The Plaza Accord was an agreement by the G5 - US, Germany, Japan, France and Britain, to manipulate exchange rates to lower the dollar’s value in 1985. An agreement struck in New York’s Plaza Hotel. Between 1980 and 1985, the dollar had appreciated by a staggering 77% compared to its main trade partners. Leading to less competitive exports, cheaper imports and a rising trade deficit. By manipulating exchange rates the accord helped to lower the dollar's value, helping to reduce America’s trade deficits. But this did have some unintended consequences. Policies to increase demand, like tax cuts and government spending, helped create a massive credit and asset bubble in Japan. When this burst, Japan experienced a lost decade of low growth and deflation in the 90s. Ironically, the plaza accord was so successful at cheapening the dollar, it was largely reversed in 1987 by the Louvre Accord.
The Louvre Accord (formally, the Statement of the G6 Finance Ministers and Central Bank Governors) was an agreement, signed on February 22, 1987, in Paris, that aimed to stabilize international currency markets and halt the continued decline of the US dollar after 1985 following the Plaza Accord. It was considered, from a relational international contract viewpoint, as a rational compromise solution between two ideal-type extremes of international monetary regimes: the perfectly flexible and the perfectly fixed exchange rates.
The tight monetary policy of Federal Reserve's Chairman Paul Volcker and the expansionary fiscal policy of President Ronald Reagan's first term in 1981-84 pushed up long-term interest rates and attracted capital inflow, appreciating the dollar. The French government was strongly in favor of currency intervention to reduce it, but US administration officials such as Treasure Secretary Donald Regan and Under Secretary for Monetary Affairs Beryl Sprinkel opposed such plans, considering the strong dollar a vote of confidence in the US economy and supporting the concept of free market above all else. At the 1982 G7Versailles Summit the US agreed to a request by the other members to a study of the effectiveness of foreign currency intervention, which resulted in the Jurgensen Report at the 1983 G7 Williamsburg Summit, but it wasn't as supportive of intervention as the other leaders had hoped. As the dollar's appreciation kept rising and the trade deficit grew even more, the second Reagan administration viewed currency intervention in a different light. In January 1985James Baker became the new Treasure Secretary and Baker's aide Richard Darman became Deputy Secretary of the Treasury. David Mulford joined as the new Assistant Secretary for International Affairs.
From 1980 to 1985, the dollar had appreciated by about 50% against the Japanese yen, Deutsche Mark, French franc, and British pound, the currencies of the next four biggest economies at the time. In March 1985, just before the G7, the dollar reached its highest valuation ever against the British pound, a valuation which would remain untopped for over 30 years. This caused considerable difficulties for American industry but at first their lobbying was largely ignored by the government. The financial sector was able to profit from the rising dollar, and a depreciation would have run counter to the Reagan administration's plans for bringing down inflation. A broad alliance of manufacturers, service providers, and farmers responded by running an increasingly high-profile campaign asking for protection against foreign competition. Major players included grain exporters, the U.S. automotive industry, heavy American manufacturers like Caterpillar Inc., as well as high-tech companies including IBM and Motorola. By 1985, their campaign had acquired sufficient traction for Congress to begin considering passing protectionist laws. The negative prospect of trade restrictions spurred the White House to begin the negotiations that led to the Plaza Accord.
The devaluation was justified to reduce the U.S. current account deficit, which had reached 3.5% of the GDP, and to help the U.S. economy to emerge from a serious recession that began in the early 1980s. The U.S. Federal Reserve System under Paul Volcker had halted the stagflation crisis of the 1970s by raising interest rates. The increased interest rate sufficiently controlled domestic monetary policy and staved off inflation. By 1975, Nixon successfully convinced several OPEC countries to trade oil only in USD, and the US would in return, give them regional military support. This sudden infusion of international demand for dollars gave the USD the infusion it needed in the 1970s. However, a strong dollar is a double edged sword, inducing the Triffin dilemma, which on the one hand, gave more spending power to domestic consumers, companies, and to the US government, and on the other hand, hampered US exports until the value of the dollar re-equilibrated. The U.S. automobile industry was unable to recover.
While for the first two years the US deficit only worsened, it then began to turn around as the elasticities had risen enough that the quantity effects began to outweigh the valuation effect. The devaluation made U.S. exports cheaper to purchase for its trading partners, which in turn allegedly meant that other countries would buy more American-made goods and services. The Plaza Accord failed to help reduce the U.S.–Japan trade deficit, but it did reduce the U.S. deficit with other countries by making U.S. exports more competitive. And thus, the US Congress refrained from enacting protectionist trade barriers.
Joseph E. Gagnon describes the Plaza's result being more due to the message that was sent to the financial markets about policy intentions and the implied threat of further dollar sales than actual policies. Intervention was far more pronounced in the opposite direction following the 1987 Louvre Accord when the dollar's depreciation was decided to be halted.
The Plaza Accord was successful in reducing the U.S. trade deficit with Western European nations, but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan. This deficit was due to structural conditions that were insensitive to monetary policy, specifically trade conditions. The manufactured goods of the United States became more competitive in the exports market, though were still largely unable to succeed in the Japanese domestic market due to Japan's structural restrictions on imports. The Louvre Accord was signed in 1987 to halt the continuing decline of the U.S. dollar.
Following the subsequent 1987 Louvre Accord, there were few other interventions in the dollar's exchange rate such as by the first Clinton Administration in 1992-95. However, since then currency interventions have been few among the G7. The European Central Bank supported in 2000 then over-depreciated euro. The Bank of Japan intervened for the last time in 2011, with the cooperation of the US and others to dampen strong appreciation of the yen after the 2011 Tōhoku earthquake and tsunami. In 2013 the G7 members agreed to refrain from foreign exchange intervention. Since then the US administration has demanded stronger international policies against currency manipulation (to be differentiated from monetary stimulus).
The signing of the Plaza Accord was significant in that it reflected Japan's emergence as a real player in managing the international monetary system. However, the recessionary effects of the strengthened yen in Japan's economy created an incentive for the expansionary monetary policies that led to the Japanese asset price bubble of the late 1980s. Some commentators blame the Plaza Accord for the Japanese asset price bubble, which progressed into a protracted period of deflation and low growth in Japan known as the Lost Decade, which has effects still heavily felt in modern Japan. Jeffrey Frankel disagrees on the timing, pointing out that between the 1985-86 years of appreciation of the yen and the 1990s recession, came the bubble years of 1987-89 when the exchange rate no longer pushed the yen up. The rising Deutsche Mark also didn't lead to an economic bubble or a recession in Germany.
"Smith – who he was, is, and what he stands for – has been invented and reinvented by different people, writing and arguing in different times, for different purposes. It can be tempting to dismiss some past interpretations and uses of Smith as quaint, superficial, misleading or wrong. But they also reveal something about how and why we read him. Smith’s value has always been political, and it’s often politicised. But much of that value stems from assumptions about the neutrality and objectivity of the science he invented when, in fact, those assumptions are ones that his later readers projected onto him. Smith was a scientist, no doubt, but his ‘science of man’ (in David Hume’s phrasing) was not value-free. At the same time, we should be wary of reading his science through the lens of a single normative value – whether that is freedom, equality, growth or something else.
Adam Smith’s works remain vital because our need to identify and understand the values of a market society, to take advantage of its unique powers and temper its worst impulses, is as important as at any time in the previous two centuries. Economic ideas carry immense power. They have changed the world as much as armies and navies. The extraordinary breadth and sophistication of Smith’s thought reminds us that economic thinking can not – and should not – be separated from moral and political decisions."
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As the British historian Emma Rothschild has shown, [Dugald] Stewart’s depiction of Smith’s ideas cherrypicked in order to imbue political economy with scientific authority. She writes that he wanted to portray political economy as ‘an innocuous, technical sort of subject’, to help construct a politically ‘safe’ legacy for Smith during politically dangerous times. Stewart’s effort marked the beginning of Smith’s association with ‘conservative economics’.
Smith would soon earn a reputation as the father of the science of political economy – what we now know as economics. Initially, political economy was a branch of moral philosophy; studying political economy would equip future statesmen with the principles for making a nation wealthy and happy. From the 1780s to the mid-19th century, The Wealth of Nations was often used as a textbook in political economy courses in the US. Even when new textbooks and treatises on political economy were published, they were often compared with ‘the standard treatise on the Science of Political Economy’, in the words of one 19th-century American scholar.
That founding-father status took Smith’s ideas far. Politics became the arena in which his ideas – and economic ideas in general – were tried, tested and wielded. Politicians found much in Smith to support their beliefs, but the ‘invisible hand’ had yet to become a catchphrase of capitalism.
In the US, congressmen invoked Smith’s name to bolster their positions on the tariff. In 1824, George McDuffie of South Carolina defended his position on free trade ‘upon the authority of Adam Smith, who … has done more to enlighten the world of political economy than any man of modern times. He is the founder of the science.’ By the second half of the 19th century, Smith was being dubbed the ‘apostle of free trade’. Even those who championed protectionism appealed to his ideas, often only to delegitimise them. ‘The chief object of protection is to develop the home trade,’ one congressman declared in 1859, ‘and in this it has the sanction of the apostle of free trade, Adam Smith himself.’
This ‘sloganising’ of Smith’s name and ideas is perhaps most recognisable to us today in the phrase ‘the invisible hand’. Its popularity as a political catchphrase stems from the rising so-called Chicago School economists in the mid- to late-20th century, of whom Milton Friedman is a prominent example. Smith’s metaphor of the invisible hand was a central theme in much of Friedman’s public-facing works – op-eds, television shows, public debates, speeches and bestselling books. In 1977, Friedman described the invisible hand as representing the price system: ‘the way in which voluntary acts of millions of individuals each pursuing his own objectives could be coordinated, without central direction, through a price system’. This insight marked The Wealth of Nations ‘as the beginning of scientific economics’. What is more, Friedman also linked Smith with American founding values. Thomas Jefferson’s Declaration of Independence was the ‘political twin’ of Smith’s Wealth of Nations, according to Friedman in 1988, and economic freedom was a prerequisite for political freedom in America.
In popular imagination, Smith’s invisible hand has become so strongly associated with Friedman’s openly conservative economic agenda that people often take for granted that is what Smith meant. Many scholars have argued the contrary.
In the late 19th century, the term "economics" gradually began to replace the term "political economy" with the rise of mathematical modelling coinciding with the publication of an influential textbook by Alfred Marshall in 1890. Earlier, William Stanley Jevons, a proponent of mathematical methods applied to the subject, advocated economics for brevity and with the hope of the term becoming "the recognised name of a science". Citation measurement metrics from Google Ngram Viewer indicate that use of the term "economics" began to overshadow "political economy" around roughly 1910, becoming the preferred term for the discipline by 1920. Today, the term "economics" usually refers to the narrow study of the economy absent other political and social considerations while the term "political economy" represents a distinct and competing approach.
Political economy, where it isn't considered a synonym for economics, may refer to very different things. From an academic standpoint, the term may reference Marxian economics, applied public choice approaches emanating from the Chicago school and the Virginia school. In common parlance, "political economy" may simply refer to the advice given by economists to the government or public on general economic policy or on specific economic proposals developed by political scientists. A rapidly growing mainstream literature from the 1970s has expanded beyond the model of economic policy in which planners maximize utility of a representative individual toward examining how political forces affect the choice of economic policies, especially as to distributional conflicts and political institutions.
