The following post is from Steven Bryan author of The Gold Standard at the Turn of the Twentieth Century: Rising Powers, Global Money, and the Age of Empire.
There is no great mystery to the appeal of depreciating currencies for countries relying on exports or intent on developing industry or relieving domestic unemployment. Nor is there anything particularly novel about countries seeking the advantages of a depreciated currency. Historically, depreciating one’s currency relative to other countries has been a standard tool to promote economic development. This was true in the late-nineteenth century when the rising powers of the age sought currency systems most favorable to exports and domestic growth. It was true in the 1970s and 1980s when the United States pressured Japan, Germany, and other countries to revalue their currencies. It is true today when China intervenes to depreciate its currency and the United States applies pressure to cause that currency to appreciate.
In broad strokes, depreciating currency aids exporters, and industries that rely on exports, by decreasing prices of exported goods in foreign currency. Depreciation also makes goods imported from foreign countries more expensive in local currency. This is as true today as it was in the 1890s. It is why sudden, relative currency appreciation in exporting countries so often leads to financial and broader economic crises, particularly when tied to borrowing in foreign currency.
Appreciating currency helped spark the economic crises in Asia in the late 1990s and Argentina in the early 2000s. Various studies have found that currency appreciation played a role in Japan’s “lost decade” of the 1990s either by itself or by prompting attempts to combat appreciation that led to Japan’s asset bubble of the late 1980s and subsequent bust. Rapid appreciation of the yen relative to the dollar since late 2008 has exacerbated the effects of the global economic crisis for Japanese industries.
The export advantage of depreciating currency is also why countries have used, and continue to use, currency depreciation explicitly to promote exports. Argentine economic policy since the depths of the economic crisis in 2002 rested on a conscious policy of depreciated currency to promote exports combined with domestic subsidies on food and energy to promote consumption.
Even countries not particularly dependent on exports, and far from the infant industry stage, such as the United States, have continued on and off to rely on currency depreciation in hopes of promoting exports and blocking imports. The United States departure from the Bretton Woods system in the early 1970s, the Plaza and Louvre agreements in the mid-1980s, and periodic calls for Japanese and, more recently, Chinese currency appreciation have all been attempts to gain for the dollar the advantages of a depreciating currency.
Despite the attention currently paid to what is generally seen as an undervalued renminbi, neither China’s currency intervention nor its currency goals are surprising or unique. The world economy of the late-nineteenth century – the ideological and institutional basis of our own world economy – rested on similar currency policies and concerns.
The worldwide downturn and deflation from the mid-1870s to the 1890s placed currency appreciation – and its deflationary effects – at the center of economic debates worldwide.
It was common in the last quarter of the nineteenth century to find claims from American and European economists that currency appreciation was “one of the worst evils that can threaten humanity,” that it spelled “ruin for the industrialist, misery for the worker, discontent and universal suffering,” and that it would “bury the nineteenth century in a tumult of poverty and make felt in the cradle of the twentieth the heavy hand of paralysis.”
British finance ministers, future Prime Ministers, and other Victorian notables joined in the calls for giving “to Queen Silver her conjugal relations” “without dethroning King Gold.” For these eminent Victorian critics of currency appreciation, that appreciation had converted English currency “into an immensely deceitful standard” that “worsens the situation of the debtor and gives creditors an illegitimate benefit,” “weighs over men and those who have a spirit of enterprise, who try to develop the agriculture and industry of the country,” “increases the burden that weighs on the country’s industry,” and, if left unchecked, would “cause a crisis more disastrous than all those that the commercial world can recall.”
This concern was particularly acute in those countries already using appreciated currency – i.e., countries already on the gold standard prior to the 1890s. French textile manufacturers and silk producers sought protection from lower-priced, silver-based Japanese thread. In the United States in the late 1880s and early 1890s farmers and miners found themselves at a price disadvantage against the weaker currencies of Argentina, India, Brazil, China, and Russia. Mixed in were also racial fears—particularly of the presumed danger of the “yellow peril” of Asian immigration and economic and military competition. Concerns about “unfair” Chinese currency were common. As Winston Churchill’s uncle put it, “The yellow man using the white metal holds at his mercy the white man using the yellow metal.”
Concern with deflation and its economic and social effects helped fuel the rise of the Populist Party in the United States and the takeover of the then pro-banker, pro-hard money, and pro-gold standard Democratic Party by William Jennings Bryan and his silverite supporters. The silver movement dominated American politics in the mid-1890s with Bryan declaring that mankind would not be “crucified on a cross of gold” and even made its presence felt in children’s literature with the Kansas populist L. Frank Baum writing The Wonderful Wizard of Oz as an allegory of silver politics, with the wizard as William Jennings Bryan and the yellow brick road symbolizing the gold standard.
The perceived national competitive disadvantage from appreciated currency led Nelson Aldrich, the dominant financial figure in the U.S. Senate—protectionist, architect of the Federal Reserve System, and father-in-law of John D. Rockefeller—to push repeatedly for international monetary conferences into the late 1890s. Aldrich argued that “the decline in the price of silver has as an effect to provide to silver countries…the means to sell their products at a premium, with great prejudice for American producers.”
Change “silver” to “renminbi” and Aldrich to Tim Geithner and the sentence could have been written today. But, as at the turn of the twentieth century, the desire to promote exports and industry is not exclusive. In China today, as in countries such as Japan and Argentina at the turn of the twentieth century, there are individuals and groups who favor currency appreciation and would benefit from it. So, too, overly depreciated currency brings its own broader problems, particularly in terms of domestic inflation. To date China has followed a currency policy based on balancing these competing interests in terms of what overall currency policy best serves those interests and an overarching idea of national interest. In other words, China has approached currency policy the same way most countries historically have.