"Crisis Investing" Issue 2 / February 2025 – Vol 2

Dear Reader,

On a September evening in 1985, finance ministers from the world's largest economies gathered at New York's Plaza Hotel for what would become one of the most significant currency interventions in modern history. The dollar had become too strong for U.S. exports to remain competitive, leading to factory closures, job losses across the industrial heartland, and record trade deficits. The Plaza Accord, as the agreement became known, set the stage for a controlled devaluation of the dollar, which would fall 40% against major currencies over the next two years.

The Plaza Accord worked because of two key factors—both of which feel relevant today.

First, the U.S. used trade threats as leverage. Just like now, the government pushed for tariffs, import surcharges, quotas, and tough talk about "unfair trade" to pressure surplus countries into negotiating.

Japan and West Germany, both heavily reliant on exports to the U.S., had a choice: accept a weaker dollar or get hit with punitive tariffs. They ran the numbers and came to a clear verdict: yielding to U.S. demands was the better option.

And so, the Plaza Accord was born—a carefully coordinated effort to bring the dollar down (without triggering a crisis).

Central banks worked together, selling dollars and buying yen and Deutsche marks to push the dollar lower. But the deal wasn't just about currency markets—each country made key policy changes to support the adjustment. Japan agreed to open up its financial markets, Germany cut taxes, and the U.S. pledged to reduce its budget deficit.