Money, Gold, and History by Lewis Lehrman

Author:Lewis Lehrman [Lehrman, Lewis]
Language: eng
Format: epub
Publisher: The Lehrman Institute
Published: 2013-06-30T22:00:00+00:00

Ultimately, this process is not sustainable. The foreign demand for the reserve currency has a limit, and when it is clearly surpassed, foreign holders will unload that currency, and it will begin to fall rapidly. The reserve-currency country will then be faced, as the United States is today, with the choice between propping up interest rates and deflating the domestic economy, or else repudiating all or part of its debts (by ending convertibility as in 1973, or by devaluating under the float as in 1986).

It is essential to understand these defects of a reserve-currency system because the dollar’s reserve-currency role did not end with the breakdown of Bretton Woods. In fact, with gold immobilized, the dollar’s role expanded. Demand for the dollar as a reserve currency continued or increased. Thus, it is no accident that since 1974 – the year of our last nearly balanced budget – the twin deficits of the United States have mushroomed.

I do not argue that, under a properly functioning international monetary system, a trade surplus is good and a trade deficit bad; that argument is an all-time fallacy. In fact, a trade deficit leading to greater investment and output is a good thing. The point is that under the present floating system the increased foreign official dollar reserves – redeposited, say, in New York – permit the United States to sustain increased current consumption in excess of real income, for example by financing the budget deficit. In addition, the dollar’s reserve-currency status alters, and at times jams, the natural adjustment mechanism of world payments, prices, and trade – whether exchange rates are fixed or floating.

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