Since he was a young up-and-coming property magnate in New York City, Donald Trump has been fixated on what he believes to be foreigners’ “cheating” on international trading terms to the detriment of the US. He believes—along with many Americans—that foreigners have stolen all our good, high-paying jobs by manipulating their own currencies, subsidizing their home industries, and erecting protective trade barriers—in the form of tariffs and quotas—that make American goods uncompetitive.
He believes that erecting high tariffs against foreign goods will level the playing field, so to speak, and restore American industry and high paying jobs. In summary, Donald Trump is a firm believer in autarky and mercantilism—discredited economic theories that tout national self-sufficiency on the one hand and exporting more than one imports on the other.
Foreigners Are Not to Blame for America’s Economic Woes
Whatever one may think about America’s economic progress or lack thereof and about whether or not America is losing high-paying jobs, foreigners are not to blame. The state apparatus over time is to blame, and there are several ways in which “we do it to ourselves.” The first and most important occurred at Bretton Woods in 1944, when the dollar was granted international reserve currency standing as the equivalent of gold at thirty-five dollars per ounce.
The thinking—which was challenged at the time in a series of articles by New York Times columnist Henry Hazlitt—was that as long as the US had enough gold to completely back its currency at that price, the international trade clearing system would function just as well and with less cost than the cumbersome system, as it was described, of shipping gold back and forth among nations. For example, if England imported more goods from France than vice versa, then England would owe France money. It would “clear” its shortfall by shipping gold to France. Under the Bretton Woods system, England would send American dollars to France or ask an American bank to pay France dollars held in its account in New York. Much easier, or so almost everyone thought at the time. Although he spoke in more diplomatic terms, Henry Hazlitt felt that the temptation to print money without gold backing was too tempting. He was right.
De Gaulle and Rueff Suspected American Cheating
The problems arose when the US started printing more money than it could back with gold at thirty-five dollars an ounce, just as Hazlitt feared. Charles De Gaulle—president of France in the 1960’s—and Jacques Rueff, his long-time chief financial advisor, were both economic scholars of the “old school” who suspected that Americans were cheating (i.e., printing dollars without sufficient gold backing).
De Gaulle ordered the Bank of France to exchange 80 percent of its dollar holdings for gold specie at the set price. The race was on. There ensued the equivalent of an old-fashioned bank run on the US gold supply by foreign central banks. When America’s gold supply became dangerously low and demand for gold redemption had not slowed, President Nixon suspended gold redemption. Because of its post-WWII economic position and its critical defense support of NATO against the Soviet Union, America’s major trading partners acquiesced in the gold suspension and the world went on a dollar reserve system, unbacked by anything other than faith in the US.
This was the beginning of an explosion in fiat money and American budget deficits. This lethal combination of fiat dollars becoming the world’s premier reserve currency meant that the US never really “cleared” its international trading account again in real money (i.e., gold). Today, America is the largest debtor nation in the history of the world.
The Consequences to America for Violating David Hume’s “Price-Specie Flow Mechanism”
In a recent interview on Liberty and Finance, Jeffrey Tucker explained the importance of clearing international trade in sound money, namely gold, which was the well-accepted doctrine of the world for centuries. Born over three hundred years ago, Scottish philosopher David Hume explained why nations that settle international trade in gold will always tend toward price equilibrium. No nation needs to manipulate its trading terms out of fear that it will run out of gold or import so much gold that its “price level” will rise so high that its products will become uncompetitive in the world market. Hume termed his discovery the “Price-Specie Flow Mechanism.”
If a country sells much more in the world market than it buys—which is the mercantilists’ desire—prices of goods will rise so high that its products will become uncompetitive, ending the importation of gold for goods and services. Likewise, if a country imports more than it sells, its “price level” will fall; making its products more competitive and the flow will reverse. This was the accepted theory for centuries, during which international trade and living standards expanded to reach new historical heights.
The Consequences of the Failure of Bretton Woods
But, Tucker explains, what happens when gold—the “specie” in Hume’s theory—is no longer used for settlement? What happens when fiat money—which can and was manufactured in vast quantities out of thin air—becomes the settlement medium? Enter the failure of Bretton Woods, which resulted in the rise of the fiat dollar reserve system. Tucker explains that America became corrupted by its newly-found money spigot. It no longer had to compete with the world because it could always simply print more money. And print more money it did!
Austrian economics explains that all economic life is conducted at the individual level, what Austrians call methodological individualism. The ability of America to import until the cows come home and settle with inflated dollars meant that it really did not have to compete in worldwide markets anymore. The main thing that America exported was dollars. At the individual level, this meant that America could accede to just about all welfare lobbies. Americans no longer really had to worry about getting a good education, working hard, etc. in order to get good jobs. Radicalized labor unions could strike for wages above world labor rates. As Tucker explains, half a century later, American workers are overpaid in international markets. Its goods are shoddily produced, industry after industry has failed, government schools turn out students who rank very far down world survey results. America has been covering up this scandal with fiat money, which is just more of the same old snake oil that got it there.
There Is a Solution
The only solution is to go back to the gold standard. As long as America can inflate fiat money to pay for imports, it will do so. Under the discipline of the gold standard, however, Americans would have to produce good quality products at world market prices in order to earn the foreign exchange (gold) needed to settle international trade. It’s the only way.
Erecting tariffs—as desired by President Trump—solves nothing and merely exacerbates the situation. America must learn to compete in the world on equal terms (i.e., it cannot simply inflate money). It must produce goods that foreigners wish to buy at prices that foreigners are willing to pay. Becoming an autarkic nation will condemn Americans to poverty. America needs to become an honest, commercially-oriented nation. If not, the world will pass it by, just as has happened to other great nations in the past.
