The Pitfalls of Currency Manipulation – A History of Interventionist Failure by Pater Tenebrarum

A History of Devastating Failures

History suggests that global monetary policy cooperation in order to artificially prop up or weaken specific currencies invariably leads to major disasters. The most famous example is perhaps the agreement struck between the Federal Reserve’s Benjamin Strong (notorious provider of “coups de whiskey” to the stock market) and BoE chief Montagu Morgan in the 1920s.

The plan was to support the British pound by means of the Fed adopting a looser monetary policy. Britain had gone back to gold parity at a completely unrealistic exchange rate and had implemented policies that were putting additional pressure on the currency. As a result gold started to flow out from Britain at an accelerating pace, so it had to either alter its policies or get outside help. The Fed decided to provide it.

This in turn helped to drive the credit and asset bubble of the roaring 1920s to excessive heights and eventually produced what was arguably the greatest economic and socio-political catastrophe of modern times. As Murray Rothbard writes on the agreement in “America’s Great Depression”:

“Instead of repealing unemployment insurance, contracting credit, and/or going back to gold at a more realistic parity, Great Britain inflated her money supply to offset the loss of gold and turned to the United States for help. For if the United States government were to inflate American money, Great Britain would no longer lose gold to the United States. In short, the American public was nominated to suffer the burdens of inflation and subsequent collapse in order to maintain the British government and the British trade union movement in the style to which they insisted on becoming accustomed.”

Along similar lines, in more recent times there have e.g. been the Plaza and Louvre accords – one of which was designed to weaken the dollar’s exchange rate, while the other was designed to strengthen it after the results of the first accord appeared to have gone too far. The result was not only a period of extreme currency volatility, but an asset bubble that eventually culminated in the 1987 stock market crash and the blow-off in Japan’s stock and real estate markets that peaked in 1989. Whatever short-term objectives were supposedly served by these accords were completely dwarfed by the long term effects.

The 1987 crash in turn inspired the so-called “Greenspan put”, and the bubble of the 1990s followed in its wake. Along the way there was the peso crisis of the mid 1990s and the Asian/Russian currency crisis of 97/98, after the currency pegs of the “Asian tigers” gave way. These crises were of course met with even more interventions, which egged on credit and asset bubbles of truly stunning proportions (in this case, interest rate cuts by the Fed in late 1998 were the precursor to the giant blow-off in technology stocks).

These modern-day currency manipulation efforts can essentially be seen as a reaction to the fact that the unfettered fiat money system that has been in place since the early 1970s is producing ever greater imbalances and distortions. It is held that these negative results require additional intervention so as to be “corrected”.  One must keep in mind to this that currency manipulation always involves the adoption of specific monetary policies. These will as a rule push interest rates even further away from the natural rate and amplify boom-bust cycles accordingly.


Looking at the way in which today’s ever more extreme monetary policy measures and interventions are reported and discussed, one could almost get the impression that the philosopher’s stone has finally been found and that wealth can indeed be conjured up ex nihilo at the push of a button. However, this is not the case – on the contrary, the more often these buttons are pushed, the weaker the structure that actually generates real wealth becomes.

We believe a lot of unpleasantness could be avoided if these crazy policies were finally stopped. For a while here would certainly be a period of intense economic pain, but human ingenuity combined with the world’s accumulated real capital should soon restore sound economic growth. In principle, we are actually quite optimistic on that score. After all, even today’s severely hampered market economy still manages to create enough wealth for the world to muddle on.

However, this would also require a profoundly change in thinking. Economic progress cannot be “ordered” from the top by a coterie of planners, regardless of how well-intentioned they may be. Their constant tampering with the market economy must end. It would be best to release these people into the marketplace, where they could put their abilities to good use by serving consumers instead of coercing them.

The entire article can be read here.

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