On September 22, 1985, the finance ministers and central bank governors of the United States, Japan, West Germany, Britain and France met at the Plaza Hotel in New York and issued a statement that the exchange value of the dollar had not reflected fundamentals and that some orderly appreciation of the main non-dollar currencies was desirable. The dollar had risen about 50 per cent against the other major currencies since 1980. It fell the next day.
American policy caused the rise. The Federal Reserve under Paul Volcker had pushed interest rates above 20 per cent in 1981 to break inflation, and the Reagan administration's tax cuts and defence spending had kept deficits high, and capital had come in to earn the difference. That made American exports expensive and imports cheap, and by 1985 the trade deficit was running at about 120 billion dollars a year, and the steel, machine tool and car industries were laying people off.
Congress was the pressure. Protectionist legislation was moving, including a bill that would have imposed a 25 per cent surcharge on Japanese imports, and the administration's case was that it needed either a lower dollar or a trade war. James Baker, who had become treasury secretary in February, wanted the dollar down. The Japanese, who had the largest surplus, wanted a managed decline rather than a collapse, and got it.
What was agreed was intervention: the central banks would sell dollars from their reserves in a coordinated way, and they did, about 10 billion dollars' worth in the first six weeks. That is small compared with daily turnover now and it was small then, but it changed expectations, which is what it was for. By 1987 the dollar had fallen about 50 per cent against the yen and about 40 per cent against the mark. The Louvre Accord in February 1987 tried to stop the fall.
The consequences were bigger than the exchange rate. The yen's rise cut Japanese exports sharply and the Bank of Japan cut interest rates to offset it, from 5 per cent in 1985 to 2.5 per cent in 1987, and the money went into land and shares. Japanese share prices roughly tripled between 1985 and 1989 and land prices in Tokyo went up several times over, and the bubble burst in 1990. Japan has been fighting deflation on and off since.
For the United States the trade deficit did not close until 1991, and the current account has been negative almost continuously since 1982. The accord is now the standard case study in how much coordinated intervention can and cannot do.