A common argument regarding the cedis’ appreciation is that it is “artificial.” Many claim its value is being propped up by extensive central bank intervention, asserting that the currency should be allowed to fluctuate according to market dynamics to find its “natural” rate. They envision a neutral marketplace where prices are determined by countless buyers and sellers. However, currency values do not follow natural laws—they are managed economic outcomes. While major currencies are often depicted as freely floating, government and central bank actions frequently influence them. Authorities may intervene when they judge a currency to be overly strong, weak, or in need of adjustment, thereby controlling both when and how such interventions occur. I’d like to tell a story about two events that took place in New York and Paris in the 1980s, which showcased how important government intervention was in currency markets.
On a sunny September 22, 1985, delegates from five leading global economies gathered at New York City’s Plaza Hotel with one goal: to address concerns about the overly strong and possibly troublesome U.S. dollar. Their discreet meeting produced the Plaza Accords. Finance ministers and central bankers from France, West Germany, Japan, the United Kingdom, and the United States agreed to reduce the dollar’s value relative to their currencies by intervening in currency markets. Within two years, the dollar’s value against the currencies had nearly dropped by half. This situation prompts a serious question: If money is supposed to be the ultimate free-market tool, how could a small group of officials from leading free-market countries intentionally manipulate the world’s reserve currency? To grasp what led to this critical moment when the dollar was deliberately adjusted, we must look back several years.
Near the end of World War II, Allied countries met at Bretton Woods in 1944 to create a new international monetary system. Under this arrangement, each nation’s currency was tied to the U.S. dollar, which could be exchanged for gold by foreign central banks at a fixed rate. With this, the dollar became the world’s reserve currency and for some time, the system worked well. However, ongoing balance of payments deficits, higher public spending due to the Vietnam War, and inflationary actions by the Federal Reserve led to the dollar becoming overvalued in the 1960s. As more dollars ended up abroad than the U.S. had gold to cover, nations like Britain and France began converting their dollar holdings into gold. This resulted in a run on U.S. gold reserves. Ultimately, President Nixon suspended the dollar-to-gold conversion in August 1971, ushering in the age of fiat currencies.
However, persistent issues remained throughout the 1970s. Economic difficulties continued because of oil crises, the Watergate scandal, and extended periods of accommodative monetary policy that diminished the value of the dollar. Inflation reached a peak of 14.83%, eroding real wages and steadily weakening confidence in the reserve currency. The situation shifted dramatically when Paul Volcker became Chair of the Federal Reserve. He viewed inflation as a bigger threat than unemployment or even recession, leading him to implement strict monetary tightening. The Federal Reserve sharply increased interest rates, lifting the federal funds rate to 20% in 1981. This contributed to the 1980–1982 recession and pushed unemployment to 11%. Inflation was finally brought under control, but it resulted in an unintended consequence. The Federal Reserve’s strict policies, along with substantial government borrowing during President Ronald Reagan’s first term (1981–84), pushed long-term interest rates upward and drew in foreign capital, resulting in a stronger dollar. Global investors searching for stability and high returns turned to the United States, where lending to the government provided some of the highest risk-free interest rates available.
Between 1980 and 1985, the value of the dollar increased by about 50% against major currencies. This severely hurt U.S. exporters, making their products much more expensive abroad. Meanwhile, Japan and West Germany enjoyed booming exports to the U.S., as their currencies did not rise as sharply, creating economic and political tensions. American manufacturers and unions blamed the strong dollar for job losses and industry decline, prompting calls for tariffs and protectionist policies. Concerned about dependency on U.S. markets, Japan and Germany feared trade wars would harm everyone. In 1985, leading nations chose coordinated intervention at the Plaza Hotel in New York, agreeing to realign exchange rates through joint central bank action rather than leaving it to the markets. They began selling dollars and buying other currencies on a large scale. This had an immediate impact: the dollar dropped significantly against the Japanese yen and the German mark, ultimately losing about half its value from early 1985 over the next few years. What could have taken markets years to accomplish happened much faster thanks to coordinated policy action. Many American exporters benefited as their goods became more affordable abroad, helping some factories become competitive again and improving the political mood in Washington. But this came at a cost elsewhere.
Prior to the Accord, one US dollar was worth about 242 yen, but within two years, this rate dropped to 146 yen per dollar. Since Japan’s economy depended heavily on exports, this sharp appreciation caused a serious economic shock by reducing income in yen from abroad without changing demand. To counteract this, the Bank of Japan cut interest rates sharply, aiming to support exporters and expanded money supply. The resulting surge in liquidity made borrowing easier and fueled speculation, driving up both land and stock prices. Japanese investors took advantage of cheap liquidity and a strong yen to purchase U.S. assets, including Columbia Pictures and iconic New York real estate such as Rockefeller Center. They even partnered with a future U.S. president to acquire the land beneath the Empire State Building. This credit-driven asset bubble grew beyond sustainable limits and, when it burst in 1990, triggered long periods of stagnation and deflation known as the lost decades.
West Germany also faced difficulties from a stronger Deutsche Mark, which created obstacles for its export sector but also enhanced its reputation as a stable force in European monetary affairs. This elevated position enabled Germany to advocate for improved monetary coordination within the EU in response to the economic volatility of the 1980s, ultimately contributing to the creation of the Euro. Consequently, an agreement reached in New York had significant and far-reaching impacts: it supported U.S. industry, spurred speculative activity and a prolonged downturn in Japan, and energized European initiatives toward monetary integration—outcomes that, although not explicitly intended by the Plaza Accord, became a lasting component of its legacy.
By 1987, the dollar had dropped enough for the United States and its partners to worry about it declining too much. Once again, key players met—this time in Paris at the Louvre—and agreed that the dollar’s decline should stop and move toward stabilization. There was one agreement to weaken the dollar, followed by another to prevent further drops. It was not the first or last instance of free-market advocates intervening in the currency market, but this was the rare occasion when they did so openly. They did this during a period when the IMF was recommending that African nations allow their currencies to float freely as part of Structural Adjustment Programs.
Today, such interventions continue, though less overtly. When central banks purchase large amounts of government bonds through quantitative easing or publicly state that a weaker currency would benefit industry, they also have an eye on the currency markets. They shift the reference point of value. Each intervention creates winners and losers: exporters may welcome a weaker currency, making their goods cheaper abroad, while importers can face challenges. Asset prices might increase as capital seeks higher returns, leaving savers quietly losing purchasing power as deposit rates remain low.
For Ghana, then, the argument should not be reduced to whether the Bank of Ghana intervenes or stands aside—as if non-intervention was some higher form of purity. Every exchange-rate regime is managed in one way or another, and the real question is simply whether the cedi is being valued at a level that serves the economy we say we want. A currency that is merely “strong” on paper but chokes off exports, encourages import dependence, and compresses domestic producers is not a national achievement; it is a policy choice with predictable consequences. What matters is getting to a credible, sustainable rate that rewards production for export, supports tourism and tradable services, and turns growth into tax revenue the state can actually collect—without constant firefighting. Call it intervention or call it market forces; the only honest metric is whether the exchange rate is helping Ghana boost foreign reserves and expand government revenues over time. But what do I know?
Gideon is an avid reader, dog lover, foodie, closet sports genius but a non-financial expert
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