Make The Dollar Great Again

Certain members of the Trump Administration seem to be taken in by the siren call of a weak dollar. The idea is that cheapening the value of the greenback will improve our trade balance by making imports more expensive and our exports cheaper. This ignores the real-world reality that any short-term advantage will be overwhelmed by the inflationary damage to the domestic economy that a devalued dollar will wreak.

In the early 2000s, the George W. Bush administration believed a gradually weakening dollar would boost trade and help the economy. The result was the debacle of 2007-09, from which we still haven’t fully recovered. The hard truth is that a mighty dollar is crucial to maintaining the U.S. as a powerful world leader.

National security experts ignore how a strong currency is critical to a country’s global strength. However, a currency that’s reliably stable in value—and is trusted to stay that way—can enable a country, if it so chooses, to exercise a seemingly outsize influence in the world, economically and militarily. Strong, stable currencies are essential for economic growth. They lead to the development of domestic capital markets and financial institutions that can both fuel internal expansion and facilitate the creation of inter-national supply chains. The trustworthy dollar was key to making the U.S. the financial capital of the world.

Centuries ago, the northern provinces of the Hapsburg Netherlands—which became the Dutch Republic—fought off their Spanish overlords, who were, on paper, far richer and stronger. Thanks to its trusted currency, the Dutch Re-public became a capital powerhouse and created a globe-girdling empire. The world’s first stock exchange opened in Amsterdam in 1602.

When a Dutch prince, William of Orange, became king of England in 1689, his new realm was, at best, a middling power. But William brought a Dutch sense of finance with him, and this helped lead to the creation of the Bank of England, which undergirded the British pound that, in terms of gold, wouldn’t change value for well over two centuries. Britain developed an increasingly sophisticated financial system. Even though this smallish island was a fraction of the size of France, its capital markets enabled it to successfully finance the global contest with France, whose crude financial system was a severe handicap in financing those wars.

Great powers don’t have feeble currencies.

A particularly misbegotten idea seriously hobbled France’s economy in those times: the belief that economic strength came from a strong government micromanaging the economy and maintaining trade surpluses. The more gold and silver a country could get its hands on and hoard, the more powerful it was, went their thinking. This statist approach was called mercantilism.

Adam Smith’s The Wealth of Nations demolished this constipated notion. Both buyer and seller gain from a transaction, he correctly pointed out. Trade enhances the creation of wealth and leads to greater and more widespread prosperity. Smith’s Britain leapt ahead of France.

Unfortunately, various forms of mercantilism emerged in the 20th century. One variation poisoned the 1930s: A country would devalue its currency to supposedly gain a competitive advantage against its trading partners. It’s no surprise that other nations followed suit. The result was chaos and economic immiseration and, ultimately, World War II.

The U.S. triggered a global trade war and depression with its enactment of the notorious Smoot-Hawley Tariff Act in 1930.

We once again fell for the illusion that cheap money can stimulate growth when President Richard Nixon began a series of dollar devaluations in 1971, ushering in a decade of virulent inflation and the belief that the U.S. was a nation in decline. It wasn’t until Ronald Reagan took office after the terrible 1970s that the inflationary beast was finally slain.

A weak dollar begets a weak country, and there’s nothing great about that.