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A Future Without Currency Wars?

US President Donald Trump's protectionist policies and frequent accusations of currency manipulation by other countries speak to the need for a universal monetary system of the type twentieth-century economists such as John Maynard Keynes envisioned. Thanks to digital technologies, the long quest for such a system could be over.

PRINCETON – The terrible experience of the 1930s should remind us that trade and currency wars go together like a horse and carriage. Now that US President Donald Trump’s administration is fully implementing his protectionist “America First” agenda, it is only a matter of time before a currency conflict erupts.

There has not been a full-scale currency war in quite some time, though the world came close after the 2008 financial crisis, when then-Brazilian Finance Minister Guido Mantega used the term to describe America’s extraordinarily low interest rates. Following the United States, Japan and Europe seemed to adopt similar strategies of export promotion, and a depreciated exchange rate became an unheralded but central feature of economic recovery in advanced economies.

Similarly, after 2012, the euro crisis started to look more manageable only after the euro began depreciating against the dollar. And as many economists in the United Kingdom had already pointed out, a flexible exchange rate had given the UK, in contrast to the eurozone countries, a uniquely effective tool for managing the shocks of the period.

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