Notably, this pre-World War I era of currency is the image that today's opponents of the U.S. Federal Reserve System, such as Representative Ron Paul, advocate for the contemporary United States to (re-)adopt private currencies as needed with the government having no power to print, regulate or define those currencies.

"End the Fed" advocates like Paul have tended to look to the classical period of the gold standard as an ideal system of state-free, inflation-free, automatic, natural money. For them, gold has an intrinsic value that makes it uniquely resistant to political interference.

Some observers and analysts from the nineteenth century onward have agreed. For the strongest advocates of gold currency, gold has consistently been the only "true and universal money" whose value was set by nature, and whose worth was beyond government control. In November, the World Bank President Robert Zoellick started a minor controversy by seeming to call for some sort of modified gold standard.

But if this true and universal money of "Paul-ite" dreams ever existed, it was certainly not in the nineteenth century, and certainly not with the gold standard. Despite the attention currently paid to the presumed danger of competitive depreciations, the world economy of the late-nineteenth century was founded on similar currency policies and concerns.

To use the present-day terminology, the gold standard, as it emerged worldwide in the 1890s, was itself a tool of currency wars.

The gold standard, in its late nineteenth century glory days, was founded upon and operated by states seeking to work the system to their advantage. These states manipulated interest rates to control currency flows, and strategically adopted gold as part of industrial development and military calculations aimed at assuring the most favorable currency and exchange rate for their endeavors.

Argentina, Japan, Germany, Russia, the United States, and other countries that rose to power in the years before World War I, for example, followed currency policies similar to those of supposed currency warriors today. Rather than allying themselves with dominant, but fading British power, they used the gold standard to challenge that power.

Economically, these countries sought to lock in the most depreciated value possible for their currencies in order to promote industry and exports. Politically, they sought to use the gold standard to increase access to foreign loans for their military purchases.

At mid-century, the ideology of English liberalism dominated global economic thinking with ideas of an automatic, laissez-faire gold standard and a flurry of free-trade agreements.

However, all those countries striving to compete with the British began consciously to follow a developmental strategy advocated originally by Alexander Hamilton in the United States and Friedrich List in Germany. This strategy focused on government intervention in currency and other economic matters in an effort to build each state's economic might and wealth. This approach became dominant worldwide in the late-nineteenth century.

By the late-nineteenth century, in the face of a severe U.S.-European economic depression from the 1870s, the liberal orthodoxy had fizzled. Depression and deflation from the mid-1870s to the 1890s made economic growth and an end to deflation the dominant economic concern. In most countries, this meant a wide range of government measures to keep their currencies from appreciating.

It was common in the last quarter of the nineteenth century to find claims from American and European economists and politicians that currency appreciation was "one of the worst evils that can threaten humanity," that it spelled "ruin for the industrialist, misery for the worker, discontent and universal suffering," and that it would "bury the nineteenth century in a tumult of poverty and make felt in the cradle of the twentieth the heavy hand of paralysis."

This concern about appreciation was particularly acute in those countries already using appreciated gold currency--that is, amongst countries on the gold standard. French textile manufacturers and silk producers sought protection from lower-priced thread from Japan, which backed its currency with silver.

In the United States farmers and miners found themselves at a price disadvantage against the weaker currencies of non-gold standard countries such as Argentina, India, Brazil, China, and Russia.

Mixed in were also racial fears—particularly of the presumed danger of Asian immigration, the "yellow peril," and the threat this Asian encroachment was seen to pose to the Anglo-Saxon way of life.

Concerns about "unfair" Chinese currency were common. As Winston Churchill's uncle put it, "The yellow man using the white metal [silver] holds at his mercy the white man using the yellow metal [gold]."

Critics of a gold standard, therefore, saw in silver a way of keeping the United States and its currency competitive globally.

Concern with deflation and its economic and social effects helped fuel the rise of the Populist Party in the United States and the takeover of the then pro-banker, pro-hard money, pro-gold standard Democratic Party by William Jennings Bryan and his silverite supporters.

The silver movement dominated American politics in the mid-1890s with Bryan declaring that mankind would not be "crucified on a cross of gold." It also made its presence felt in children's literature with the Kansas populist L. Frank Baum writing The Wonderful Wizard of Oz as an allegory of silver politics, with the yellow brick road symbolizing the gold standard.

Even with this emphasis on depreciation in adopting the gold standard, states continued to tweak its workings to serve their needs. Rather than letting gold flows move purely pursuant to private market forces, nations such as Britain increased or decreased their interest rates in order to attract or repel gold.

In Argentina, the government exchanged paper for gold when it had gold, and ignored its currency's supposed convertibility into gold when it had none. Beyond fiddling with their currencies, states in the late-nineteenth century built tariff walls and otherwise sought to protect their developing industries.

Currency Wars and the Great Depression

The one example that contemporary commentators tend to give as a warning about the dangers of an actual currency war happened in the 1930s during the Great Depression.

Commentators argue that the simultaneous and at times rapid devaluations of the 1930s, which aimed to boost economic growth, actually worsened or even caused the Great Depression.

At the same time, the Great Depression has been attributed inaccurately to trade protectionism. Despite being refuted again and again by economists and historians, this cautionary myth about free trade nonetheless remains popular.

Quite the opposite was the case, however. The currency war of the 1930s was the start of recovery from the Great Depression.

Economic historians have regarded devaluation and abandonment of the gold standard in the 1930s as essential to allowing countries to re-inflate their economies. Only after countries began to devalue their currencies did they gain the expansionary and inflationary benefits that helped pull them out of the Depression.

This is precisely what Spain, Portugal and other peripheral European countries are unable to do today because their policies are restricted within the larger currency policies of the European Union and the euro.

Exorbitant Privilege: The Dollar after World War II

The principle behind currency wars—i.e., the strategic use of currency for national ends, economic and political—has continued at the heart of the international monetary system since World War II.

In 1944 the Allied powers signed the Bretton Woods agreement establishing a "new international monetary order" of fixed exchange rates, modeled on the gold standard but intended to be more flexible and lasting. Though ostensibly based on gold, it was really a system based on the U.S. dollar, tailored to U.S. needs, and intended as a centerpiece of what Time magazine publisher Henry Luce called "the American century."

The British sought an alternative system that relied on a new international currency unit rather than the dollar, but lacked the political, military, and financial power in the wake of the war to alter American preferences.

The French, split between one government essentially allied with Germany and another powerless and in exile in London, played virtually no role until the 1960s when they attempted, unsuccessfully, to switch the system to a purer gold standard rather than a U.S. dollar standard that gave the U.S. sovereign control over the world's default currency.

With the help of two World Wars the dollar obtained the "exorbitant privilege" of being the world's default currency. The United States also gained the privilege of having the rest of the world adapt not only to its currency, but to its broader economic needs and desires.

When Bretton Woods no longer proved conducive to U.S. interests, the Nixon administration abandoned it in the early 1970s and ushered in the current era of floating, market based exchange rates with periodic interventions by states and central banks.

Dollar Wars: From Japan to China

If today the focus of most currency discussion in the U.S. is China, in the 1980s the focus was Japan. And today's tensions with China in many ways mirror those earlier ones with Japan.

Then as now, the United States was running a sizeable trade deficit with an Asian rival and accusing it of unfair trade practices, of closing its markets to U.S. goods and businesses, and of currency manipulation.

Under U.S. pressure, the Japanese government agreed to restrict exports to the United States and to change Japanese laws and business practices to accommodate American firms. Japan also agreed to loosen its monetary policy in order to increase domestic consumption--which U.S. officials imagined would mean greater consumption of U.S. goods--and to deregulate its financial and legal markets to accommodate U.S. firms.

The Reagan administration also engineered the 1985 Plaza Accord under which the United States, France, Britain, and West Germany spent the equivalent of $10 billion in order to depreciate the U.S. dollar and reduce the U.S. trade deficit.

The dollar did depreciate: some 54% against both the yen and the mark over the next two years. But this did little to reduce the trade deficit with Japan since the U.S. had few competing products to replace Japanese goods—just as there are few competing products with China today.

In Japan, however, the regulatory changes and low-interest-rate policy that followed the Plaza Accord led to the financial and real estate bubble from which Japan has spent the past twenty years trying to recover.

In short, the Plaza Accord amounted to its own sort of currency war. If the United States won relatively little, the clear loser was Japan.

In China today, this episode is viewed as a cautionary tale, and its moral is not to make economic policy changes in response to foreign pressure. History has taught the Chinese that it is more important instead to promote one's own needs and interests.

Japan's economic pliancy ultimately rested on the particular history of World War II, the U.S. Occupation, and Japan's incorporation thereafter into a U.S. security sphere.

In short, since World War II Japan has been reluctant to assert independent policies vis-a-vis the United States given the importance to Japanese governments of the American security alliance. Japan ultimately avoided conflict with the United States by placing its security alliance first and conceding to U.S. economic demands.

Domestically for Japan, preserving the U.S. alliance has been simpler and less controversial than revising the Occupation-era constitution and pursuing independent military and foreign policies. In effect this has meant that Japanese economic policy, as far as it impacts what U.S. governments consider their strategic interests, has been subject to U.S. approval. [Read here for more on post-WWII Japan]

For China the history is different. China is neither a U.S. military protectorate, nor does it wish to be. As a result, to date, the Chinese government has followed the late-nineteenth-century model of adapting international norms and institutions to its own needs and interests. Currency policy is one part of this approach.

In this sense, China's actions today resemble what the United States has done over the last 150 years and more.

A real currency war, if it ever comes, can only happen when, or if, the renminbi, euro, yen or some other currency is strong enough fully to challenge the dollar's "exorbitant privilege." That, however, as with currency policy in general, is as much a political issue as an economic one.

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For more on the history of currency exchange and the gold standard by Steven Bryan, see his The Gold Standard at the Turn of the Twentieth Century: Rising Powers, Global Money, and the Age of Empire(Columbia University Press, 2010).