September 2015 – GLOBAL ECONOMY – In 1934, United States President Franklin Delano Roosevelt outlawed the private ownership of gold. After confiscating billions in bullion, Roosevelt shocked the world by revaluing it. The cost for an ounce of gold, previously set at $20.67, was suddenly $35. Overnight, Roosevelt devalued the dollar by 69 percent. The president told the country that it was a radical effort to stimulate America’s economy. A cheaper dollar would make America’s exports less expensive and help American companies sell more products to the rest of the world, he said. More money would flow into America, and more jobs would be created. It did those things. And it also marched the world another giant step closer to war. From the world’s perspective, President Roosevelt’s actions felt like a full-on economic broadside designed to steal a bigger chunk of a stagnating global economy. To the world, it was another—albeit much bigger—salvo in an ongoing global currency and trade war! And it responded in kind.
Today, the economic guns of 1934 are thundering once more. The world’s economy is mired. China, Europe and America face sluggish growth. Commodity prices have cratered. And demand for materials has been blown to smithereens. Meanwhile, global debt is skyrocketing. And stock markets are rattled. Desperate nations are doing everything they can—including destroying their currencies—to stimulate their economies and keep disruptive internal social forces at bay. Could we really be headed toward world war again? The parallels are ominous. It is in this current tense climate that, on August 11, China surprised the world by initiating the greatest single-day devaluation of the yuan in China’s history. And that was just the warning shot. Over the next days, the yuan fell at an unprecedented rate—blowing multi-decade records for depreciation. The move was especially significant because, for the past several decades, China has made sure the value of the yuan closely tracked the dollar.
The fall of the yuan quickly mobilized other nations into action. Kazakhstan and Vietnam announced they would devalue their currencies in response. India, the world’s second-largest nation by population, did not even make an official announcement before it depreciated the rupee. Turkey let its lira slide for a record five days. The international outrage was loud and clear—and it drew a response from China. On August 16, Ma Jun, the chief economist at the People’s Bank of China, emphatically reassured the world that the Chinese government had “no intention or need to participate in a currency war.” He called commentary to the contrary “completely groundless and unfounded.” The denial was seen as confirmation that China had now officially entered the global currency fray, and that the war was headed into a new—potentially much more devastating—phase.
Former U.S. ambassador to China Jon Huntsman told cnn that “people are very, very frustrated” with China’s deliberate policy of devaluation. “China is no longer an average player in the global economy. They’re the second-largest economy in the world. And when you have the devaluation of 2 percent right off the bat automatically—you’re going to have a higher cost burden on the exports from the United States to Asia, and to one of our largest export markets, to say nothing of the impact it’s going to have on the region” (August 16). Over the course of eight hours, Chinese products became 2 percent cheaper than they were prior to the currency markets opening that day. During the course of a week, they became 4.8 percent less expensive. Where will they be in a month or a year? Can American exporters survive such warfare?
Reuters quoted unnamed “powerful voices” within China’s government who suggested the yuan needed to fall by 10 percent. Morgan Stanley predicted a 15 percent fall on August 12. If this occurs, there will be retaliation. China’s currency bombardment is not happening in a vacuum—just as President Roosevelt’s action to devalue and outlaw private gold ownership did not happen in a vacuum.
Currency War Precedes World War
The lead-up to the second Great War began in a world of great economic excesses and speculative fervor. In America it was particularly evident in the growth of the real-estate bubble of 1921 to 1926 and the great stock market bubble of 1924 to 1929—both of which were fueled by easy borrowing. In Japan, during the 1920s, the national government spent massive amounts in a futile attempt to prop up commodity prices. It resulted in its great financial crash of 1927. In Europe too, the origin of the crisis can be pinned on excessive debt. The failure of little-known Austrian bank Credit-Anstalt triggered a wave of bank failures, and an economic downturn that swept the Continent.
When the debt bubbles exploded, the resulting economic downturns led to wave after wave of currency devaluation. Germany, Hungary and Italy virtually destroyed their currencies in an attempt to stimulate their economies. In 1930, America responded by passing the Smoot-Hawley Act to protect American producers. Historian Richard Hofstadter called the law, which raised the tariffs on 20,000 imported goods to record levels, “a virtual declaration of economic war on the rest of the world.” The impact ricocheted. Twenty-three major trading partners sent letters of protest and threats of retaliation. They were ignored. In May 1930, America’s greatest trading partner, Canada, reacted by imposing tariffs on more than a dozen products that accounted for almost a third of U.S. exports to Canada.
Within two years, 25 countries had fired back. Over the ensuing years, U.S. and foreign trade took massive losses. America exported $5.24 billion in goods in 1929; by 1932 the total had fallen to just $1.6 billion. Overall, world trade declined some 66 percent by 1934. But the Smoot-Hawley Act was really just one shot in an ongoing economic war that was already hot and about to get hotter. –The Trumpet