Currency War: An Extremely Short Introduction

Manhattan Nights, by Jeremy Mann

John Maynard Keynes once wrote that “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”[1] Bretton Woods, hyperinflation, and stagflation have increased this view’s sway, and some would argue that Keynes’ own economic theories have given his statement a veracity that it would not possess otherwise. Nevertheless, this statement is capable of being combined in a fruitful way with the notion that “the way a society makes war reflects the way it makes wealth.”[2] These two theses become crystallized in the concept of a currency war, the implications of which will first be outlined historically, then contextualized within contemporary discourse on international politics, and discussed in terms of how it problematizes typical discussions of security.

Prior to Bretton Woods, the value of money was pegged to the price of gold, i.e. the gold standard. This led to phenomena such as ‘Gresham’s Law’, where if the price of bullion was higher than the value of a coin made of a precious metal, people would melt down the coin and sell the bullion, pocketing the difference; this tendency can be observed even today with respect to the penny. More importantly, as Lyotard argues, this structured international trade into a zero-sum game. As he comments:

[T]he quantity of metallic money which is ‘circulating in all Europe’ being constant, and this gold being wealth itself, in order that the king grow richer he must seize the maximum of this gold. This is to condemn the partner to die, in the long or short term. It is to count the time of trade not up to infinity, but by limiting it to the moment when all the gold in Europe is in Versailles.[3]

This was not, however, a currency war per se, but rather a ‘wealth war’—the difference will shortly be made clear. In 1933, facing the Great Depression, the United States finally abandoned the gold standard, and soon after devalued its currency 40 percent, which greatly boosted the US economy as well as that of the rest of the world.[4] Deprived of a ‘universal’ numeraire, the currencies of the world subsequently became valued relative to each other, creating a competitive atmosphere of an entirely different kind. The lower a state’s currency is valued, the more businesses in other countries will be incentivized to import their products, and this fact (particularly in the case of Japan) is explicitly taken into account in monetary policy. The picture is complicated further when it is considered how the US dollar is a reserve currency—i.e. the ‘default’ currency which states use to allow for current account surpluses (i.e. countries importing more than they export) or to purposively modify exchange rates (particularly in the case of currencies pegged to another currency, such as China’s yuan to the dollar). As one article[5] describes: “the effect of a devaluation of a non-reserve currency…is implicitly to put upward buying pressure on the USD,” and conversely,[6] “every time the Fed debases the US Dollar it forces the Euro and other currencies higher, hurting those countries’ exports.”

Post Street Downpour, by Jeremy Mann

Currency war proper is framed as a ‘race to the bottom’, as each country races to devalue its currency, mirroring the “beggar-thy-neighbour” policies that proved so disastrous in the 1930s.[7] It’s a fine example of the sort of Nash equilibrium in which each state has the incentive to devalue their own currency, but for all states to do so would be catastrophic. Thus, the issue can largely be framed within a realist framework, though with some qualifications. Notably, institutions such as the World Trade Organization are said[8] to “act like a circuit breaker of sorts,” offering “a conflict resolution mechanism to prevent trade disputes from leading to…[a] downward spiral.” Likewise, trade regimes such as supply chains are taken as having an immensely significant nugatory effect on political conflict; Tom Friedman, for example, attributes the absence of a ‘hot’ war between India and Pakistan to economic interdependence of this type.[9] Although it is fairly well-established[10] that currency wars often lead to trade wars, and subsequently lead to ‘hot wars’—a pattern whose history, in fact, reaches back to Roman times—it is nonetheless debatable[11] whether this pattern still holds good.

The question remains, however, what is to be gained by en emphasis upon currency wars. In an interview with Kitco News,[12] Jim Rickards argues that because of China’s yuan being pegged to the dollar, quantitative easing by the US Federal Reserve (particularly in 2011) effectively exported inflation to China, which was then forced to raise the value of its currency in fear of inflation’s politically destabilizing consequences.[13] He likewise argues that one of the main reasons that the US is trying to devalue its currency by means of QE is that this allows them to “import inflation in the form of higher import prices.”[14] The latter is desirable because 1) deflation would increase the real value of debt, leading to more defaults, which fall on banks, and 2) because, as the Austrian economists emphasize, inflation is a hidden tax, whereas deflation cannot be taxed.[15] So it is clearly illegitimate to delimit regional from global politics. Also, as illustrated above, viewing finance as political allows a more nuanced view of sovereignty, with notions such as US hegemony concretized through the dollar’s status as a reserve currency. It also takes into account North-South relations (demarcated, respectively, by their possession of a trade deficit or a trade surplus),[16] as illustrated in the following excerpt:

Typically central banks want the external value of their currencies to move in the same direction as monetary policy.  Given the synchronized economic downturn in the high income countries, it is not surprising that monetary policy has become synchronized and that most officials want weaker currencies.  And this is at loggerheads with…emerging market currencies that are not willing to accept substantial currency appreciation.[17]

On a different note, the above provides a more concrete elaboration upon Mary Kaldor’s theory of the proliferation of ‘new wars’ in states whose tax base has eroded due to ‘globalization’.[18] If it is true that inflation acts as a hidden tax, and if it is true that developed countries’ devaluation of their currency leads to deflation in developing countries’ currencies, then this to some extent supports Kaldor’s theory. Also, taking into account the likelihood of “social and economic insecurity…being in itself a justification of wars of intervention,”[19] currency wars may indeed have a self-justifying and self-reinforcing capacity.

Brooding Cityscapes, by Jeremy Mann

It has been said that “Under conditions of Globalization, the…security state is no longer at the center of security concerns, as it loses the ability to effectively provide insurance against contingency….”[20] One need only take this statement in a more literal sense than it was intended to realize the emerging political role of finance—whose job it is, indeed, to quantify contingency, in a way fundamentally opposed to state-centric neo-realist assumptions.[21] Furthermore, a financial perspective of politics allows a new dimension within political debate—one focused on the veracity of economic theories (as opposed to which metaphysics, ethics, or hermeneutics one arbitrarily prefers to run with), as illustrated in the case of China, who breaks nearly all the rules of Western economics and has met with superlative success in doing so. Most important is its emphasis upon viewing the political world as holistic, thus fostering an awareness of the contingency of the concepts of international relations, instead relying upon observable differences such as a country’s trade balance, thus expanding focus from interpretation to discovery.


[Note: I do not necessarily subscribe to all the above points nor to the views typically associated with this position (e.g. about gold or the quantity theory of money). This essay is intended as an introduction to the concept of currency war.]

Source: Zero Hedge

[1]: Keynes, J.M. (1920). Economic Consequences of the Peace. New York: Harcourt, Brace & Howe, ch. 6. Keynes attributes this idea to Lenin, and a discussion of this attribution can be found in White, M. & Schuler, K. (2009). “Who said ‘Debauch the Currency’: Keynes or Lenin?Journal of Economic Perspectives 23(2), pp. 213-22

[2]: Toffler, A. & Toffler, H. (1993), referenced on p. 222 of Sheehan, M. “Ch. 13 – The Changing Character of War,” in Baylis, J., Smith, S., & Owens, P. (2011). The Globalization of World Politics. Oxford: OUP.

[3]: Lyotard, J.-F.; Grant, I. (trans.). (1993). Libidinal Economy. Bloomington, IN: Indiana University Press, pp. 191-2

[4]: Sapa-AFP (2010, Oct 23) “Currency wars echo the 1930s” Sunday Times. Retrieved from

[5]: Durden, T. (2013, Feb 17). “There Is A Winner In The Currency War.” Zero Hedge. Retrieved from

[6]: Phoenix Capital Research. (2013, Jan 29). “China Just Threatened a Currency War if the Fed Doesn’t Stop Printing.” Zero Hedge. Retrieved from

[7]: For a more detailed explanation, see Fels, J. (2013, Feb 7). “Lessons From The 1930s Currency Wars.” Zero Hedge. Retrieved from

[8]: Marc to Market. (2013, Jan 23). “Currency Wars: Causes and Consequences.” Zero Hedge. Retrieved from

[9]: Friedman, T. (2005). The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Strauss, & Giroux. Compare p. 326-7 as well as p. 327, box 14.2 of Baylis, J. “ Ch. 14 – International and Global Security,” in Baylis, J., Smith, S., & Owens, P. (2011). The Globalization of World Politics. Oxford: OUP.

[10]: For a well-documented list of citations on this topic from influential economists and politicians, see Washington, G. (2013, Feb 8). “Currency Wars Often Lead to Trade Wars…Which In Turn Can Devolve Into Hot Wars.” Zero Hedge. Retrieved from

[11]: See Marc to Market (2013, Jan 23), op. cit.

[12]: KitcoNews. (2013, Feb 26). James Rickards (Currency Wars: The Making of the Next Global Crisis): No Way Fed Will Stop Easing. Retrieved from

[13]: Ibid, 11:30-12:00

[14]: Ibid, 12:40-14:00

[15]: Ibid.

[16]: Durden, T. (2013, Feb 19). “South Korea Starts Currency War Rumblings; Has Japan in Its Sights.” Zero Hedge. Retrieved from

[17]: Marc to Market (2013, Jan 23), op. cit.

[18]: See Sheehan, op. cit., p. 222

[19]: Chomsky, N. (1999), quoted in Sheehan, op. cit., p. 225

[20]: Mabee, B. (2009), quoted in Sheehan, op. cit., p. 243, box 14.6

[21]: See Sheehan, op. cit., p. 235


About Graham Joncas

We are a way for capital to know itself.

Posted on April 24, 2013, in Economics, Finance, Politics and tagged , , , , . Bookmark the permalink. 3 Comments.

  1. I’ve always thought long and hard on the economic system and credit cards and such and the system seem really dumb to me. when you use credit cards it devalues the money, fractional reserve banking creates more debt…I think the economic system and currency is a useful scam. It does help facilitate trade, but as we trade and use more of it it becomes worthless…that doesnt make any sense to me. Nice article to get people thinking

  2. do you think that the chinese yuan will be a international currency?…taking in to account that the chinese economic growth is constantly enforced with gold

    • In the video by Jim Rickards that inspired the post, he points out (aptly, I think) that in order to for a country’s currency to be an international reserve currency, the country needs to have a certain political and financial infrastructure, which he argues that China does not have, but the USA does. I read in a French news article some time ago that no less than 500 protests occur in China every day—hardly something to increase investor confidence. So until China becomes more secure politically and its stock exchange grows to rival Wall Street, the yuan won’t take the place of the dollar as international reserve currency.

      If you just mean an ‘international currency’, however, the yuan is already being used for transactions by Australia and other pacific rim countries. For most other countries, however, the dollar is still more convenient to use.

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