The truth is that the dollar’s continuing position as the global reserve currency will make it darned tough for the U. S. to “bring manufacturing back” to the United States. At the Wall Street Journal John D. Mueller remarks:
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 world-wide 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.
Why hasn’t the euro become the world’s reserve currency (I hear someone ask)? There are many reasons. The Germans don’t want it to be because they’re fully aware of the Triffin Dilemma and want to continue their export-driven growth. The European Central Bank does not allow the amount of liquidity that would be required, probably for that reason. European countries have too much sovereign debt. And there are concerns about the stability of the European Union.
If the yuan were convertible, it might be a better candidate but it isn’t so it’s not. Besides, a currency that’s still under the control of a relative handful of Chinese officials who are committed to a mercantilist approach to economic growth is pretty risky.
Frankly, I doubt that Mr. Mueller notion of an effective return to the gold standard will gain much traction. The present system gives unearned benefits to too many people. It provides benefits to people who deal in dollars, it makes it less expensive for the federal government to borrow, and it allows Americans to consume (particularly to consume oil) at prices lower than would otherwise be the case.
There are some things that could be done short of a return to the gold standard. For example, the World Bank has guidelines for the volume of dollar holdings that countries may maintain. China, Germany, Japan, South Korea, and many other countries that seek to grow via exports maintain holdings in dollars that far exceed those guidelines. The World Bank could start penalizing those countries. Obviously it won’t but it could.
Still, it would be nice if more Americans and particularly American pundits and politicians understood that the dictums of classical economics about international trade presuppose the gold standard.