International Monetary Cooperation: Lessons From the Plaza Accord After Thirty Years

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International Monetary Cooperation: Lessons From the Plaza Accord After Thirty Years
by Edited by C. Fred Bergsten and Russell A. Green
Peterson Institute for International Economics, 2016
300 pp.
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The administration of U.S. President Ronald Reagan was philosophically committed to free markets, in particular the foreign exchange market. It was therefore a major surprise when, in September 1985, the finance ministers of France, Japan, the United Kingdom, and West Germany met at the Plaza Hotel in New York City with the secretary of the U.S. Treasury, James Baker, and publicly announced that the U.S. dollar was overvalued and that they would take collective action to encourage its depreciation and a corresponding appreciation of the four other major countries’ currencies. The Plaza Accord was followed 17 months later by the Louvre Accord, in which the same group declared that the depreciation had gone far enough and that they would consequently take steps to stabilize exchange rates. How to properly manage exchange rates remains a vexing question for many countries today, one for which there seems to be no enduring correct answer. The 16 contributors to this book—which include Baker and then Fed Chair Paul Volcker, the leading U.S. participants in these events—evaluate the effects of the accords and argue that they serve as an exemplar for macroeconomic cooperation among major countries. That position was controversial at the time and remains so today, partly because some influential Chinese economists maintain—wrongly, as this books demonstrates—that the accords led to the bursting of the Japanese stock market and real estate bubbles at the end of the 1980s, an outcome that present-day China, with its overheated equity and land markets, is eager to avoid.