When the gold standard began falling out of favor in the 1930s, governments began experimenting with floating currency policies as a means of stabilizing the growth of a national economy. However, because of the recessionary nature of the global economy at that time, governments quickly began taking on inflationary policies in an attempt to competitively devalue their currencies, and bring in export business for their struggling industries and workers.
The resulting period of inflation and volatile export demand coined the term ‘beggar-thy-neighbor’ to define the competitive policies that ensued, as governments attempted to undercut each other as being a low-cost export provider. Today, similar policies continue to emerge as being a strategy to aggressively tackle a pervasive economic recession. However, by taking a look at how it is that the original beggar-thy-neighbor policies emerged in the 1930s, we can find some similarities between their modern equivalents, and how it is that they imply future currency trends.
The competitive devaluation policies of the 1930s demonstrated the beginnings of the end of the gold standard. As countries found themselves unable to implement expansionary monetary policies to stimulate their economies, or to deflate their currencies in a way that allowed them to attract exporters, they began reducing their gold requirements in a way which provided them with additional flexibility for managing their currency.
This became an important policy measure for countries like the UK and USA, in that they began aggressively devaluing their currencies so as to attract foreign business. However, because of the way in which both of these countries were actually competing for the attention of the same importing customers, they wound up in a situation where they were forced to continue undercutting each other’s currencies in order to remain competitive, similarly to the way in which gas-stations will often engage in ‘price wars’. The end result is a situation where countries were explicitly under-pricing each other in an attempt to ‘steal’ the wealth of other nations for their own economies.
As the period of competitive devaluation reached a close, countries began to wind down their expansionary monetary policies by entering into cooperative currency agreements that encouraged them to maintain currency prices that were stable relative to a partnered nation’s. Here’s where things start to get interesting, as it denotes the beginnings of the policies that would lead into our modern currency markets.
Between the fixed trading regimes that would eventually turn into the European Union, the tying of the Chinese Yuan to the American Dollar, and the extreme volatility of nations which were left out of these agreements all together, the currency markets we see today evolved out of the global decision to reduce exposure to the gold standard, and to move into free-floating markets.