In October 2010, the Brazilian Finance Minister Guido Mantega made news by claiming an "international currency war" had broken out.
According to Mantega, countries worldwide were simultaneously attempting to force down the value of their money in order to reduce the price of their products sold in foreign markets.
Central banks in Japan, South Korea, and Taiwan had recently intervened in currency markets to control their currencies' appreciation. The Bank of England, similarly, had encouraged the pound to fall since 2008. The Swiss National Bank had intervened in foreign exchange markets as well.
For Mantega, such maneuvers signaled that these and other countries were entering into a competitive spiral of devaluations in an effort to export their way out of the ongoing economic slump.
And the inescapable conclusion for him and other finance ministers was that no country could gain if all countries devalued their currencies at once. They feared that such fiddling with currency would only serve to damage those countries most dependent on exports (such as Brazil), and increase political tensions worldwide.
The term "currency war" promptly became a global buzz phrase. Commentators and public officials—like Dominque Strauss-Kahn, the head of the International Monetary Fund, and his counterpart at the World Bank, Robert Zoellick—warned about the dangers of conflicts over money. Such wars, they argued alarmingly, had proven disastrous historically and, most chillingly, had worsened, if not actually caused, the Great Depression.
Despite the hyperbole, currency wars as described by Mantega--where the world's leading economies race together to depreciate their currencies--are, in fact, exceptionally rare historically.
Currency manipulation and selective devaluations to promote exports, growth, and employment, however, are not. Nor are the fears of established economic and political powers that perceived up-and-coming rivals will unseat them from their economic thrones.
Since the end of World War II, the United States has enjoyed the "exorbitant privilege" (in the words of France's 1970s President Valery Giscard d'Estaing) of having the dollar as the world's default currency. And the U.S. government has held the position that it is the responsibility of other countries to adapt to the perceived needs of the United States, rather than vice versa.
As the then Secretary of the Treasury John Connally famously put it to European officials critical of the inflationary effects of U.S. currency policy on their own economies in the early 1970s, "The dollar is our currency, but your problem."
International tensions surrounding currency competition, and the dollar's privileged status, were apparent at the G20 Summit in Seoul in November 2010.
In advance of the summit, the U.S. central bank--the Federal Reserve--announced that it would be purchasing government bonds in a maneuver called "quantitative easing."
This policy entailed multiplying the number of dollars in circulation in order to buy these bonds, with an end result of depreciating the dollar relative to other currencies. It also meant that excess dollars would likely flow to foreign markets such as Brazil, China, and Korea adding to price inflation and financial instability in those countries unless they acted to block the inflows.
In addition, the Obama administration hoped to use the Seoul G20 Summit to wage its own form of "currency war" by applying pressure on China to increase the value of its currency--the renminbi--and thus, indirectly, cause the dollar to depreciate. The U.S. has long argued that China itself was a currency warrior, which had fired the first shots in the money wars by consistently undervaluing the renminbi.
Rather than addressing this highly sensitive political issue directly, the U.S. administration sought to establish new international rules requiring countries to limit their trade surpluses.
Effectively such rules would mean that surplus countries like China would have to institute policies to cause their currencies to appreciate relative to the dollar. American officials hoped that this would increase U.S. exports, growth, and employment without the United States having to make economic or budgetary changes of its own.