Currency Wars, Then and Now

How Policymakers Can Avoid the Perils of the 1930s

In June 1933, a thousand representatives from 66 countries gathered in London for the World Economic Conference -- the grandest collection of world leaders since the Paris Peace Conference of 1919. Among those attending were a king, eight prime ministers, 20 foreign ministers, and 80 other cabinet ministers and heads of central banks.

The global economy was still mired in a depression that had begun more than three years earlier. In the two countries hardest hit, Germany and the United States, unemployment was above 30 percent. The United Kingdom, the nations of the British Empire, and a handful of other European countries with close commercial ties to London had abandoned the gold standard in late 1931, leaving exchange-rate arrangements in complete disarray. Meanwhile, Germany, after a banking crisis in the summer of 1931, had suspended payments on most of its international debts and imposed severe currency and capital controls.

The purpose of the conference, originally conceived in the last days of U.S. President Herbert Hoover's administration, was to spur a joint effort to repair the severely damaged international financial system. But the new U.S. president, Franklin Roosevelt, made it clear that his first priority was to get the U.S. economy back on its feet; international considerations would have to take second place. In the first month of his administration, after successfully stabilizing the domestic banking system, he had followed the British example by taking the United States off the gold standard. The London summit thus took place against the backdrop of a falling dollar and enormous turmoil in the currency markets.

It appeared as if policies in the two biggest economies in the world, the United States and the United Kingdom, were aimed at getting themselves moving at the expense of the economies in Europe. As the meeting began, European leaders were desperately trying to negotiate an arrangement to keep currencies stable.

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