When the Great Depression descended in the 1930s, protectionist trade policies ensured that the downturn was longer and more severe than it might otherwise have been. In the aftermath of the Great Recession that began in 2008, world leaders vowed not to repeat those mistakes. While the protectionist temptation has been strong, it has largely been fended off, although with some slippage.
The same courage and resilience has not been evident when it comes to currency policy. There are enough indications that governments are trying to sustain export competitiveness by weakening their currencies — enough for experts to believe that we are already in the midst of a "currency war." Not surprisingly, the currency policy was front and center as world economic officials met last weekend in Washington D.C. They did not reach agreement on how to deal with the problem. Nor is there any indication that they will get a grip on it anytime soon.
The ongoing transition to the new global economic order was evident on the night of Oct. 8, when Group of Seven officials, formerly the men who ran the world economy, convened for just dinner and discussion and did not issue a communique. During the evening, Japanese officials explained the rationale behind their attempts in September to halt the yen's sharp appreciation, the first such intervention in more than six years, and one that appears to have worked only temporarily. Those officials interpreted the group's silence as acquiescence to the policy, although other participants said that time had run out for criticism and warned that similar moves in the future would not be appreciated.