report of statistics assessment of factors causing pressure in the lives of ftu students

Currency war, also known as competitive devaluation, is a term used to describe competitive currency devaluation Currency wars occur when countries simultaneously devalue their currencie

TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG

Tiền Tâm Đan - 2215027019

Ngô Lê Quỳnh Như 2215027040

Lê Gia Huynh — 2215027057

Ho Chi Minh City, 2024

PROLOGUE

According to Wikipedia, currency is a means of exchanging goods and services accepted for payment within a region or between a specific group of people Currency can take the form of paper money or metal coins (fiat money) issued by the State (central bank, Ministry of Finance, .), commodity money (rice, salt, gold), substitute money (coupons, reward points, .) or cryptocurrency issued by a network of computers (typically Bitcoin) In the view of M Freidman and modem economists, "money is the means of payment" and can perform the functions of intermediaries of exchange, units of calculation and can accumulate wealth Economists before C Marx interpreted money from its highest form of development, thus failing to clarify the nature of money On the contrary, C Marx studied money from the history of the development of production and exchange of goods, from the development of forms of commodity value, thus finding the origin and nature of money Thus, in modern society, money has always played an important role, being a special commodity separated from the commodity world as a uniform common parity for other goods, expressing social labor and expressing relations between those who produce goods

The term Currency War is well known when it is the title of the famous book published in 2008, penned by author Song Hongbing It was a war with neither bombs nor gunfire, but the consequences were brutal It can be said that these are retaliatory measures of the economies involved, economic conflicts between economies, which, in macro eyes, will lead to instability in the global economy In recent years, the phrase CTTT has been mentioned more when China has "devalued" its currency Looking back

at history, no one wants another war, because the consequences of the previous two wars have haunted many countries

Because of the attractiveness of currency, under the facilitation of Mr Pham Van Quynh, our team decided to choose the topic "Currency Wars", applying macro theories

to delve into exploiting and analyzing 2 currency wars in world history, the I (1921- 1936) and the II (1967-1987).

TABLE OF CONTENTS

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2 The impact of currency wars on the worÌd economy 5c cào se 6 CHAPTER 3 CURRENCY WARS FROM A MACROECONOMIC PERSPECTIVE

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1 Macroeconomic theoretical foundafIonns - c1 112211111 ket 8

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2 Analyze the causes and effects of currency wars from a macroeconomic

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PA ° ¬ - 4 9 2.1.1 Currency wars occur due to a country's trade deficit 9 2.1.2 Currency wars occur due to high unemployment in a country 12 2.1.3 Currency wars occur due to a country's policy of hoarding foreign

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PICTURE BIBLIOGRAPHY

Figure 1 The trade deficit between China and the US in 2015.0 17 Figure 2 Children in Germany play with piles of money like lego puzzles 27 Figure 3 Precursors as mountain-high in a German bank in 1920 - 28 Figure 4 Prices of basic commodities plummeted ó5: 22c 22s 32x22 47

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CONTENT CHAPTER 1 OVERVIEW

1.1 Reasons for choosing the topic

Issues surrounding currencies have always been a hot topic for economists around the world Currency is the most fundamental and important measure, and once currency fluctuations occur, it can have far-reaching effects on the economy In economic fluctuations, it is impossible not to mention currency devaluation It is a completely common phenomenon in the forex market However, if a series of countries simultaneously get involved, trying to reduce the value of their currencies at the same time, it is a sign of a currency war to come

There have been many economic studies related to competitive devaluation but almost only cover one to two contents, not exhaustive Moreover, each era has different problems, especially in the current context, international currencies appear as integration and competition, so the causes of currency wars will have distinctive characteristics from previous wars Not only that, for the issue of competitive devaluation to have more depth and clarify their impact on competition between countries, it is necessary to put it from a macroeconomic perspective that some articles or studies ignore In addition, although there are many measures proposed when affected by the trade conflict between the US and China, they are not really effective, so from the measures that international measures have taken to prevent currency wars, it is necessary to be carefully selected and in line with Vietnam's action orientations in case it 1s faced with currency wars

For these reasons, this essay can be a fairly comprehensive account of the currency wars that occurred and their connection, and collect opinions and arguments from economists and politicians to talk about the possibilities of a currency war in the present day From there, based on the proposed solutions to prevent the currency war in the world applied to Vietnam in the most appropriate way

1.2 Research objectives

e Learn aspects of currency wars: definition, causes, impact

e Analyze aspects of currency wars from a macroeconomic perspective

¢ Lear about currency wars in the world, thereby drawing lessons for Vietnam

1.3 Research questions

Question 1: What are currency wars?

Question 2: What causes currency wars?

Question 3: What impact do currency wars have on the world economy? Question 4: What currency wars have there been in the world?

Question 5: What lessons have been learned for Vietnam from the currency wars? 1.4 Practical significance of the topic

e Synthesize the basics of currency in general and currency wars in particular

e Analyze aspects of currency wars from a macroeconomic perspective, thereby helping to study macroeconomics more effectively

® Draw lessons learned for Vietnam in preventing and dealing with currency wars from previous currency wars

1.5 Essay structure

The essay is built with a structure of 5 chapters as follows:

Chapter 1: Overview

Chapter 2: The Theory of Currency Wars

Chapter 3: Currency Wars from a Macroeconomic Perspective

Chapter 4: History of Currency Wars

CHAPTER 2 THEORY OF CURRENCY WARS

2.1, Currency wars

2.1.1 Definition

Currency war, also known as competitive devaluation, is a term used to describe competitive currency devaluation Currency wars occur when countries simultaneously devalue their currencies in hopes of increasing the attractiveness of domestic goods leading to increased exports, increased production and reduced unemployment The

"simultaneous" factor in monetary policy changes here is very important, as it is very normal for a currency to depreciate when trading on a free market Without the

"simultaneous" factor, it is unlikely that a currency war will break out

In late September 2010, Brazilian Finance Minister G Mangega warned: "We are now witnessing an international currency war, a mass devaluation of currencies." And that was the first time the term "currency war" was mentioned by economic executives

At that time, Brazil was considered one of the victims of low interest rates in the United States, causing capital to flow into emerging markets, making Brazilian exports expensive Since then, experts have repeatedly used the phrase "currency war" to describe serious disagreements in discussions between leaders of major exporting economies such

as China, Germany and Japan, and countries trying to boost exports such as the United States or countries in the eurozone

However, 3 years earlier, in 2007, people interested in economics, especially in Asia, knew the term "currency war", when it was the title of the famous book (sold about 200,000 official copies) by Chinese author - Song Hongbing The content of the book is about the monetary policy of Western nations, where the author claims that central banks and policies are manipulated by a group of banks and private financial institutions

In recent years, the concept has become even more talked about, as economies race to loosen currencies to stimulate growth Before China's recent yuan devaluation was

criticized for letting the yen depreciate by 28% against the dollar over 2 years, helping its

exporters soar profits

Although the term "currency war" has only appeared in recent years, the nature of currency devaluation races has been going on since the 30s of the twentieth century, before the Great Depression of the global economy At that time, countries abandoned the gold standard system - fixing the value of the currency to the price of this precious metal 2.1.2 Purpose

Countries engage in currency wars to gain comparative advantage in international trade By devaluing their currency, they make their exports cheaper in foreign markets Businesses export more, gain more profits, and create new jobs As a result, the country benefited from stronger economic growth

Currency war also encourages investment in the nation's assets The stock market became less expensive for foreign investors Direct foreign investment increased as domestic businesses became cheaper Foreign companies can also buy natural resources 2.1.3 The fall of the currency

The exchange rate determines the value of a currency when exchanged between countries A country in a currency war deliberately lowers the value of its currency Countries with fixed exchange rates usually only make announcements Other countries fix their rates to the U.S dollar because it is the global reserve currency

However, most countries adopt flexible exchange rates They must increase the money supply to reduce the value of their currency When supply is more than demand, the value of the currency drops

A central bank has many tools to increase the money supply by expanding credit The central bank does this by lowering interest rates on internal bank loans, which affects loans to consumers Central banks can also add credit to national banks' reserves This is the concept behind open market operations and quantitative easing

A country's government can also influence the value of its currency with an expansionary fiscal policy The government does this by spending more or cutting taxes However, expansionary fiscal policies are mainly used for political reasons, not to engage

in a currency war

2.2, The impact of currency wars on the world economy

¢ Currency devaluation can reduce productivity in the long run, as imports of equipment and machinery become too expensive for local businesses If the devaluation of the currency is not accompanied by real structural reforms, productivity will eventually suffer

® The magnitude of currency depreciation may be greater than desired, which may eventually cause rising inflation and capital outflows

e Accurrency war could lead to greater protectionism and erect trade barriers, which would hamper global trade

¢ Competitive devaluation can cause an increase in currency volatility, lead

to higher hedging costs for companies and may discourage foreign investment

¢ Unemployment skyrocketed Evidenced by the First Currency War (1921- 1936): creating one of the worst depressions in world history - the Great Depression Unemployment soared and industrial production collapsed, creating periods of very weak to negative growth Unemployment is up to 25% - 30% in industrialized countries; Production in industnalized countries fell to negative 15%-20%

¢ Causing socio-political disturbances: Governments of developed capitalist countries such as the US, UK, France, Germany, Japan were in disarray (in the United States, during that recession, Democrats won majorities in both the Senate and House of Representatives, the Democratic president replaced the Republican president), especially the Nazis and Japanese militarists came to power, plunging the world into World War II

The world's major economies race into the abyss, disrupting trade, declining output, and spawning poverty, creating extreme political trends

In the U.S 11,000 out of 25,000 banks fail; Within 2 months, the value of

50 stock markets fell by 1/2, leading to a decline in consumption

CHAPTER 3 CURRENCY WARS FROM A MACROECONOMIC

PERSPECTIVE

3.1 Macroeconomic theoretical foundations

Although in currency wars, countries compete to devalue their currencies en masse

to reduce the value of their currencies to gain an advantage over their opponents, the essence of currency wars stems from the internal problems of each country When a country has declined economic growth, high unemployment, and a stagnant financial and banking system, it is difficult for a country to promote growth again based solely on internal tools To assess a country's economic growth, the most important indicator often used is its gross domestic product (GDP)

Expenditure Approach - GDP is calculated as the sum of all expenditures on services and final goods GDP is made up of four basic factors: people's spending (C), business investment (I), government spending on goods and services (G), and net exports (X exports minus M imports) We can express it through the following equation:

GDP =C +1+G+(X-M)

In an economy that is slow to develop and still exists conditions such as high unemployment, weak system, it will lead to factors such as C, I, G being stagnant or declining Therefore, improving exports (increasing net exports: X - M) becomes the remaining option to save the situation, and currency devaluation is the fastest way to do

it

In addition, when performing currency devaluation, a country interferes with the exchange rate between its currency and its foreign currency The exchange rate between two currencies is the rate at which one currency will be exchanged for another For example, the exchange rate between Vietnamese dong and US dollar on 18/03/2022 is 23.620, i.e 23620 Vietnamese dong will be exchanged for 1 US dollar

3.2 Analyze the causes and effects of currency wars from a macroeconomic perspective

3.2.1 Cause

Currency warfare describes the devaluation of currencies by countries to maintain competitiveness in the import and export market when a country decides to devalue its currency, directly affecting competitors In other words, the direct cause of currency wars

is the simultaneous devaluation of their currencies by the countries involved

Currency devaluation is a term used to describe the act of devaluing the local currency (also known as currency devaluation ) of countries, which is mainly caused by the expectation of countries to pursue export growth policies to improve the trade balance

in many aspects (in favor of the budget, in favor of foreign-invested enterprises, restoring the equilibrium of the long-term current balance), due to high unemployment and the will of countries to maintain a low exchange rate to help hoard foreign currencies,

in case of future financial crises And a country's currency devaluation policy is directly aimed at promoting competition to gain an advantage over competitors 1m the international arena, putting pressure on competitors when the country's exports applying the currency devaluation policy will be cheaper than the domestic goods of the rival country, causing these countries to depreciate their local currencies to maintain competitiveness

It can be concluded that the direct cause of a currency war is the currency devaluation policy of countries, and the indirect causes are solutions to the internal problems of countries, namely export growth policies to improve the trade deficit, reduce high unemployment and improve the finances of a particular country

3.2.2 Currency wars occur due to a country's trade deficit

A trade deficit is an unfavorable trade deficit, meaning that a deficit in the trade balance occurs when the value of a country's tangible exports (1.e exports of goods) is lower than the value of its tangible imports Such a trade deficit may not be a direct concern, if it is offset by a surplus created at some part of the balance of payments When

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a country consistently experiences trade deficits, the negative consequences can affect economic growth and stability Therefore, countries will come up with several solutions

to limit the trade surplus rate, including currency devaluation

The goal of currency devaluation is to increase the competitiveness of domestic goods and thereby improve the balance of current payments When the local currency depreciates, 1t will increase the nominal exchange rate, leading to an increase in the real exchange rate, which will stimulate exports and limit imports, improving the trade balance When the exchange rate increases (devaluation), the export price becomes cheaper when measured in foreign currency, the increase in import prices in local currency is called the price effect When the falling exchange rate made the price of exports cheaper, it increased export volumes while limiting import volumes This phenomenon ts called the mass effect

However, whether the trade balance deteriorates or improves depends on the price effect and the quantity effect of which is superior

In the short term, when the exchange rate rises while domestic prices and wages are relatively ngid, it will make export goods cheaper and imports more expensive: export contracts have been signed at the old exchange rate, domestic enterprises have not mobilized enough resources to be ready to conduct more production than before to meet export demand Exports increased, as did domestic demand In addition, in the short term, demand for imported goods does not quickly decrease due to consumer sentiment When devaluing, the price of imported goods increases, however, consumers may be concerned about the quality of domestic goods without worthy substitutes for imported goods, making the demand for imported goods cannot be reduced immediately Therefore, the number of exports in the short term does not increase rapidly and the number of imports does not decrease sharply Therefore, in the short run the price effect often outweighs the quantity effect, causing the trade balance to deteriorate

In the long term, falling domestic prices have stimulated domestic production and domestic consumers have enough time to access and compare the quality of domestic goods with imported goods On the other hand, in the long term, enterprises have time to gather enough resources to increase production volumes Currently, output begins to expand, the quantity effect is superior to the price effect, causing the trade balance to munprove

Devaluation is not always harmful, in fact it also has good effects for the economy such as: increasing exports, reducing imports; increase capital imports, reduce capital exports; increase imports of services (tourism), reduce exports of services (tourism) and thus increase the supply of foreign currency, maintaining exchange rate stability in the long term However, this devaluation will put some other countries at a disadvantage because the price of the devaluation country's goods can be relatively cheap in the international market, to the detriment of competitors This leads other countries to depreciate their currencies to relieve pressure and maintain competitiveness in

Month Exports Imports Balance Jan-15 9,552.00 38, 158.40 -28,606.40 Feb-15 8,699.80 31,240.10 -22,540.30 Mar-15 9,887.20 41,121.90 -31,234.70 Apr-15 9,316.80 35,795.10 -26,478.30 May-15 8,758.80 39,211.20 -30,452 40 Jun-15 9,687.80 41,145.10 -31,457.30 Jul-15 9,500.70 41,077.20 -31,576.60 TOTAL 65,403.10 267,749.00) -202,345.90

international markets And this is the beginning of a currency war

Form 1 The trade deficit between China and the US in 2015

In China, for example, in the past, a kilogram of rice in China cost 10 yuan, and $1

= 20 yuan Thus, 1 USD will buy 2kg of rice in China Because of the economic downtum, China devalued its currency, 1 USD = 40 yuan Thus, now with the amount of

1 USD, we can buy 4kg of Chinese rice This shows that China's domestic rice prices have not changed But in overseas markets, Chinese goods will be cheaper before currency depreciation Thanks to the price advantage, Chinese goods will be boosted for

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export to other markets When export demand is large, China will solve production and employment problems Thereby solving the problem of declining GDP In fact, China has thrown its burden on countries that have no price advantage Suppose that in the United States, if Chinese goods are cheaper than domestic, people will start to prefer Chinese goods This puts production pressure on domestic enterprises To increase competitiveness, countries are forced to depreciate their currencies as well This leads to

a currency war ensuing

3.2.3 Currency wars occur due to high unemployment in a country Unemployment in economics is a condition in which workers want to get a job but cannot find a job or are not employed by organizations, companies and communities The unemployment rate is the percentage of unemployed workers out of society's total labor force High unemployment will negatively affect economic growth and easily push countries to the brink of inflation, affecting the income and living standards of workers and adversely affecting social order, even causing political upheaval

Therefore, a country with high unemployment will have to have appropriate policies and solutions to solve this problem, and one of the solutions that countries can apply to reduce unemployment is currency devaluation Monetary devaluation policies affect the increase in the supply of foreign currency, helping to expand the size of the economy Through currency devaluation, i.e a decrease in the exchange rate, one country's exports will be cheaper than another's domestic goods Businesses will benefit from this policy because the supply of foreign currency increases, production and exports are boosted, businesses will need more workers for the production process, thereby creating more jobs for people, unemployment is reduced

Although currency devaluation has a certain positive effect when it comes to solving high unemployment in a country, this policy will directly affect the competitiveness of the countries involved in the international arena when commodity prices are significantly changed At that time, countries directly or indirectly affected by this policy will not sit idly by and take "retaliatory" moves to minimize the negative

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impact of the currency devaluation policy So, in addition to the engine of export growth, high unemployment in a country is also a starting point for a currency war

3.2.4 Currency wars occur due to a country's policy of hoarding foreign currency

State foreign exchange reserves, often referred to as foreign exchange reserves or foreign currency reserves, are the amount of foreign currency held by a central bank or monetary authority of a country or territory This is a type of State property that is stored

in the form of foreign currency (usually hard currencies such as US Dollar, Euro, Japanese Yen, etc.) for the purpose of international payments or to support the value of the national currency Foreign exchange reserves are an important foundation to help stabilize a country's macroeconomy, the increase in foreign exchange reserves helps the SBV have more room and suitable solutions nm managing monetary policy, facilitating flexible management and exchange rate stability, improve the value of copper coins Every country has specific policies to maintain and strengthen foreign exchange reserves

as it serves as an armor to protect the national economy from the negative effects of possible financial crises in the future, and currency devaluation is one of the policies that can be applied However, currency devaluation is not an optimal measure to increase foreign exchange reserves For many countries with artificially weak or strong currency rates, deciding whether to devalue their currencies is not a pleasant choice Protecting exchange rate pegs makes these countries’ already meager foreign exchange reserves increasingly depleted, while hindering economic growth by making export prices more expensive But currency devaluation fuels inflation by causing import prices of goods to escalate, while raising the cost of paying off foreign currency debts For some countries

in debt crisis, currency devaluation is also a "force majeure” option in exchange for support from the International Monetary Fund (IMF)

Take, for example, Ukraine, whose economy is exhausted by the conflict with Russia, during February to June 2022, had to increase its monthly intervention in currency markets from $300 million to $4 billion When foreign exchange reserves ran

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out, the government in Kiev allowed the local currency Hryvnia to slide nearly 25% against the dollar in July Between December last year and January this year, Ukraine's central bank spent more than $3 billion a month defending its peg, leading to speculation that the country would have to devalue its currency again sooner or later Viktor Szabo of Abrdn Investment Management said that "devaluation is not the best policy for Ukraine

at the moment but will only bring more inflation and increase the suffering of the people."

As analyzed above, the long-term currency devaluation policy will boost exports, thereby earning more foreign currency to contribute to the country's foreign exchange reserves Therefore, without discussing the degree of effectiveness that currency devaluation policies can bring to the strengthening of foreign exchange reserves, we can conclude that the will of countries, especially countries with weak currency exchange rates, to increase their foreign currency reserves is also a reason for the decision to devalue Thus leading to a currency war

Governments will also disrupt trade, creating political extremes: The value of money can wing or destroy a country's economy If it is too high, it will make the

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country's exports uncompetitive If it is too low, it will make imports too expensive and spark high inflation rates At a certain point, the value of a country's currency is at a stable level, but overnight when another country depreciates its currency, it will suddenly become too high for the original country's currency, thereby pressuring domestic goods Faced with that situation, governments are caught in a spiral of retaliation when simultaneously devaluing their currencies deliberately if they do not want to be grasped

by rivals That gives national governments a headache to solve many other problems arising from currency devaluation At the same time, sudden fluctuations in currency value often create panic in currency markets, place additional burdens on warring governments, and negatively impact countries not directly involved in the war

3.3.2 The impact of currency wars on the world economy

Currency wars also cause great damage to mternational trade and trade of the whole world

The most serious consequence: the most dangerous consequence that can occur in

a currency war is that it will stall economic growth and tip the global economy into recession China's growth has been decelerating in recent years, while U.S growth has shown signs of slowing If the yuan continues to weaken, this could hurt European manufacturers competing with Chinese products, leading to stagnant economic growth

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CHAPTER 4 HISTORY OF CURRENCY WARS

4.1 First Currency War (1921-1936)

4.1.1 Premise

Currency wars are like most wars in that they have no obvious antecedents or causes The three most important premises of the First Currency War were the Gold Standard from 1870 to 1914, the formation of the Federal Reserve System mm 1907 to

1913, World War I and the Treaty of Versailles in 1914 to 1919 A brief summary of these three stages will help readers understand the economic conflicts that ensued 4.1.2 Gold Standard (1870 — 1914)

Britain established a gold-backed paper currency at a fixed exchange rate in 1717, which lasted in various forms (except for some hiatus due to war) until 1931 Similar monetary mechanisms can all be called the "Gold Standard", although the concept does not have a uniform definition The Gold Standard system can take many forms, from the use of real gold coins to gold-backed notes in varying amounts

The classical gold standard for 1870-1914 has a unique place in the history of gold

as currency This was a period of almost no inflation; or only positive deflation in countries with developed economies; The result of technological innovations increases productivity and living standards without increasing unemployment

The first Gold Standard was not conceived at international conferences as in the twentieth century, nor was it imposed from the top down by multilateral organizations The gold standard in the old days seemed like a club voluntarily joined by nations Once joined, member states behave according to generally understood, though not documented, rules Not all, but many countries participate in this system, and they all liberalize the capital account, market forces prevail, government intervention is minimal, exchange rates are stable

Some countnes adopted the Gold Standard long before 1870, such as the United Kingdom from 1717 and the Netherlands from 1818, but it was not until after 1870 that

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many countries adopted the same system, from which the "Gold Standard" formed its own characteristics New members included Germany and Japan in 1871, France and Spain in 1876, Austria in 1879, Argentina in 1881, Russia in 1893 and India in 1898 In fact, the United States has followed the Gold Standard since 1832, when it began minting l-ounce gold coins with a $20 conversion value at the time; however, the United States did not officially adopt the Gold Standard in paper money conversion until the Gold Standard Act in 1900 Therefore, it can be considered that the United States is the last major country to join the classical gold standard

Within the countries that adopted the Gold Standard in the last three decades of the nineteenth century, regular capital flows were rare, exchange rate interventions were rare, international trade grew at a record, there were almost no balance-of-payments problems, etc Capital, means of production and workers move easily, inflation is low, long-term prospects in industrial production and income growth are positive, unemployment remains relatively low

An important part of the appeal of the Gold Standard is its simplicity In this system there is not necessarily a central bank (although the central bank can perform certain functions), and in fact even the United States did not have a central bank during the Gold Standard When participating in a "gold standard club", a country simply declares that its paper currency is worth a certain amount of gold, and that it is willing to buy or sell gold at that price in exchange for issued paper money, in any number from other member states For international finance, the benefit of this system lies in the fact that when the value of two currencies is pegged to a certain volume of gold, the exchange rate between those two currencies 1s also "pegged" to each other

During the Classical Gold Standard, the world benefited from the stability of currencies and prices, without the need for mutual supervision or central bank planning Despite government intervention, this intervention is carried out in a transparent and

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stabilizing manner rather than manipulating the market An additional benefit of the Gold Standard is its self-return to equilibrium, not only in terms of day-to-day open market operations, but even when larger events such as changes in mining output and gold production are considered If the supply of gold grows faster than society's productivity, the level of commodity prices will temporarily increase However, this will lead to increased costs for gold producers, which in turn reduces gold production and ultimately re-establishes price stability in the long run Conversely, if economic productivity increases rapidly due to new technology, commodity prices will fall temporarily, meaning that the purchasing power of the currency increases This causes gold holders to sell gold, gold producers to extract more, eventually the supply of gold increases and returns to price stability In both cases, temporary shocks in the supply and demand of gold lead to changes in the behavior of market participants, which will re-establish long- term price stability

However, this self-balancing process operates without central bank intervention Facilitating that process are arbitrage traders, buying "cheap" gold in one country and selling "expensive" gold in another (after taking into account factors such as exchange rates, the time value of the currency, transportation costs, and gold refining costs) Moreover, not all claims are immediately paid in physical gold Most international trade transactions are financed by commercial papers and letter credits, which pay for themselves when buyers receive goods and sell goods for cash without any physical gold transfers

The classical gold standard embodies the era of prosperity before World War I (1914-1918) Attempts to repurpose prewar gold prices were marred by mountains of debt and policy mistakes that turned the Gold Exchange Standard system of the 1920s into a deflation and depression machine Since 1914, the world has lost sight of the pure gold standard in international finance

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4.1.3 The Formation of the Federal Reserve System (1907-1913)

The second premise of the currency war was the formation of the Federal Reserve System in the United States in 1913 This panic began when several banks in New York (including one of the largest, the Knickerbocker Trust) made unsuccessful attempts to manipulate the copper market When news of the Knickerbocker's involvement in the aforementioned scheme broke, a rush to the bank to withdraw money occurred The failure of the Knickerbocker Trust was just the beginning of a splash of widespread mistrust, leading to another stock market crash, multiple bank withdrawals, and finally a full-blown liquidity crisis, threatening the stability of the entire financial system The aftermath of the famous chaos of 1907 was that the private banks involved in the rescue agreed that the United States needed a government-established central bank capable of issuing money or equivalent financial instruments to rescue the private banking system when required Banks need a government-funded institution that can lend them an unlimited amount of cash with various types of collateral The United States needs a central bank that acts as an unlimited lender of last resort to private banks to deal with future crises

The political objections to the two national banks were due to a loss of confidence

in centralized financial power, as well as a belief that the issuance of paper money would create asset bubbles, leading to inflation made easier by bank credit From 1836 to 1913, nearly 8 decades of unprecedented prosperity passed with economic innovation and growth, America had no central bank Understanding that the public still did not trust the institution, supporters of the idea, led by J P Morgan, John D Rockefeller, Jr., and Jacob

H Schiff (from Kuhn, Loeb & Company) understood that a campaign needed to mobilize and educate the masses to gain the necessary support The group's political sponsor was Republican Senator Nelson W Aldrich of Rhode Island, chairman of the Senate Finance Committee, and a supporter of the 1908 bill to establish the National Monetary Commission Over the course of several years, the committee hosted numerous studies, sponsored events, speeches, and affiliated with prestigious professional associations of

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economists and political scientists, all with the goal of promoting the idea of establishing

a powerful central bank In 1910, Aldrich presided over a meeting attended by several representatives of Wall Street bankers, and Abram Piatt Andrew, who had just been appointed Deputy Secretary of the Treasury The group worked for a week to draft Aldrich's bill, which would be the first draft of the Federal Reserve System

It took another three years to pass the Federal Reserve Act, which is the official name of the Aldrich bill, the result of the Jekyll Island plan This act was passed with an overwhelming majority in the National Assembly on December 23, 1913, officially taking effect in November 1914 The Federal Reserve Act of 1913 encompassed many of the ideas initiated by Aldrich and Warburg to counter opposition to the central banking model in the United States This new institution will not bear the name of the central bank, but will be called the Federal Reserve System It is also not an individual institution, but rather a collection of regional reserve banks, governed by a Federal Reserve Board, whose members are nominated by the President and approved by the National Assembly, rather than elected by the banks

Monetary policy (conducted through open market operations) will be most influenced by the Federal Reserve Bank of New York, as the Fed deals primarily with major banks and financial institutions in New York The Federal Reserve Bank of New York is governed by a board of directors and governors elected by shareholders, not politicians, who are controlled by major banks in New York As a result, there appears to

be an "Fed inside the Fed" dominated by New York banks and sticking to their goals, including granting easy credit to rescue packages when needed

4.1.4 World War I and the Treaty of Versailles (1914-1919)

The final premise of the First Currency War was the continuation of World War I, the Paris Peace Conference and the Treaty of Versailles

World War I ended not with a surrender by either side, but with an armistice, or ceasefire In an armistice, it is expected that the parties can pause hostilities and sit at the

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peace bargaining table Negotiating a lasting peace was the goal of the Pars Peace Conference of 1919 Britain and France understood that it was time to calculate the costs

of the war, and they saw the Paris peace as a good opportunity to impose those costs on defeated countries such as Germany and Austria

The size and content of Germany's war reparations were among the biggest headaches at that year's Paris Peace Conference First, Germany was forced to cede some territories and their industrial potential On the other hand, the greater the concessions, the less likely Germany would be to pay the financial reparations it was also forced to pay France looks at the German gold stockpile, which had reached 876 tons in 1915, the fourth largest in the world after the United States, Russia and France

While one was merely concerned with how much reparations the Germans could afford to pay the Allies, the reality is that the big picture is much more complicated, with both the victors and losers of World War I in debt As author Margaret MacMillan wrote

in Paris 1919, both Britain and France lent Russia large sums of money, which Russia failed to repay after the October Revolution Other debtors such as Italy are also insolvent But Britain owes the United States $4.7 billion, France $4 billion and Britain

$3 billion In general, no debtor is able to repay their debts, and the entire credit and trade system is frozen

Thus, the problem was not only German reimbursement of Allied expenses, but also a messy network of mutual loans owed to each other within the Allies What needs

to be done now is to get credit flowing and trade again The best solution would be to ask the country with the strongest financial resources — the United States — to start the process with new loans and guarantees, in addition to previous ones This new flow of liquidity, along with free-trade zones, will help spur the growth needed to combat the debt burden Another method proposed by many parties is to write off all debts to "start over" However, in reality, none of these solutions have occurred The strong powers, led

by Britain and France, demanded that weak countries (mainly Germany) pay their war costs in cash, gold and kind

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Calculating compensation as well as the mechanism for paying those amounts is almost an impossible task France, Belgtum and Britain wanted to calculate based on actual war losses, but the United States favored the ability of the vanquished to pay However, the statistics on the German economy are very dire and opaque, so it is difficult

to obtain reliable calculations of their ability to repay their debts Conversely, the assessment of damages (as suggested by France, Belgium and the United Kingdom) is also difficult to complete in the short term Even within the Allies there were fierce debates, no less than those with Germany, about whether war reparations should be limited to actual losses (which were supported by France and Belgium) or to include financial costs such as pensions and soldiers' salaries In the end, the Treaty of Versailles gave no exact figure for war reparations This is the result of not being able to calculate a number (technical factor) nor being able to agree on that number (political factor) Any number high enough for France and England to please was too high for the Germans and vice versa Instead of agreeing on a specific amount of war compensation, expert panels were set up to continue studying the issue and publish conclusions in the following years

as a basis for the actual amount of compensation This practice lasted a while, but the problem was actually delayed, then further messed up in the 1920s with the Gold Standard and efforts to restart the international monetary system

4.1.5 Conclusion

World War I and the Treaty of Versailles introduced a new element that had never been a major problem in the Gold Standard: enormous, mutually overlapping and insolvent national debts that posed enormous obstacles to the normalization of capital flows The formation of the Federal Reserve System and the role of the Federal Reserve Bank of New York signaled the emergence of the United States on the international monetary stage as a powerful partner The potential for the Fed to regenerate system-wide liquidity by printing more local currencies (U.S dollars) has begun to emerge In the early 1920s, expectations for the Gold Standard, tensions with unpaid war reparations,

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and concerns about the Fed's ability led to the creation of a new international monetary system and the course of the First Currency War

4.2 Cause

In 1919, the Treaty of Versailles formally ended World War I (1914-1918) signed between Germany and the Allied nations The Peace Treaty was drafted by Georges Clemenceau, Prime Minister of France, along with the United States and Great Britain, the three victors

After several bloody battles from 1914 until mid-1918, the French army was broke However, thanks to the support of British and U.S troops, France continued its war effort Finally, when Germany's situation became chaotic, France celebrated its victory and wished for a peace conference to completely eliminate the threat and obtain war reparations

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This peace treaty imposed strict terms on defeated Germany The peace treaty stipulated that Germany must return to France Alsace-Lorraine, a piece of land to Belgium, a similar piece in Schleswig to Denmark — depending on the result of a referendum — that Chancellor Otto von Bismarck had taken in the previous century after defeating Denmark in the Second Schleswig War The peace treaty returned some lands

to Poland, some depending on the result of the referendum, which Germany had taken from the partitions of Poland The heaviest clause was the invisible Treaty of Versailles

to disarm Germany with the purpose, at least for a time, of halt Germany's path to

1921 (which could deliver several kinds of items — coal, ships, timber, cows, etc in lieu

of compensation)

Form 2, Children in Germany play with piles of money like lego puzzles

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Germany acted first in 1921 with a bout of hyperinflation initially calculated by the Reichsbank to increase competitiveness, but eventually prolonged and completely destroyed an economy weighed down by war reparations And this was also the beginning of the First Currency War (1921-1936) In the face of the chaotic situation of the German economy in particular and European countries at that time, other countries also in turn "retaliated", specifically the time of devaluation of the local currency of France was in 1925, the UK (1931), the US (1933)

It can be concluded that the direct cause of the First Currency War originated in Germany when the Central Bank of the country printed money massively, creating a hyperinflation to enhance competitiveness to improve the economy that was badly damaged after World War I, which was deeply caused by Germany The losing country should be forced by the victors, Britain, France and the United States, to sign the Treaty

of Versailles on many terms unfavorable to Germany, forcing it to brace itself to restore its economy and pay its war debts to the victors This action prompted countries such as Britain, France and the United States to take "retaliatory" actions against Germany by repeatedly devaluing their currencies, and this was also the beginning of the 15-year First

4.2.1 Analysis of developments

The First Currency War broke out in a very special way in 1921 immediately after the gunfire of World War I, and lasted without a complete end until 1936 This war was divided into several phases, spanning all 5 continents and even having a great influence

on the twenty-first century today

Germany acted first in 1921 with a bout of hyperinflation initially aimed at increasing competitiveness, then prolonging and completely destroying an economy weighed down by war reparations In 1925, France continued with the devaluation of the franc before returning to the Gold Standard, thereby gaining an export advantage over countries such as Britain and the United States, which returned to the Gold Standard at pre-war exchange rates Britain renounced the Gold Standard m 1931, regaining the advantages lost to France in 1925 Germany was boosted in 1931 when U.S President Herbert Hoover announced a postponement of reparations This forbearance later became debt cancellation as a result of the Lausanne Conference in 1932 From 1933 and with Hitler's ascension, Germany increasingly went its own way, withdrawing from the world trading system and becoming an independent economy, although it still had some links with Austria and Eastern Europe This was followed by a devaluation of the currency against American gold in 1933, regaining some of the competitive advantage in export costs lost to Britain in 1931 Finally, it was the turn of France and England to devalue again In 1936, France abandoned the Gold Standard and became the last major country

to escape the effects of the Great Depression, while Britain devalued its currency again to regain some of the advantage lost to the United States after President F.D Roosevelt's dollar devaluation announcement in 1933

With successive cycles of currency devaluation and debt insolvency, world economies are plunged into a race to the bottom, on which trade is stalled and prosperity

is devastated The destabilizing and self-destructive nature of the international monetary system during this period made the First Currency War a stark warning to the world today, when we are also facing mountains of insolvent debt

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