As stated in the preceding column here eminent labor economist Jared Bernstein recently called in the
New York Times for the dethroning of King Dollar" claiming that the reserve currency status of the dollar has cost the United States as many as six million jobs in 2008 and these would tend to be the sort of high-wage manufacturing jobs."
Six million is about as many jobs as presidents Bush and Obama together over 13 years created. So this is a big claim. Whether or not one accepts the magnitude of the jobs deficit proclaimed by Dr. Bernstein reserve currency status comes with heavy costs.
As former president of the Federal Reserve Bank of Dallas Bob McTeer wrote in a
Forbes.com column entitled
Reserve Currency Status A Mixed Blessing:
The advantages of reserve currency status for the dollar are well known. The worlds willingness to accumulate dollar reserves in the post World War II period first removed and later reduced the requirement of maintaining balance of payments equilibrium or more specifically current account balance. By removing or weakening this restraint U.S. policymakers had more freedom than policymakers in other countries to pursue strictly domestic objectives. We ran current account deficits year after year balanced or paid for by capital inflows from our trading partners. The good side of that was that we could import real goods and services for domestic consumption or absorption and pay for them with paper or the electronic equivalent. In other words our contemporary standard of living was enhanced by others willingness to hold our currency without cashing it in" for goods and services or before 1971 gold.
The bad side of our reserve currency status although seldom recognized was that the very leeway that enhanced our current standard of living built up debt (and/or reduced foreign assets) to dangerous levels. I remember well when in 1985 the United States ceased being a net creditor nation to the rest of the world and instead became a net debtor nation. Our net indebtedness has only grown over the years and hangs over us like the legendary sword of Damocles.
Sword of Damocles? Lehrman in his
Money Gold and History states:
When one countrys currency the dollar reserve currency of today is used to settle international payments the international settlement and adjustment mechanism is jammed for that country and for the world. This is no abstract notion. …
…
The reality behind the twin deficits" is simply this: the greater and more permanent the Federal Reserve and foreign reserve facilities for financing the U.S. budget and trade deficits the greater will be the twin deficits and the growth of the Federal government. All congressional administrative and statutory attempts to end the U.S. deficit have proved futile and will prove futile until the crucial underlying flaw namely the absence of an efficient international settlements and adjustment mechanism is remedied by international monetary reform inaugurating a new international gold standard and the prohibition of official reserve currencies.
By pinning down the future price level by gold convertibility the immediate effect of international monetary reform will be to end currency speculation in floating currencies and terminate the immense costs of inflation hedging. Gold convertibility eliminates the very costly exchange of currencies at the profit-seeking banks. Thus new savings will be channeled out of financial arbitrage and speculation into long-term financial markets.
Increased long-term investment and improvements in world productivity will surely follow as investment capital moves out of unproductive hedges and speculation made necessary by floating exchange rates seeking new and productive investments leading to more quality jobs.
The sobering views expressed by McTeer and by Lehrman more than neutralize Heritage Foundations Bryan Riley and William Wilsons
valiant championship of the dollars reserve currency status in opposition to Bernstein. Heritages championship is gallant but … unpersuasive.
John Mueller who served as gold standard advocate Jack Kemps chief economist and now as the Ethics and Public Policy Centers Lehrman Institute Fellow in Economics and Director Economics and Ethics Program crisply observes in an interview for this column:
As Kenneth Austin lucidly reminded us it is a necessity of double-entry bookkeeping that any increase in foreign official dollar reserves equals the increase in combined US current and private capital account deficits. Denying the connection requires magical thinking. The entire decline in the international investment position since 1976 is due to Congresss borrowing from foreign central banksthat is the dollars official reserve currency rolewhile the books of private US residents with the rest of the world have remained close to balance.
There are differing schools of thought among the gold standards most prominent adherents as to the significance of merchandise deficit account. Their theoretical differences about current accounts are likely to prove operationally immaterial.
Both the Forbes and Lehrman schools share mortal opposition to mercantilism. Both passionately oppose the cheapening of the dollar. Both see the gold standard as a critical mechanism to restoring the brisk growth of as Lehrman termed it quality jobs" … and the restoration of median family income growth that began profoundly to stagnate with Nixons destruction of Bretton Woods.
In this columnists own earnest if much less erudite view the most significant element of the reserve currency curse derives from how it subtracts capital from the real e.g. goods and services economy. Corporate earnings are taken in return for local currency into the coffers of the relevant international central bank. That central bank then promptly loans the proceeds directly to the federal government of the United States by purchase of treasury instruments.
The way the world of central banking works thus subverts a process extolled by Adam Smith (in the context of his analysis of the benefits of fractional reserve money) in
Wealth of Nations. Smith:
When therefore by the substitution of paper the gold and silver necessary for circulation is reduced to perhaps a fifth part of the former quantity if the value of only the greater part of the other four-fifths be added to the funds which are destined for the maintenance of industry it must make a very considerable addition to the quantity of that industry and consequently to the value of the annual produce of land and labour.
The mechanics of the reserve currency system preempt these funds ready availability for the maintenance of industry." The mechanics of the dollar as a reserve asset therefore finance bigger government while insidiously preempting productivity jobs and equitable prosperity.
This columnist agrees wholeheartedly with Bernstein on what seem his three most important points. The reserve currency status of the dollar causes American workers and the world big problems. The exorbitant privilege deserves and demands far more attention than it receives. Moving the dollar away from being the worlds reserve currency would be a great deal easier than many now assume.
Bernstein in his
blog identifies four mechanisms as out there" (without explicitly endorsing or critiquing them): by legislation (which this columnist views as playing with tariff fire); taxation (thereby raising the price of currency management" which this columnist finds hardly an obvious source of job creation); reciprocity (demanding the right to buy foreign treasuries); and an international reserve currency.
Mueller says of Bernsteins legislative and tax proposals you simply cant solve a monetary problem with a fiscal solution."
As for
reciprocity the United States Treasury even under a Joe Biden or even a Bernie Sanders presidency is never going to turn away ready lenders. This homely truth seems about as self-evident as it gets. Beyond that even if China were to undertake market-oriented reforms and according to the
Wall Street Journal the political winds seem to be blowing the other way just now the RMB accounts for only
1.64 of global payments. It is not even close to being a power player. Beyond the beyond … it is well beyond dubious to expect international central banks enthusiastically to bulk up on the debt instruments of the Peoples Republic of China for the indefinite future.
An international reserve currency" however is a sound proposition if well designed. Proposing SDRs for that role does not hold up. As then-Treasury Secretary Tim Geithner during a hearing of the House Appropriations Subcommittee on Foreign Operations on March 9 2011 stated There is no risk of the SDR playing that a reserve currency role. The SDR is not a currency. Its a unit of account. And it cant provide the role that many people aspire to it. There is no risk of that happening." Mueller elucidating why this is so states:
Its not possible to solve the problems caused by tying other nations domestic currencies to one nations inconvertible domestic currency (the dollar) by tying them all to a basket of inconvertible domestic fiat currenciesthat is to a subset of themselves. The result has no anchor. And the world economy always gravitates to a single final asset" because using several multiplies transactions costs.
There appear to be but two technically plausible ways of getting there. One is Nobel economics laureate Robert Mundells
proposal of a world currency. The other of course represents a sort of reversion to the mean." Restore a 21st century international gold standard.
While the gold standard is very unfashionable it by no means is absurd. Then-World Bank Group president Robert Zoellick in 2010 was dead on when he observed in an
FT column that Although textbooks may view gold as the old money markets are using gold as an alternative monetary asset today." About a year later the Bank of England issued a startling but meticulous
white paper demonstrating that the Federal Reserve Note standard" materially has underperformed in every area considered both the Bretton Woods gold-exchange standard and the classical gold standard itself.
As
previously referenced in this column Bundesbank president Jens Weidmann in a 2012 speech forthrightly
stated:
Concrete objects have served as money for most of human history; we may therefore speak of commodity money. A great deal of trust was placed in particular in precious and rare metals gold first and foremost due to their assumed intrinsic value. In its function as a medium of exchange medium of payment and store of value gold is thus in a sense a timeless classic.
The gold standard notwithstanding Churchills not-to-be-repeated 1925 blunder is in no way a prescription for austerity. The classical gold standard properly constructed is a recipe for workers and median income families to flourish economically.
We have not flourished consistently since its last remnants were destroyed by President Nixon on August 15 1971. So… what to do?
The first thing to do is to address the important issue squarely. By shrewdly posing the right question Jared Bernstein has raised the odds perhaps significantly that we finally will find our way to the right answer. Getting out of the woods may be no more complicated than following JFK/LBJ economic advisor Walter Hellers most famous
dictum: Put aside principle and do whats right."
Adroitly resolving the reserve currency issue as part of implementing an international reserve currency is far more likely to be fruitful in generating quality jobs by the millions than are earnest jeremiads such as that by Dr. Bernstein himself that
American political elites have completely failed to understand what the Fed should be doing right now." Relying on central bankers consistently to get discretionary management right represents a triumph of hope over experience. Or as novelist Rita Mae Brown memorably observed insanity is doing the same thing over and over again but expecting different results."
Let us take Keynes in
The Economic Consequences of the Peace chapter VI to heart:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation governments can confiscate secretly and unobserved an important part of the wealth of their citizens. By this method they not only confiscate but they confiscate arbitrarily; and while the process impoverishes many it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls beyond their deserts and even beyond their expectations or desires become profiteers who are the object of the hatred of the bourgeoisie whom the inflationism has impoverished not less than of the proletariat. … Lenin was certainly right. There is no subtler no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.
As Steve Forbes pithily
puts it Youve got to get the money right." Time to lift the reserve currency curse. Time to
fix the dollar.
As stated in the preceding column here eminent labor economist Jared Bernstein recently called in the New York Times for the dethroning of King Dollar" claiming that the reserve currency status of the dollar has cost the United States as many as six million jobs in 2008 and these would tend to be the sort of high-wage manufacturing jobs."
Six million is about as many jobs as presidents Bush and Obama together over 13 years created. So this is a big claim. Whether or not one accepts the magnitude of the jobs deficit proclaimed by Dr. Bernstein reserve currency status comes with heavy costs.
As former president of the Federal Reserve Bank of Dallas Bob McTeer wrote in a Forbes.com column entitled Reserve Currency Status A Mixed Blessing: