https://www.wsj.com/articles/to-bring-back-u-...-get-the-wor...
Donald Trump promised to "make America great again," but he
might make America Great Britain. To re-industrialize the U.S. economy,
President Trump must avoid the mistake that de-industrialized Britain: Namely,
he must end the dollar's role as the world's chief reserve currency.
A century ago when Britain began to lose its place as the world's leading
power, it was suffering economic maladies today's Americans will find
familiar: declining exports, large government deficits, and a huge amount of
foreign debt. The British pound's role as the world's chief reserve currency
was a major driver of this economic decline.
John Maynard Keynes promoted the British pound's use as the world's reserve
currency, writing in 1913 that replacing gold with foreign-exchange reserves
was a step toward "the ideal currency of the future." But it didn't
take long for the markets to prove that currency reserves are not a foolproof
form of savings. The monetary system Keynes recommended was established
throughout Europe after a 1922 conference in Genoa, but it collapsed in 1931
at the onset of the Depression.
French economist Jacques Rueff described the fatal weakness of
foreign-exchange reserves in a 1932 lecture. He explained that when a
monetary authority accepts dollar or sterling claims for its official
reserves rather than gold, purchasing power "has simply been
duplicated," so that, for example, "the American market is in a
position to buy in Europe, and in the United States, at the same time."
In other words, when a foreign nation accepts repayment in U.S. dollars it
increases its money supply without diminishing the U.S. money supply,
allowing both countries' central banks to lend in dollars.
This credit "duplication" is not only inflationary in the
reserve-currency country and any country whose currency is tied to the
reserve currency; it also necessarily causes the average price of goods to
rise faster in the reserve-currency country than among its trading partners.
This is why Britain's and America's manufacturing industries lost their
competitiveness as exporters, resulting in deindustrialization.
This so-called Triffin Dilemma, though first described by Rueff, was named
around 1960 for the Belgian-American economist Robert Triffin, who described
the post-World War II unraveling of the Bretton Woods gold-exchange system.
Under the gold standard, the worldwide increase in monetary gold equaled the
world's net exports. The problem of the Triffin Dilemma is that every additional
dollar of foreign-exchange "reserves" must be matched by an equal
deficit in the reserve-currency country's net exports—that is, by net
imports.
The glut of reserve currencies made the 20th century a period of intense
inflation. The average price of British goods increased 72-fold from 1900 to
2000, while U.S. prices rose 18-fold over the same period. These increases
far outpaced inflation in other major export countries that did not provide
international reserve currencies. The prices of German, Japanese and Chinese
goods all have fallen compared with U.S. exports.
Tariffs and other forms of protectionism can't restore America's export
competitiveness. They invite retaliation, inhibit trade, and raise prices
even higher. The uncompetitive U.S. price level is effectively a tariff on
American goods. Thinking that another tariff will help American workers makes
no more sense than believing one can heal the injuries of a pedestrian hit by
a car by backing up over the victim.
The Triffin Dilemma can't be solved without a monetary reform that ends
the dollar's use as the world's chief reserve currency.
Here's a deal that could place Mr. Trump in Alexander Hamilton's league:
Persuade America's sovereign creditors that the U.S. will convert every penny
of foreign dollar reserves into long-term government-to-government debt, to
be paid off in gold over, say, 30, 40, or 50 years. Hamilton's plan paid off
the debt from the American Revolution by the mid-1830s. The gradual repayment
of all outstanding official foreign dollar reserves would reverse America's
industrial decline by restoring the price competitiveness of U.S.
manufacturing.
The most essential step would be establishing a schedule for paying off
the outstanding dollar reserves, which would require long-term planning and
consensus between the White House and Congress. But if a payment schedule
were finally set, it would remove the deflationary threat of foreign dollar
reserve liquidation overhanging the U.S. market. Then the beginning of the
actual payments would set in motion the relative price changes necessary to
reverse the reserve-currency curse.
Like Mr. Trump, Hamilton's contemporaries originally thought his glaring
character flaws far outweighed his virtues. But after the formerly penniless
immigrant managed to make a fortune for his adopted country, even those who
had been his worst political enemies found it in their interest to carry out
his plan for decades. Today, young people whistle the songs not from
"Jefferson" but "Hamilton." There will be no whistling of
tunes from "Trump" if he makes America Great Britain.
-----
Mr. Mueller directs the economics and ethics program at the Ethics and
Public Policy Center.
* * *
