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The Dollar Wars Return

Faced by uncertain re-election prospects, and worried about job losses, US President George W. Bush has begun to blame other countries, sending his Treasury Secretary to demand that they raise their exchange rates in order to make foreign goods more expensive for American consumers. That was John Snow's mission on his recent trip to China, but his goal was nothing new. Two of Snow's predecessors, John Connally and James Baker, followed a similar quest for politically desirable exchange rates.

What Snow asked of China is an odd demand: we do not normally go into stores and ask the shopkeeper to raise his prices. But the emergence of powerful new currencies always provokes fresh attempts at the use of exchange rates for political purposes.

For twenty years after WWII, there were just two major international currencies, as there had been through the interwar period: the British pound and the American dollar. By the end of the 1960's, the pound had been so weakened that international markets lost interest. Instead, two new major currencies emerged, as the strength of the Japanese and (West) German economies produced big trade surpluses.

American producers and the US government complained that American workers were being priced out of jobs because the Yen and D-mark were being held at artificially low levels. The US government under President Richard Nixon pressed the Germans and Japanese to revalue their currencies. The Germans did but the Japanese did not, infuriating the US Treasury Secretary, who tried his best to bully Japan. John Connally complained that Japan had a "controlled economy" and did not play by the rules.