Five nations met in secret to intentionally crash the dollar
In September 1985, finance chiefs from the US, Japan, West Germany, France, and Britain convened secretly at New York’s Plaza Hotel. The US dollar had surged 50% in five years, gutting American manufacturers by making exports uncompetitive. The five nations signed the Plaza Accord, agreeing to flood currency markets with coordinated interventions to weaken the dollar. Over the next two years, the US dollar plummeted roughly 40% against the yen and mark.
The Weight of an Overvalued Currency
In the early 1980s, the United States economy was emerging from a punishing period of stagflation. Under Federal Reserve Chairman Paul Volcker, the central bank had pushed benchmark interest rates to unprecedented heights to break the back of double-digit inflation. These high yields transformed the United States into a magnet for international capital. Investors across the globe rushed to convert their local currencies into dollars to buy high-yielding American bonds and financial assets. At the same time, the Reagan administration pursued a mix of substantial tax cuts and increased defense expenditures, driving up federal borrowing and reinforcing the upward pressure on domestic real interest rates.
The resulting demand propelled the US dollar upward at a blistering pace. Between 1980 and early 1985, the currency surged by roughly fifty percent against the currencies of America's primary trading partners. For American consumers and tourists traveling abroad, a powerful dollar felt like an unmitigated boon, making imported foreign goods and international travel remarkably affordable. Inside the domestic economy, however, the soaring exchange rate functioned like a massive tax on exports and an artificial subsidy for foreign competition.
American manufacturing bore the brunt of the imbalance. Heavy industries, electronics producers, and automobile manufacturers suddenly found their products priced out of foreign markets, while domestic showrooms and retail shelves filled with cheaper imported alternatives from Japan and West Germany. As corporate profits eroded and factories shuttered across industrial hubs, political anger boiled over. Members of Congress faced immense pressure from domestic industrial coalitions to erect protective trade barriers, including punitive tariffs and import quotas. By late 1984, the sheer scale of the US trade deficit threatened to shatter the post-war international trading order.