1. Historical Context
In the early 1980s, the US dollar was excessively strong against other world currencies, stifling the competitiveness of the US export industry and creating a huge trade deficit.
2. The Breakdown Event
On September 22, 1985, the finance ministers and central bank governors of the US, Japan, West Germany, France and the United Kingdom met secretly at the Plaza Hotel in New York. They signed an agreement to intervene in a coordinated manner in the foreign currency market, massively selling dollars and buying Japanese yen and German marks to force the depreciation of the US currency and reduce the trade imbalance.
3. Global Economic Impact
The dollar depreciated more than 25% over the next two years, improving the US trade balance. However, the resulting spectacular appreciation of the yen forced the Bank of Japan to cut interest rates to compensate for the loss of competitiveness of its exporters, setting the stage for the inflation and collapse of Japan's housing bubble.
Key Financial Lesson (Psychology of Money)
Artificial exchange rate interventions resolve short-term trade imbalances, but they tend to transfer instability to other domestic markets (real estate, credit) of the countries involved.
4. Practical Case or Real Life Example
The Plaza Accord is often cited by Japanese economists as the triggering source of their era of chronic deflationary stagnation by unsustainably altering the yen parity.