The Abundant Good Of a Dollar Alternative
When it’s asked why foreigners frequently look askance at Americans, the answer usually boils down to our supposedly obnoxious nature; one that at times reveals itself in foreign policy initiatives that some around the world don’t like. The former is likely due to our being the descendants of some pretty courageous people who crossed oceans to participate in what was a libertarian experiment, while the latter should be answered by foreign policy experts.
But arguably the most compelling reason for foreign dislike of the United States is something that is not frequently commented on. In short, U.S. oversight of the dollar since 1971 has been nothing short of irresponsible, and as the dollar remains the world’s currency, poor dollar policy has invariably impacted the world in very negative ways.
In the aftermath of World War II, arguably the most powerful reason for worldwide economic recovery had to do with the world being on a dollar standard, while the dollar’s value was tied to gold at 1/35th of an ounce. With currencies stable, investment was far more certain and country economies from Europe to the Orient boomed.
By the late 1960s, U.S. dollar policy changed for the worse. And with the Nixon administration greatly influenced by monetarists who believed the dollar should have no definition alongside protectionists who felt a weak dollar would drive exports, President Nixon decided to close the gold window. Lacking a golden anchor, the dollar declined, and its decline led to worldwide inflation due to the fact that central banks no longer had a credible currency to peg theirs against.
If there was a positive to all this, it had to do with the Soviet Union. While communism never worked in economic terms, the Soviet economy was able to muddle along thanks to the Ruble’s implicit peg to the formerly stable dollar. Absent the peg, the Five-Year Plans set by the Soviets proved even more unworkable, so it should be said that Nixon’s mistaken decision to leave gold at the very least hastened the Soviet Union’s decline, albeit while boosting the rise of the formerly toothless OPEC countries.
The lost, inflationary decade of the 1970s was thankfully righted with Ronald Reagan’s election in 1980. A strong dollar advocate, the dollar rose as his election became more certain, and continued to strengthen once he was in office.
If there was a problem, it had to do with Reagan’s inability to get the nation back to the stability formerly offered by the gold standard. So with the dollar’s rise continuing unchecked, and with manufacturers and farmers making a great deal of noise about the overly strong dollar, the heads of the G5 countries met in New York in September of 1985 for what is now called the Plaza Accord. The latter succeeded in driving up non-dollar currencies versus the dollar.
Japan in particular complied with the above thanks to protectionist entities stateside who felt a much stronger yen was necessary in order to make U.S. manufacturers more competitive. Simplified, Japan was given the choice of U.S. tariffs or a stronger yen, and it accepted the latter. This is important when we consider the Japan’s two lost decades since. Irresponsible, protectionist currency policy from the United States forced a deflation on Japan that it still struggles to recover from.
Moving to the ‘90s, the arrival of Robert Rubin as President Clinton’s Treasury secretary heralded a move away from the sometimes protectionist policies of the Clinton administration vis-à-vis Japan earlier in the decade. Indeed, as Stanford professor Ronald McKinnon observed, once Rubin was in control the jawboning from Treasury about the value of the yen ceased.
So while the above was a major positive, the dollar’s rise in the late ‘90s proved problematic to certain countries with dollar pegs. In particular, the greenback’s unchecked rise led to currency crises in South Korea, Malaysia and Thailand, and later on in both Argentina and Russia. Simplified, the dollar’s continued strength made those currency pegs tenuous, and as such, it should be said that dollar policy stateside claimed its latest victims.
When dollar policy this decade is considered, all three Bush Treasury secretaries communicated to the markets their desire for a weaker greenback, and markets complied. The dollar’s decline led to a housing boom in the U.S. that eventually occurred around the world as central banks mimicked our monetary mistakes. Absent irresponsible policies in the U.S., it would be hard for anyone to credibly argue that we would be where we are today. Indeed, the inflationary real estate boom that was would never have been, along with the inevitable bust.
All this brings us to recent comments from Chinese and Russian officials about how it’s necessary for the world to replace the dollar as its reserve currency. It’s hard to fathom considering the dollar’s outsized (90% +) role in world currency markets, not to mention that nearly 70 percent of all central bank reserves are denominated in dollars.
Still, judging by history since 1971, U.S. monetary authorities have irrespective of party shown how unsuited they are to overseeing what is the most important price in the world. In that sense, it should be hoped that Euroland joins up with England, or perhaps China joins with Japan in creating a currency not used for protectionist reasons, but instead one founded on the notion of currency stability.
World economies would surely benefit from currency stability, and so would the United States. Indeed, what some call “bubbles” are nothing more than currency mistakes created by the U.S. Treasury, and some would say, the Fed. If the dollar were replaced, or better yet, forced into stability thanks to currency competition from elsewhere, this would bring amazing benefits to our economy.
Not only would investment be more rational thanks to currency instability being removed as an economic variable, it’s also true that if the dollar lost its role as world currency that the U.S. economy would benefit from lower government spending; spending presently made easier thanks to the dollar’s unwarranted stature. This isn’t to say there wouldn’t be company failures (failure is as much a part of capitalism as success is) under stable currency values, but it is to say that much of the malinvestment that frequently has its origins in bad currency policy would disappear.
All that, plus the popularity of Americans around the world might grow. No longer foisting horrific currency policy on our friends, we might instead resume our role as the world’s growth engine thanks to currency stability. In that sense, we should welcome the dollar’s replacement as a way of saving us from ourselves.