America must now take one of two divergent roads. First, America may persist on the road of soft indulgence afforded by the unstable dollar’s official reserve currency role—the enabler of ever-rising budget and balance-of-payments deficits, therefore of immense American foreign debt. Though the centrality of the world dollar standard may gradually decline, it may still continue for another generation because of the unique amplitude and liquidity of the dollarized financial markets, repositories for vast sums not easily stored elsewhere as official national reserves. Therefore, the “exorbitant privilege” of the dollar’s role as the world’s primary reserve currency may enable American authorities, policy makers, and academic economists to persist in rationalizing the misleading mask of this reserve currency privilege as a boon, instead of a deadly economic malignancy leading ultimately to national insolvency.
Or, second, American leaders may acknowledge the dollar’s world reserve currency role as an insupportable burden, instead of a privilege. It is a burden because decades of supplying dollar reserves to the world in the form of dollar debt has caused an exponentially rising burden of United States foreign and domestic debt. This process enables America to finance rising American budget and balance-of-payments deficits without institutional limits. These monetized deficits of the reserve currency country entail arbitrage mechanisms which cause inflation followed by deflation both at home and abroad.
If American leaders continue to choose option one—rising debt and deficits financed by the dollar’s reserve currency role—the reserve currency fantasy may carry on for several more decades before its complete collapse. Historians have analyzed the very same pattern of gradual reserve currency decline of the British imperial pound as it persisted after World War II—lingering as it did on life support for three more decades, then collapsing, finally making clear to the world the general collapse of British power.
If American leaders choose option two, they will reject the siren song of the reserve currency’s “exorbitant privilege.” They will acknowledge the insupportable burden of the dollar’s official reserve currency role. They will plan now for the termination and wind up of the dollar’s reserve currency role, restore dollar convertibility to gold, define by statute the dollar as a certain weight unit of gold, and propose gold as the sole international reserve currency, thereafter settling all residual balance-of-payments deficits in gold alone.
For America to choose option one is not unlike an intelligent, insouciant dare-devil, Icarus, who—well-suited for the leap—takes off from the fiftieth floor of his skyscraper, secure in the knowledge that he is feeling fine ten floors down, the street level still forty floors far below.
To choose option two is to choose the American Constitutional roadmap to monetary reconstruction on the bedrock of a stable dollar, shorn of the crushing weight of trade disadvantages and the accumulating dollar debt intensified by the reserve currency system.
American monetary and economic reconstruction on this historic basis will lead to a resurgence of rapid economic growth empowered by a sound and stable dollar and the renewed confidence and certainty born of market expectations of a stable long-term price level. These fundamental incentives will engender a vast increase of true savings available for long-term investment from current income—investable savings—and much more from dishoarding. The outpouring of savings will be redeployed by entrepreneurs in new and innovative plants, technology, and equipment, minimizing unemployment as skilled and unskilled workers are hired to manage the new facilities. The United States export production machine will be reoriented to the world market under free and fair trading conditions.
This is the true road of American monetary and economic reconstruction.
This article was previously published at The Gold Standard Now.