On April 5, 1933, Franklin Roosevelt did it right here in the White House. On August 15, 1971 Richard Nixon came back from Camp David and did it. On September 22, 1985, Ronald Reagan went to the Plaza Hotel and did it.
American presidents are not the only ones who did it. Chinese communists do it often and are doing it now, as is Japan’s Prime Minister Shinzo Abe. And Mario Draghi, the head of the European Central Bank, finally decided to do it right there in Frankfurt even though his German overseers disapprove.
All of these world leaders, and many others, do it in different ways, but all have the same goal: driving down the value of their currencies. The theory is simple, in more ways than one. If you have a cheap currency, the world will beat a path to your manufacturers’ door, other things being equal. Firms in your country will obtain a competitive advantage as their goods are cheaper. That’s why Caterpillar urged Franklin Roosevelt to untie the dollar from gold so that the dollar would sink in value and, now, more than 80 years later, is urging the Federal Reserve Board not to raise interest rates, a move that would make the dollar more attractive to foreigners and drive up the value of our currency.
There are three possible problems with the policy of devaluing a national currency. The first is that such a move, involving as it does ramping up the money supply, might trigger inflation, driving up prices of homemade stuff, offsetting or more than offsetting the competitive advantage of a cheaper currency. Robert Mugabe reduced the value of Zimbabwe’s currency to the vanishing point, with its 100 trillion dollar banknote insufficient to buy a bus ticket, and transactions now done in the currencies of other countries; prosperity has not followed. The second is that devaluation is often accompanied by offsetting events and features of the national economy that reduce or eliminate its effectiveness. The Russian ruble has dropped precipitously, but a simultaneous drop in the price of Russia’s main export, crude oil, and the imposition of sanctions following Putin’s grab of Crimea and part of Ukraine, have offset any beneficial effect of its cheaper currency. And made foreign travel so expensive for Russians, with only their devalued rubles with which to buy dollars and Swiss francs, that the ski resorts this winter are virtually Russian-free, with cheerier, more relaxed staffs as a consequence.
The third is that no devaluer can safely assume that its trading partners will simply shrug and struggle along trying to peddle their wares in a world market in which their goods have suddenly been made less attractive. Better a currency war, than ceding markets to the first nation to attempt to gain an advantage by making its goods cheaper. The victor in the first skirmish might be the nation with the greatest loss in the value of its money, perhaps ensuring that nation’s defeat in the longer war for greater international competitiveness.
In the case of the euro, the stimulative effect of the long-rumored, Draghi-induced drop in its value eases the pressure on national governments to reform their over-regulated labor markets, end protection of inefficient industries, and reduce their costly entitlement programs. The lower-valued euro produces a short-term euphoric high that in the long run allows countries such as France to avoid the reforms that in the long run are necessary if it is to get its sclerotic economy growing again.
It is this latest devaluation, Draghi’s move to head off deflation in the eurozone, that has attracted so much attention here. The U.S. economy is no longer merely the best house in a bad neighborhood; it is a pretty swanky place to put money. America is a safe haven in a troubled world, our economy is growing, autos are moving off the lots, unemployment is dropping, consumer confidence is high and rising, inflation is tame, and the Fed is considering raising interest rates to make the greenback already, heading for its highest level in a decade, even more attractive. Throw in euroland’s economic doldrums, and the revving up of its printing presses, and it is no surprise that whereas not so long ago it took almost $1.40 to buy a euro, the price is closer to $1.10 now. That means that a shirt that a tourist might have picked up in Paris or Rome for $140 now costs only $110, unless the sellers are raising prices to make up for their loss of dollars. Good for U.S. travelling consumers, bad for U.S. shirt-makers.