Plaza Accord

The Plaza Accord (1985) was a landmark agreement by the Group of Five — the US, Japan, Germany, France, and the UK — to coordinate currency intervention and weaken the overvalued US dollar. The dollar had appreciated 50% in the early 1980s, making US exports expensive and imports cheap. The accord succeeded in depreciating the dollar ~50% over two years, providing relief to US manufacturers and signaling the start of coordinated international economic policy.

Context: the strong dollar of the early 1980s

In 1980–1985, the US dollar appreciated dramatically. The Reagan administration had raised interest rates sharply to fight inflation, and capital poured into the US seeking high returns. The dollar went from 210 yen (1980) to 260 yen (1985), and from 2.20 German marks to 3.50 marks.

The strong dollar made US exports expensive. A car made in Detroit cost 50% more in marks or yen than it had five years earlier. US manufacturers lost market share globally. Simultaneously, imports became cheap, and the US trade deficit surged.

By 1985, the US trade deficit had reached 3% of GDP (enormous). Manufacturing in the US was struggling. Politicians blamed the strong dollar and demanded action.

The agreement

On September 22, 1985, finance ministers and central bank officials from the G5 met at the Plaza Hotel in New York. They agreed to:

1. Acknowledge that the dollar was overvalued.
2. Coordinate intervention to weaken it. Each central bank would sell dollars (and buy other currencies) simultaneously in the foreign-exchange market.
3. Cooperate on policy: The US would reduce its federal budget deficit (through taxation and spending cuts), and other countries would reduce their trade surpluses.

The intervention was public and coordinated, signaling to markets that major governments were committed to weakening the dollar.

The aftermath

Markets responded immediately. The dollar began to depreciate. By 1987, the dollar had fallen ~50% from its 1985 peak. USD/JPY fell from 260 to 145. USD/DM fell from 3.50 to 1.50.

The depreciation was both rapid and large — a historic move in the currency markets. US exports became competitive again. The US trade deficit eventually shrank (though not immediately; the “J-curve” meant it worsened first as volume adjustments lagged price adjustments).

Coordinated vs. unilateral intervention

The Plaza Accord was remarkable because it was the first time major governments successfully coordinated currency intervention. Each central bank alone could not sustain the dollar’s depreciation (reserves would run out), but together, they could overwhelm private trading.

The success of Plaza showed that coordinated intervention could move markets when all parties agreed on direction.

The follow-up: the Louvre Accord

By early 1987, the dollar had fallen far and fast. Now countries worried it was too weak. Japan and Europe feared their currencies were appreciating too much, hurting their exports.

In February 1987, the same G5 plus Canada agreed to stabilize the dollar at new levels — the Louvre Accord. They would defend the dollar from falling further. But the Louvre Accord was less successful; the dollar continued to weaken and fell to 120 yen by 1995.

Lessons for modern policy

The Plaza Accord is studied by policymakers as an example of effective coordination. It showed that:

1. Consensus matters: All major countries had to agree.
2. Public signaling matters: The announcement that governments would intervene was as important as the intervention itself.
3. Intervention can work if coordinated and sustained.
4. Costs exist: US savers benefited from cheaper imports, but US manufacturers benefited from a weaker dollar. Trade-offs are unavoidable.

Modern coordination is rare. The post-2008 world saw countries arguing about “currency wars” and competitive devaluations. A coordinated accord like Plaza seems unlikely in the current geopolitical environment.

See also