ALEX BRUMMER: 1985 action over dollar contrasts current malaise

On a balmy Sunday in September 1985, when working as a correspondent in Washington, I took a phone call from a colleague at the FT who suggested that it might be worth going to New York. Financial leaders from the big five advanced economies were holding an unscheduled meeting. 

We made our way to the Plaza hotel in Manhattan. On arrival we inquired as to where the meeting was taking place and were directed to a suite on an upper floor. 

There we were confronted by Paul Volcker – then chairman of the Federal Reserve – and out of the corner of my eye I glimpsed Britain’s Chancellor Nigel Lawson. 

Watching brief: This year alone, the pound has tumbled 11 per cent against the dollar

We realised that we had accidentally gatecrashed what was later to prove a landmark in global financial history and backed out of the room. We joined other waiting journalists in the basement Oyster bar before being summoned to an impromptu briefing late into the evening. The Plaza meeting was convened by the US Treasury Secretary James Baker and his deputy Richard Darman after a series of secret and informal gatherings in Japan and Europe. 

A surge in the dollar was creating serious imbalances for the global economy and it was agreed that after a period of free float for global currencies – without central bank actions – policy had to change. 

Decisive steps taken 37 years ago, by strong and committed financial leaders, provide a contrast to the lack of public response to the current disruptive trajectory of the dollar. This year alone, the pound has tumbled 11 per cent, the euro 11 per cent and the Japanese yen is down a whopping 15 per cent.

At the Plaza, Japan committed to tax reform to boost domestic investment and Germany, after some persuasion, agreed to being labelled a ‘surplus’ country. 

All five nations – the US, Germany, Japan, France and the UK – agreed to launch a joint plan to knock down the value of the dollar by co-ordinated intervention. 

Plaza was critical in two ways. It signalled a new period of economic co-ordination by the then great economic powers. And it demonstrated a willingness, in an era of floating exchange rates, for central banks to act. 

In more recent times, similar co-ordinated action was seen as the great financial crisis unfurled in the autumn of 2008. And at the start of the pandemic in March 2020 when there was joint action to cut interest rates and increase the scale of bond buying. New currency swap arrangements were fixed as a backstop to global disruption. 

Anyone following the market narrative in recent weeks might think that this year’s tumble of the pound was a unique British event dictated by Brexit, the immolation of Boris Johnson and Britain’s sub-optimal balance of payments. 

That doesn’t explain why the yen is at its lowest level for a quarter of a century and the euro at near parity with the dollar. 

The European and Japanese central banks have been slow off the mark in raising interest rates, opening a gap with the returns on safe haven US Treasury bonds and their overseas counterparts. Bank of England chief economist Huw Pill has also noted that US energy self-sufficiency is a dividing line. 

Sharp currency and rate divergences among G7 economies lead to trade imbalances, sharpen protectionist instincts and postpone recovery from the pandemic. That’s why another Plaza is needed. 

With Joe Biden’s moribund administration, this is a wholly different matter.

This post first appeared on Dailymail.co.uk