Lessons From The 1930s Currency Wars

Tyler Durden's picture

With Abe picking his new dovish playmate, and Draghi doing his best to jawbone the EUR down without actually saying anything, it is becoming very clear that no matter what level of bullshit histrionics is used by the politicians and bankers in public, the currency wars have begun to gather pace. Japan's more open aggressive policy intervention is the game-changer (and increasingly fascinating how they will talk around it at the upcoming G-20), as if a weaker JPY is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation. The last time the world saw a fully fledged currency war was in the early 1930s. Morgan Stanley's Joachim Fels looks at what it was like and what lessons can be drawn for the sequence of events - there are definite winners and losers and a clear first-mover advantage.


Via Morgan Stanley, Back to the 1930s? What Would a Currency War Look Like?

What did the currency war of the 1930s look like?

The backdrop for the currency war of the 1930s was the Gold Standard and the Great Depression (many economists blame the former for the latter). By fixing the value of the currency to the price of gold, the Gold Standard prevented a country from printing too much money. If it did, people would simply exchange it for gold (or for other currencies pegged to gold). Yet, this rigid ‘rule’ also denied policy-makers any flexibility to deal with shocks to their economies. This was the reason why the UK abandoned this regime, setting off a volatile chain of events:

  • On September 19, 1931, sterling was taken off the Gold Standard. It was devalued against gold and hence against the ‘gold bloc’ currencies (currencies that remained pegged to gold). The run-up to this event and its fallout was felt throughout the world.
  • Prior to the devaluation, in June and July 1931, one prominent bank in both Austria and Germany failed, which led to capital controls being imposed in both places. Capital controls protected these economies in the near term, but exacerbated fears about the future of sterling and the Gold Standard itself.
  • Following the devaluation of sterling, Norway and Sweden went off the Gold Standard on September 29. A day later, Denmark followed.
  • The US economies, like other countries of the gold bloc, lost competitiveness and exports turned down. Eventually, in January 1934, the US Congress passed the ‘Gold Reserve Act’ to nationalize gold held by banks and monetized it by giving banks gold certificates that they could use as reserves at the Fed. More importantly, it also forced a devaluation of the US dollar against gold.
  • Like the US economy, the remaining gold bloc countries (France, Germany and some smaller economies) also suffered a loss of competitiveness and poor export and industrial production growth. By 1936, they gave up and abandoned the Gold Standard as well.

What lessons can we draw from the events of the 1930s?

 We draw three pertinent lessons from that episode:

Lesson 1: As in every crisis, events were and will always be highly non-linear, with domestic conditions the most likely cause: It was painfully high unemployment that was the main driver of the devaluation of sterling.2 Although unemployment had been painfully high for a while, it was only a few months prior to the devaluation that market fear really ratcheted up.


Lesson 2: Markets punish policy uncertainty: Needless to say, there were dramatic movements in the exchange rate of the countries that devalued. However, with the devaluation out of the way, market and economic pressure as well as policy uncertainty shifted to the ‘gold bloc’ economies. For investors, it became a matter of when, rather than whether, the gold bloc economies would be forced to respond.


Lesson 3: Early movers benefited at the expense of the gold bloc, a ‘beggar-thy-neighbor’ outcome: From an economic standpoint, the sharp improvement in competitiveness of the early movers stood them in good stead against the gold bloc economies who stuck to the regime. Exhibit 1 shows that the UK and the Scandinavian economies saw a significant improvement in industrial production by 1935, whereas the ‘gold bloc’ economies (France and Germany – even though the latter employed capital controls) suffered. By the time the gold bloc economies capitulated, they had lost significant ground on this front to the early movers.



Could it happen again? Like any historical precedent, there are differences and similarities that must be accounted for.

What’s different this time? Unlike the Gold Standard era, most major currencies are now part of a flexible exchange rate regime, which should make such large currency moves less likely. Further, extreme tail risks that might well have precipitated such dramatic policy responses only a few years ago have also receded.

What’s similar? Domestic origins and ‘beggar-thy-neighbor’ effects: Even though policy-makers battled using exchange rates, the events of the 1930s had their origins in domestic issues. As mentioned above, it was painfully high unemployment in England that led sterling off the Gold Standard. The competitive devaluations that followed were also reactions by policy-makers to protect their domestic economies.

Similarly, it is the domestic agenda that could drive competitive depreciation today. In this vein, the desire of Japan’s policy-makers to revive investment in their export-oriented economy likely means that the yen will likely play an important role. However, since global demand is likely to remain sluggish, a revival of Japan’s export sector on the back of yen weakness is likely to eat into the market share of other exporters – something that could well invite measures to curb significant weakening of the yen. These negative spillovers are identical in nature to the ‘beggar-thy-neighbour’ policies of the 1930s.

If it did happen, what could an improbable but not implausible sequence of events look like?

In what follows, we create a plausible sequence using events that have both a reasonable probability of occurring and are already on investors’ radar screens:

  • The starting point: Japan’s policy-makers initially follow a concerted plan of reflating the Japanese economy, with a weak yen as an important pillar of strengthening the export sector.
  • Further easing from the major central banks... The ECB and/or the Fed ease further due to a deterioration in financial conditions. In the case of the euro area, euro strength or an idiosyncratic increase in risks might be responsible for a tightening in financial conditions. In the US, the obvious candidate is the risk surrounding the fiscal cliff and the debt ceiling confronting the US Congress.
  • ...and/or capital controls from EM economies: Uncomfortable with the combination of further capital inflows and yen weakness, some AXJ and LatAm economies impose capital controls.
  • Japanese policy-makers react to yen strength: In order to ensure export competitiveness, Japanese policy-makers take further measures to weaken the yen.

There isn’t much in the ‘timeline’ above that is news, yet the combination serves well to illustrate how a currency war could plausibly play out.

Where are we now?

The key variable in the sequence of events above is the reaction of Japan’s policy-makers. If a weaker yen is indeed an integral part of their plans and if they have a strong intent to make sure it remains so, the risk of a currency war is higher now than it has been in the past. Investors have moved beyond questioning whether EM economies will have a response and are now wondering at what point such a response is likely. At the same time, near-term risks in the US and euro area economies remain in play, as does the prospect of prolonged or even enhanced monetary stimulus.

In the EM world, Japan’s export competitors in AXJ could respond with some combination of verbal intervention, FX intervention, capital controls and, with a much lower likelihood, policy rate cuts. In the particularly interesting cases of Korea and Taiwan, our economist Sharon Lam believes that verbal intervention (already under way to some extent), intervention in the foreign exchange markets and capital controls represent the most likely policy reactions. Rate cuts at a time when both economies are already expanding may serve to accelerate domestic growth and perversely cause even more capital inflows and currency appreciation rather than depreciation. For moderate moves in the yen’s value, the effects on China are likely to be limited since it does not compete head-to-head with Japan’s high-end electronics and car exports. However, in a currency war situation, the slow-moving USDCNY exchange rate may make restoring competitiveness tricky.

However, even as we discuss AXJ, let us not forget that other parts of the EM world are also concerned about currency appreciation. For all the talk about potential policy action in AXJ, we have already seen some of it come out of Latin America. In contrast to AXJ, Latin America is slowing, which puts rate cuts firmly on the agenda. Indeed, Colombia’s recent rate cut was likely influenced by the peso’s strength. Luis Arcentales, our Mexico economist, believes that concerns about the currency war have also probably been an influencing factor in Banxico’s u-turn towards a dovish stance from a hawkish one just a few weeks ago. In an innovative twist to the usual FX intervention, Peru has announced that it will buy back its international bonds and issue ones denominated in its domestic currency instead. Even Chile, one of the most advanced and stable EM economies, is discussing structural reforms to address the strength of its currency.

In summary, while a currency war is not our base case, the new-found commitment of Japan’s policy-makers does raise the risk of retaliatory action to keep the yen weak, and brings us a step closer to a currency war. The experience of the 1930s suggests to us that such large currency crises are likely triggered by domestic issues, and that they do create distinct winners and losers. EM policy-makers are already gearing up to make sure they remain on the winning side, but the balance of power for now rests with Japan.

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davidsmith's picture

And what if, instead, we are on a de facto gold standard, and what is happening is that we are going off this de facto gold standard?  Then we are not beginning "currency wars" but something else.  Nor does "currency wars" seem to be too accurate, since there are so many ways to punish bad actors in that regard.  For example, the notion of currency wars is so widespread that it is already priced in.  Is a priced in currency war a currency war, or is it a contradiction in terms.


Stratification of wealth is a de facto gold standard--it's what you do when officially going back to a gold standard, would be too disruptive and perhaps (but only perhaps!) politically unacceptable.

Stoploss's picture

Industrial Production..

I guess there arent enough functioning brain cells available to realize that in the world TODAY, industrial production is a thing OF THE PAST..

We have infinite more technology available now than at any time in history.  TECHNOLOGY, in, and of itself, REDUCES industrial production by default..

I have so many computers and gadgets, i dont have to leave the fucking house to get paid.


So, here's an idea, if technology is killing the metric of measurement, ( industrial production ), then why not change the metric to SOMETHING THAT HAPPENS IN THE CURRENT FUCKING CENTURY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! OH, I DONT KNOW, HOW ABOUT FUCKING TECHNOLOGY???????

Hey, then maybe we dont have to go around killing everything that moves to get a fucking GDP print!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!



Panafrican Funktron Robot's picture

I agree completely, another thing I was thinking about, who gives a shit if we go into a recession?  Quality of life.  That's the metric I give a shit about.  Prices fall as technology advances.  We should be experiencing recessions as a result. 

A Nanny Moose's picture

Bingo! Those "Bigger is better" AT&T commercials make me want to beat the shit out of the Bernays student who created them.

hmmtellmemore's picture

The only metric that matters:  how much gold is entering/leaving your nation.  Everything else is just a footnote.

r3phl0x's picture

Silver, Oil, Hookers, and Booze too.

nofluer's picture

You're mixing consumables and capital goods. Oil and booze are consumables and promote continued economic activity and trade, and demand is flexible. Silver is an asset/store of wealth that discourages economic activity in re trade. Hookers can be both an asset and encourage trade... so I think we probably need more hookers.

Pinto Currency's picture


The author should get his facts straight re. what led to the 1930s.  The Fed was created in 1913 along with "flexible currency".  The Fed and the Bank of England then ran loose monetary policy for 2 decades.  In the end, the Bank of England tightened sucking all of the credit out of the US.

Whatever happened after that point can be argued in terms of the response to the crash, however the "gold standard" did not cause the great depression in the US.  Two decades of Fed monetary bubbles did.


BigJim's picture

Indeed. And the author also conflates the Gold Standard (which ended in 1914) with the Gold Exchange Standard, which was introduced at the Genoa Conference in 1922.

DosZap's picture

who gives a shit if we go into a recession?

 Going into????, We HAVE never been OUT of one since '08.

bobthehorse's picture

The real lesson?


That's the only thing that got us out of the depression.

Scary shit.


nofluer's picture

Sorry, Bob. the war did NOT "end the depression." Will that old fantasy ever die?

disabledvet's picture

the outlier is the the USA. Still plowing ahead with free trade agreements "like the 10 million lost jobs are just a token." Sorry but i fail to see how the "global mercantilists" don't go all in for "crazy price wars" to battle for what few bucks we now poor US consumers have. Clearly the USA has devalued MASSIVELY (79 yen to the buck at the low!)...but in my view it does appear to have devalued CORRECTLY as well. "now the rest of the world has to get us out of our recession" in order to "get themselves out of their's." (i can think of Sweden as the only exception. and that's not saying much really.) in other words "just how FREE can you build that widget in order to have a market to begin with?" i would argue VERY free "if the alternative is your country going bust" or worse "losing the protection provided by America's police state." I really can see VERY LARGE Army divisions and VERY LARGE Naval fleets should the Federales figure out how to stretch their dollar correctly. Strangely..."i think the folks in DC are actually going to figure this one out." http://www.youtube.com/watch?v=f0G8XJNz4bY

BigJim's picture

Careful. You might wear out your " key... and then where would you be, if you actually needed a quotation mark?

IridiumRebel's picture

...ending in war...just like the 1930s.

EscapingProgress's picture

All men between the ages of 18 and 65 report for economic stimulation duty! Unless you or your daddy are well connected, of course...

Yen Cross's picture


    Iridium Rebel you are fantastic. I remember you giving great advice from "Sandy" regarding generator run times.

 We discussed gallons/liters of runtime versus(themal) output. I'm being " facetious"... I know you much better now.



IridiumRebel's picture

Thx bro, watch your 6 with all these currency plays ramping up.

Woodrox's picture

who can print faster to keep gdp from fallng the most in their respective countries= currency war

kalasend's picture

Can sombody kind enough to suggest how I can reconcile these two conflicting ZH themes:

1. The money printing, inflation, gold-bitchez theme

2. Huge housing shadow inventory temporary choked supply waiting to explode

I mean, how do you put the two into proper perspective? And if that's not possible, what data is missing here? 

IridiumRebel's picture

Succinctly: either way we are fucked.
How's that sound?

Spacemoose's picture

one question i would love to have answered:

what percentage of the shadow inventory is located in areas which had previously been redlined (prior to the anti-redlining regulations)?  (rotten apples are not shadow produce in the grocery business).



nofluer's picture

Spacemoose -

Interesting question - but I don't think the common wisdom would prevail on it. Back in the day when the whole housing bubble was ABOUT to explode (as the first MERS case unfolded in Kansas), I was looking at who was defaulting and who was not. It turned out that the poor folks who got loans would work 5 jobs, and sleep while prostituting themselves to get their payments. ie they had a chance to OWN their own house and they were NOT going to let it go!

OTOH, the house flippers, third vacation home-ers, "housing "investors" had no real personal life-changing skin in the game and were the principle users of jingle mail, and walking shoes. At least in the early stages.

Since unemployment has mushroomed, I haven't tried to follow the issue, but I'd guess that the lower end of the economic spectrum is still walking the streets picking up pop cans, working at WalMart and the corner convienience store, and likely to still be making their payments since their situation would not have changed all that much.

But "creeping" hyper-inflation may yet destroy them.

Just my perspective.

Mr Lennon Hendrix's picture

You are forgetting that Tyler has been uber bearish stocks this whole time too.  Tyler is a Biderite, a Rosierian - he thinks stocks should be valued lower.

Tyler has been right about gold and USTs though, so he has a winning record.

How to summerize ZH?  Well, you don't need to.  WHat you need to do is figure what is happening out for yourself, and I can help.

So you are starting in the right place:  unlimited money printing is highly inflationary, and there is massive deflation in the system in the form of a rate rise and shadow inventory in housing.  Add falling GDP given the UE numbers and we have a But how does it end?  The fiat ystem collapses under its own weight because it is and has always been backed by nothing.  Then people either barter with goods like they are in an island economy (island economies have production problems as everyone spends their time running around trying to find goods to trade) or people begin to use real money, gold and silver (precious metals are the only real form of money by definition since they are the only substence on earth that permanently hold their value).

kliguy38's picture

Well said Mr. Henrix. We are entering the hard down deflationary cycle and very shortly gold is about to enter a very nice move up as fear reenters the equation. It is a store of value.

earleflorida's picture

when the two said paradoxes finally collide head-on... you, me and everyone else will be paying $500k for a $50k house-- in contrast, you'll only need a few sheckels of 'gold-bitches' to purchase said property, or anything else in proportion according to Davids' daniel?

yatikto's picture

Where are you going to get 500k?

All the money is staying in the market, what's the mechanism for it to get into real economy?

Dividents?  You get those?

yatikto's picture


Money that is printed stays in stock market.  Mostly in stocks and bonds, some bleeds out into commodities which drives inflation. When it really starts pouring into commodities, then we have hyperinflation.  First the jump in futures, then clean store shelves.

The houses that are in shadow inventory are for lower classes who are not in the stock market, so they don't have the rewards of the "making it rain campaign". Any increase in wage is eaten up by inflation. So, that inventory should be full for a while.

Their(my) only benefit is lower rates, to get more into debt.


So..  Bernanke..  ah.. where do I start.

Panafrican Funktron Robot's picture

The main reconciling theme here is that the US dollar is being devalued vs. real goods and services.  That is true whether we experience "deflation" or "inflation".  This devaluation will accelerate as the currency war accelerates.  Gold is a store of wealth that is currency independent.  It is the one true hedge against fiat currency, and that hedge has been shown to be necessary.  

Silversinner's picture

Conflicting themes ??

Buy gold and silver as said many years ago and buy

good quality low price house with the future poceeds

just cash with the coins and stop being a mortage slave.

This still is and was a good financial move

at least for me,

Gold is financial freedom...

PUD's picture

yeah but ben bernanke is a student of the great depression so there! 

NoDebt's picture

I'm cheering right now because apparently those who shoot first in a currency war win.  Did the US not shoot first with ZIRP and QE1 in 2009?  Yay!  We win!  We win a steaming pile of rubble that used to be a great nation, but that's what winning looks like these days.


Catflappo's picture

Actually I am thinking Zimbabwe will therefore be the winner,  no wait I mean Argentina,   no I mean Russia .... oh hang on a moment.... this does not seem to be a 'new concept' starting in 2008 ....

Mark123's picture

Currency depreciation to stimulate your economy is just warfare without the bullets/bombs. 

Sadly, it always leads to the latter.

Tursas's picture

Not really, it was actually the opposite. The treaty in Versailles was the cause for WW II.

ersatzteil's picture

Ah but it was specific parts of the Treaty that caused the biggest issues, namely the massive financial reparations demanded from Germany. The government just monetized this post-war debt, paying off the victors with a massively devalued currency.

Similar thing with Imperial Japan: in their drive for natural resources the United States slapped them with crippling sanctions. The oil embargo was the final blow, shoving them into a corner such that military hardliners thought Pearl Harbor was their only solution.

Melson Nandela's picture

The WWI reparations were fixed in Gold marks, and financed by loans from New York Banks, and paid to the US, Britian and France. Weimar Germany then monetized its own debt, contributing to the global banking crisis of the time.Governments made sure to get paid and foisted the problems on the banking system.

Germany also financed all of WWI with debt, so they were in a terrible position to start with.

Yen Cross's picture

 Ask me in 6 hours. <about> ( Lessons from The 1930's Currency Wars)

GreatUncle's picture

Off all the points mentioned this one seems to be missed. "In the 1930's it was about unemployment"

We have an added problem this time round of seriously large debts that have to be serviced seeing as no nations seems to have any intention of ever paying them off do they? The level of debt will be a magnifier of the problem in the devaluation game.

So you go into a currency war and attempt to create jobs the highest valued counties with "MASSIVE DEBTS AND NO WAY TO REDUCE IT QUICK ENOUGH" will see their ability to service their existing debt diminish and forced to respond to Japan's actions with the same. Think that is a fairly obvious point and I also feel the level of current debt will determe how long you can carry it on for like a game of poker.

So only 2 thoughts now with Japan going all in. 

1. It is either incredibly stupid or suicidal if you start ramping up your own debt making it worse if you have to stop before you win.

 2. more cynically is it a direct financial attack on some other weaker country they know exists.


NoDebt's picture

Your point about the level of debt is a good one.  File that under "one of the things that's different this time around."  Might make a dfifference in the end, might not.  But it's worth noting something like that to caution against the belief that it's going to be an exact re-play of the 30s.

AynRandFan's picture

What debt? The Fed is buying it all and making it disappear. Even so, I doubt our new-debt-free status will help us escape from the moral abyss of unlimited spending.

eddiebe's picture

The author is comparing apples with carrots. We have no gold or silver standard now. We have a fiat standard, which automatically means a currency war, because every central bank has their own currency cannon. We can't go off the fiat standard unless we go back to a gold/silver standard. The banksters will hate that idea til they have all or most of the gold/silverplus miners themselves.

Piranhanoia's picture

England got the crap bombed out of them and opted for two generations of fratricide,  Two fascist dictators,  three traitors that gave their countries away,  two that were so small they had to play ball to survive,  and two nordic's that had to fight and got lucky because they were so far north.   No wonder all these lovers created the Euro and forgot how much their friends hate them.

nofluer's picture

I would say that England was willing to share the bottle of wine, but not the bed with her EU siblings...

world_debt_slave's picture

Waiting for aliens from outerspace to save us!

BandGap's picture

To sum it up, there's no "good" outcome. I marvel at those that have the statistics and then try to write the story. The story is happening all around us. The basic problem is there is no "good' solution, one that doesn't lead to some discumbobulation. We are all just sitting around waiting and watching for the one (or two) events that knock this shit to the floor. I guess whoever guesses this correctly will pat themselves on the back and be named prgnosticator of the year. In the end I just have to be prepared for the inevitable outcome. And the outcome, and we know it's going to be bad, isn't easy to see either.

I pray for those who may be in Harm's Way, especially the kids and young adults.

besnook's picture

as for the article. the only places with domestic issues are in europe. japan and the usa do not have domestic issues. the usa does not have domestic issues because the populace is dumber than lemmings running over a cliff. japan has no domestic issues because of a huge savings account.

there is no gold standard in play this time. all money is fiat so only the history of fiat is applicable. the history of fiat says everyone will print with abandon until someone resets with either a gold standard that will make it the richest country in the world because of the rush of foreign investment or a greenback(trillion dollatr coin) that will, at first, make that country the winner in the depreciation race until everyone realizes that the trillion dollar coin is the smartest way out(mathematically) reversing the flow of funds making that country the wealthiest in the world.

the other difference is the unknown outcome of the war for resources that has expanded across africa all the way to the borders of china, india and russia. china and russia(india will likely go along with them) have been complaining about the unipolar(dollar) world for 20 years now. their end game is to take it down. drones may be neat but boots on the ground will decide the outcome. if history is to be followed then the 1930s sterling is the 2010s dollar. the dollar was the winner in the last round. the yuan will be the winner this time.

DosZap's picture

japan has no domestic issues because of a huge savings account.

You must mean the Gv't,because the Japanese people have spent this crap out of those many years of 20-25% savings rates.

They are near dead broke,and most of their investments have been in the Gvt ,so they are doubly screwed.

Couple that with ZPG, and the elderly outnumberng the young, and they are near dead meat.

nofluer's picture

the other difference is the unknown outcome of the war for resources

Then China wins. They've been buying huge amounts of resources (like copper) that they've moved to warehouses in-country, as well as buying up mining companies around the world. Although both India and China have been buying lots of gold, China is broadly diversified in resources while India is not.