italy, met in the Louvre, Paris in early 1987 to sign the Louvre
Treaty, in order to stabilize the dollar at a new, lower price. With the Treaty of the
Louvre, the Second Currency War came to an end.
45
By 1987, gold was no longer part of the international financial system, the dollar
was devalued, the yen and mark were dominant, the pound was unstable, the euro was
promising, and China still had no place of its own on the stage. From here, relative peace
was restored on international monetary issues.
4.3.5. Consequence.
In the context of economic and social changes and the impacts from the trend of
internationalization, globalization and strong development of science and technology, the
second currency war has serious consequences for the global economy. In particular, the
entire period from 1967 to 1971 is described as a period of chaos and instability in
international monetary affairs. Despite expectations for growth and employment
stemming from the devaluation of the dollar, the United States endured three more
recessions between 1973 and 1981. The dollar's total purchasing power between 1977
and 1981 fell by 50%. Oil prices quadrupled during the recession between 1973 and 1975
and have continued to double from that level in 1979. The average annual price of gold
rose from $40.80 an ounce in 1971 to $612.56 an ounce in 1980, including a short-term
jump to $850 an ounce in January 1980. Unemployment remained high for years after the
last of three recessions ended in 1982. Growing trade deficits in Germany and Japan (due
to a stronger dollar) led Americans to buy German cars and Japanese electronics, among
other goods, etc. In addition, currency wars also cause great damage to international trade
and trade of the whole world.
Looking at the overall implications of the 2nd Currency War, James Rickards,
author of Currency Wars: The Next Global Crisis Taking Shape, wrote: "In the eyes of
many, the world is truly going crazy. A new term, "stagflation," has been used to describe
the unprecedented combination of high inflation and stagnant growth in the United
States. The economic nightmare from 1973 to 1981 was the stark contrast to the export-
driven growth that the devaluation of the dollar was about. The motives of devaluation
have gone completely bankrupt."
46
4.4. The germ of currency wars in the present.

In the context of globalization, every economic and political fluctuation of a
country (especially countries with strong economies directly or indirectly affects regional
and world economic activities. Today, the risk is not just the devaluation of one currency
against another in order to gain a competitive advantage, but the risk of a possible
collapse of the monetary system. That is, the loss of confidence in paper money and the
risk of a wave of fixed asset purchases. James Rickards, a well-known author on the
subject of currency wars, said: "The 3rd currency war could be the last currency war –
that is, the war to end all currency wars." According to many experts, if the 3rd currency
war takes place, it will be much more dangerous than the previous 2 currency wars
because the 3rd currency war is not only a race to devalue the currency but also a plot to
overturn each other's financial systems. Specifically, China wants to overthrow the
dominant position of the dollar.
Starting with China running a huge trade surplus with the US before the 2008
global financial crisis, by keeping the yuan low, after the collapse of Lehman Brothers,
the US devalued the dollar with quantitative easing (QE) packages. The greenback thus
depreciated sharply against other foreign currencies, including the yuan. Japan also
devalued the yen to spur an economic recovery. Similarly, European Central Bank (ECB)
President Mario Draghi decided to inject liquidity into the market, in order to revive the
eurozone economy. China, in turn, is also working to devalue the yuan to regain its lost
competitive advantage. This has prompted other Asian countries such as South Korea,
Thailand and even India to consider devaluing their currencies. But as with the previous
two currency wars, there is hardly a clear winner in this one, except for chaos.
In early 2014, China expressed its ambition to enter the IMF's SDR (special
drawing rights) currency basket, in order to enhance the yuan's position. Because only by
taking a large position for the renminbi can China gradually realize its ambition: to break
the link between the dollar and oil. This move further proves that China is always in a
confrontation position with the United States on this thorny issue. In February 2012, for
47
example, when the United States removed Iran from the dollar-denominated payment
system controlled by the Fed and Treasury Department, it made it difficult for Iran to
trade with international markets. Iran is an oil exporter and this has a significant impact
on the Iranian economy. China has supported Iran with USD swap flows for the country.
In addition, Iran uses China's banking system to conduct transactions under U.S.
sanctions.
China's "heavy-handed" move - a shock reduction of 4.6% of the yuan/US dollar

exchange rate for three consecutive days (11.12 and 13-8-2015), has raised fears of a
currency war that will occur not only within Asia but could spread globally.
Right at the beginning of 2016, BPOC (Central Bank of China) continuously

lowered the reference rate for 7 sessions, dragging the RMB to a 5-year low in the Hong
Kong market. In the last 5 sessions of February 2016, Beijing repeatedly fixed the yuan
reference rate to low. The PBOC explained that it devalued the yuan to better reflect
developments in the market, and affirmed that it would not depreciate continuously.
However, analysts see the move as a way for China to simultaneously boost exports, as
its goods are cheaper than others. At the same time, it wants to empower the renminbi,
make it easier to accomplish diplomatic goals and strengthen its central role in the global
economy.
China has thoroughly adopted a weak yuan policy (currency devaluation) to

achieve its own goals. The reasons behind maintaining a weak Yuan, there are 2 main
reasons given: subjective causes and objective causes. The subjective reason is that the
Chinese economy is in a period of serious growth slowdown, China uses a weak yuan
policy to stimulate exports, revive the economy in the short term. In addition, in order to
bring the yuan into the basket of international currencies, China needs to promote the
exchange rate towards marketization. The objective reason is that the global economic
slowdown is associated with the competition of monetary policies of major economies,
the dollar strengthens while other currencies weaken, the depreciating yuan exchange rate
will be appropriate and maintain a stable exchange rate in the market.
48
Many countries, including the United States, immediately warned China not to
move away from its commitment to adopt a market-based exchange rate. At the same
time, the devaluation of the country's local currency also immediately has an impact on
the currency operation of economies in the region, specifically: in the currency market,
Asian currencies have just experienced a "whirlwind", the Indonesian rupiah, Malaysian
ringgit, Singapore dollar, Taiwan dollar and Philippine peso... At the same time, there is a
common concern that China's export competitiveness will increase, and its purchasing
power will decrease, directly affecting the export and import activities of neighboring
countries.
Form 4. Prices of basic commodities plummeted

(data updated to February 2015)
China's devaluation of the yuan is exposing the region and the world to risky
economic scenarios, in which the dominant trend receiving high consensus is the
"initiation" of a new currency war, on the one hand to turn around China's gloomy
economic situation in the context of regional and world restructuring Post-crisis, on the
49
other hand, aims to establish a new world economic order based on the correlation of
economic power that currency is an enforcement tool. However, if you look at it as a
whole, it is quite early to make an official statement, but with mixed records of this action
of China, the country seems to be making quite clear economic and political calculations,
despite the statement of the People's Bank of China emphasizing that its foreign exchange
reserves are at 3.65 trillion U.S. dollars and the current balance are in surplus. The fact of
managing the country's monetary policy partly reflects the trend of adjusting
development policy in general, but first of all, adjusting monetary policy.
Chinese officials have been lobbying for the IMF to include the yuan in its basket
of reserve currencies, known as Special Drawing Rights, which the IMF uses to lend to
countries. This would be a big step forward in China's plan to internationalize the yuan.
The devaluation of the yuan towards a floating exchange rate in the near term also
shows a fundamental preparation for changes in China's development policy. More
flexible exchange rates are important for the country because it aims to give the market a
decisive role in the economy and quickly integrate into global financial markets.
Regardless of the interpretation of the devaluation of the renminbi, it demonstrates

the following fundamental problems: 1) The Chinese government is preparing for a
change in development strategy that takes into account the establishment of a new
economic and political position; 2) Devaluation of the local currency is only the surface
of strategic adjustments, but shows that the internal economy of this country contains
problems that require change; 3) Although not a panacea for China's ailing exporters
suffering the consequences of rising labor costs, devaluation of the yuan will help ease
deflationary pressures, in order to avoid repeating the risk of deflation that Japan has
suffered for many years.
In the face of the devaluation of the renminbi, each country in the region and
related economies have made certain moves, possibly situational, redundant but aimed at
the necessary stability for the country's local currency and anticipation to respond to
50
impacts related to the trade balance. In particular, for export-strong economies, the issue
to be considered is the correlation of export commodity prices or more broadly, the
competitiveness of exported goods; For economies that are heavily associated with
imports, the increase in trade surplus, the greater dependence on the export economy is a
matter to consider. Accordingly, macroeconomic issues and economic security are
aspects that countries like Vietnam must be careful of.
51
CHAPTER 5. CONCLUDE
5.1. Currency wars.
To summarize the contents of currency wars using the 5W1H model: What, When,
Where, Who, Why and How, we have the following table:
Table 1. Summary of aspects of currency wars.
What: A term used to describe the escalation of currency

 What are devaluation policies between two or more countries, it is a
currency wars? "-for-tat" policy of currency devaluation aimed at improving
each country's foreign trade competitiveness at the expense
of others.
Is a state of dispute between countries about the value of

their currencies. In a currency war, countries can take
measures such as devaluing their currencies, boosting
exports, raising tariffs, or imposing market restrictions.
When + Where + Who: When a country tries to reduce the value of its currency to
increase export competition or when countries enter a trade
war to gain a competitive advantage.
In 2008, the housing bubble in the US burst and caused the

 When did it
Great Recession. At this time, economies around the world
happen?
are affected forcing governments to stimulate economic
growth by lowering interest rates. The consequence of
lowering interest rates is the depreciation of the currency.
 Where has there During the Great Depression of the 1930s and when low
ever been a competitiveness (compared to other economies) led Great
currency war? Britain to devalue the pound sterling in 1967.
Why: Make exports more competitive: goods and services

 The purpose of produced in that country become more affordable to the rest
currency wars of the world, which drives export demand.
52
Boost demand for domestic goods and services:

discourage people from buying foreign goods and services
because they have become too expensive, and instead
encourage them to buy domestically produced substitutes.
Improving international trade conditions: Exporting

more and importing less means that a country's trade deficit
(when it imports more than it exports) decreases. Similarly,
if a country is already in a trade surplus (when it exports
more than it imports), then this increases.
Increase foreign investment and tourism

Can make government debt more manageable: Lenders
tend to lose money when the currency weakens because the
money they will receive back from the borrower will
ultimately be worth less than when the loan was issued. But
this can be good news for borrowers because it can make
repayment more manageable and reduce the total amount of
repayments.
Drive higher inflation: Higher inflation can be both good

and bad, depending on what a country or central bank is
trying to accomplish. While a weaker currency can increase
demand for exports, the fact that imports become more
expensive and consumers' purchasing power weakens
means that the overall cost of living often rises pushing
inflation higher. Currency devaluation is often described as
a way of 'importing inflation'.
How: In a currency war, countries can take measures such as
devaluing their currencies, boosting exports, raising tariffs,
or imposing market restrictions.
5.2. Lessons learned for Vietnam.
The risk of currency wars is real, but countries are still tightly controlling their monetary
policy adjustments, so this risk is not yet worrisome. However, if many countries around
the world simultaneously implement monetary easing or currency devaluation, then
53
currency wars will break out. These are the comments of Dr. Vo Tri Thanh and he also
shared that in the short term, the impact of the uncertainty of the US-China trade war is
quite large. In the current context, Vietnam needs to set out many scenarios to strengthen
the resilience of the economy, in which it is impossible to ignore the deteriorating
external environment situation. He added: "Resilience needs to include three elements:
monetary policy flexibility; fiscal buffering and financial system health, including
promoting economic restructuring that Vietnam is doing." Concrete:
First, Vietnam needs to coordinate well, improve and enhance relations with
major countries, especially the US. In order to avoid being put on the list of currency
manipulators by the US, causing a lot of disadvantages for Vietnam. But Vietnam now
faces two problems: a large trade surplus with the US; Is on the list of countries
monitored by the US for currency manipulation. Therefore, there are alternative
proposals aimed at avoiding being subject to currency wars.
Second, Vietnam's exchange rate policy should continue in the direction of being
proactive, flexible, skillful, limiting direct, one-sided and continuous intervention in the
foreign exchange market so as not to violate the third warning threshold. Vietnam needs
to insist on a proactive and flexible exchange rate policy, continue to strengthen foreign
exchange reserves, combine with effective communication to control psychological
factors and spillover risks. It is necessary to be flexible (with buying, selling) and explain
to the US that the exchange rate management in recent years is in accordance with
domestic and international market developments as well as the characteristics of
Vietnam's economy, not in order to create unfair international trade competitive
advantages.
Third, Vietnam needs to be very calm, maintain its "economic neutrality" status,
to avoid falling into an awkward and dangerous situation for national sovereignty, and at
the same time not get caught up in the vortex of currency war (if any).
54
Fourth, there should be no move to devalue the currency because it may increase
the risk of currency manipulation by the US. In addition, we must find ways to work with
global partners such as Canada, Japan, China, etc. to ensure deeper compliance with
WTO principles
Fifth, the authorities need to resolutely handle the act of disguising trade and
investing to "evade taxes" from the US. Vietnam has been considered by US President D.
Trump as the country that "takes advantage of the trade war the best" in recent times. In
fact, the US is not afraid to use sanctions on violating countries. The country's decision to
increase tariffs on some products that allegedly changed their origin to avoid taxes, such
as imposing a tax rate of 456.23% on some steel imported from Vietnam using materials
from South Korea and Taiwan are examples.
Sixth, it is necessary to increase the diversification of the economy to reduce

dependence on specific sectors and increase its ability to adapt to fluctuations in
international markets. Seize investment opportunities from the currency war between
China and the US: China or the US can choose to divert investment, then export goods
from intermediary countries such as Vietnam to the other country so as not to be subject
to high tariffs => Vietnam can take advantage of the opportunity to increase exports,
increasing market share in the United States.
Finally, Vietnam needs to continue to administer monetary policy to control

inflation, stabilize the macroeconomy, and support economic growth in a reasonable way.
The stabilization of the macroeconomy and exchange rate stability has always been an
important issue for Vietnam's economy and has been paid special attention by the
Government for many years.
In conclusion, in order to avoid risks related to currency wars, Vietnam should

note some of the following points:
55
 It is recommended to implement controls on investment capital and finance

in order to limit risks and stabilize financial markets.
 It is necessary to strengthen economic cooperation with other countries to
create a favorable business environment, promote exports and attract
investment capital.
 Implement reform measures and strengthen the competitiveness of
enterprises to be able to adapt to market fluctuations.
 Focus on supervising and regulating financial markets, ensuring stability
and avoiding risks in the future.
56
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Final Report of Macroeconomics

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Final Report of Macroeconomics

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BỘ GIÁO DỤC VÀ ĐÀO TẠO

TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG

Lecturer: Phạm Văn Quỳnh

Name of member: Nguyễn Thành Tài - 2215027065

Đoàn Tân - 2215027083

Tiền Tâm Đan - 2215027019

Ngô Lê Quỳnh Như 2215027040

Lê Gia Huynh – 2215027057

Ho Chi Minh City, 2024

According to Wikipedia, currency is a means of exchanging goods and services

LIST OF TABLES AND CHARTS..........................................................................Micro

1. Reasons for choosing the topic...............................................................................1

4. Practical significance of the topic..........................................................................2

CHAPTER 2. THEORY OF CURRENCY WARS........................................................4

1.3. The fall of the currency...................................................................................5

2. The impact of currency wars on the world economy.............................................6

CHAPTER 3. CURRENCY WARS FROM A MACROECONOMIC PERSPECTIVE

1. Macroeconomic theoretical foundations................................................................8

2. Analyze the causes and effects of currency wars from a macroeconomic

2.1.1. Currency wars occur due to a country's trade deficit................................9

2.1.2. Currency wars occur due to high unemployment in a country...............12

2.1.3. Currency wars occur due to a country's policy of hoarding foreign

2.2.2. The impact of currency wars on the world economy.............................15

CHAPTER 4. HISTORY OF CURRENCY WARS....................................................16

1. First Currency War (1921-1936)..........................................................................16

1.1.1. Gold Standard (1870 – 1914).................................................................16

1.1.2. The Formation of the Federal Reserve System (1907-1913)..................19

1.1.3. World War I and the Treaty of Versailles (1914–1919).........................21

1.3. Analysis of developments..............................................................................25

2. Second Currency War (1967–1987).....................................................................35

2.2. Analysis of developments..............................................................................36

2.2.1. The end of Bretton Woods......................................................................39

2.2.2. The Rise of the Dollar Emperor..............................................................45

3. The germ of currency wars in the present............................................................48

2. Lessons learned for Vietnam................................................................................56

LIST OF TABLES AND CHARTS

Table 1. Summary of aspects of currency wars.................................................................48

Figure 1. The trade deficit between China and the US in 2015..............................17

1.1. Reasons for choosing the topic.

1.2. Research objectives.

1.3. Research questions.

Question 2: What causes currency wars?

Question 3: What impact do currency wars have on the world economy?

Question 4: What currency wars have there been in the world?

1.4. Practical significance of the topic.

1.5. Essay structure.

Chapter 2: The Theory of Currency Wars.

Chapter 3: Currency Wars from a Macroeconomic Perspective.

Chapter 4: History of Currency Wars.

CHAPTER 2. THEORY OF CURRENCY WARS

However, 3 years earlier, in 2007, people interested in economics, especially in

2.1.3. The fall of the currency.

2.2. The impact of currency wars on the world economy.

CHAPTER 3. CURRENCY WARS FROM A MACROECONOMIC

Expenditure Approach - GDP is calculated as the sum of all expenditures on

In addition, when performing currency devaluation, a country interferes with the

3.2.2. Currency wars occur due to a country's trade deficit.

The goal of currency devaluation is to increase the competitiveness of domestic

international markets. And this is the beginning of a currency war.

Form 1. The trade deficit between China and the US in 2015.

3.2.3. Currency wars occur due to high unemployment in a country.

Therefore, a country with high unemployment will have to have appropriate

Although currency devaluation has a certain positive effect when it comes to