China’s decision to devalue its currency is rightly seen as a threat to American workers and a violation of legitimate competition. When the price of goods offered in the global market can be slashed as the result of currency manipulation rather than having more competent workers or achieving greater production efficiency, it’s not only unfair, it’s an affront to the principles of free markets and free trade.
{mosads}Both Republicans and Democrats recognize that currency debasement violates the rationale for an open global marketplace where nations compete fairly on a level playing field. “Countries like China that cheat and don’t play by the rules hurt good paying American jobs,’ Rep. Debbie Dingell (D-Mich.) observed last week. Sen. Rob Portman (R-Ohio) points out that combating currency manipulation by our foreign competitors needs to be a priority in negotiating trade agreements; he notes that last week’s devaluation of the yuan serves as “another harsh reminder that we cannot afford to sit idly by as China refuses to play by the rules.”
There’s only one problem with warning nations not to manipulate their currencies and to play by the rules: There are no rules.
Ever since the Bretton Woods agreement from 1944 was ended in the early 1970s, we have had no rule-based system for aligning exchange rates among the world’s different currencies. The Bretton Woods system required every participating nation to maintain a fixed exchange rate between its own currency and the U.S. dollar. The objective for safeguarding international monetary stability was to ensure that sliding exchange rates did not tilt the scales of price competition. Free trade was based on genuine value rather than monetary illusion. Capital flowed to productive investment opportunities rather than speculative financial instruments.
The integrity of the world’s monetary system rested on a U.S. dollar that was convertible into gold at the rate of $35 per ounce of gold.
Compare the simplicity and purity of this approach with the currency chaos and monetary manipulation we have today. Exchange rates among the world’s major currencies shift unpredictably with no linkage to any common denominator or reference point. Even worse, with central banks around the world desperately flooding economies with cheap credit, money has become disconnected from the real economy.
Such an irrational situation permits government officials to directly intervene in foreign exchange markets to influence the value of their own nation’s currency relative to other currencies. And it only takes a subtle hint from a major central bank authority regarding the future direction of interest rates to cause an exchange-rate jolt among the world’s leading currencies that devastates the business plans of manufacturing companies — while enriching speculators who happened to guess right.
How much longer will we continue to allow this monetary disorder to undermine the logic of competitive markets and the notion of free trade? Nations will be forced to take protectionist counter measures by levying stiff tariffs against trading partners and imposing capital controls. It’s a travesty of America’s commitment to free market capitalism.
We need to fix what broke before it does further damage to our own nation’s economic future and the prospects for global prosperity. Yet countries today can do anything they wish in terms of exchange rates, according to the International Monetary Fund (IMF): They can let their currency float, peg it to another currency or basket of currencies, adopt the currency of another country, form part of a monetary union or participate in a currency bloc. The only approach the IMF does not allow them to choose is to peg their currency to gold.
The irony — it borders on perverse — is that the IMF was created for the purpose of managing the Bretton Woods international monetary system in accordance with its fixed-exchange rate rules. Countries had to pay 25 percent of their “quota” subscription in gold (which the IMF still holds) to be accepted as members. And it was the stability of the gold anchor that provided the solid monetary platform for unprecedented real economic growth in the decades following World War II.
Labor productivity for the United States soared during the Bretton Woods era, with growth averaging 2.8 percent annually from 1948 to 1973. Middle-class income growth mirrored the gains in productivity, with the median household’s income likewise rising at 2.8 percent annually; at this rate, incomes double every 25 years, or about once every generation. Moreover, the gains in overall household income were broadly shared. Income inequality decreased as the share of income going to the top 1 percent fell by nearly one-third, while the bottom 90 percent gained a higher share of total income. In short, having an orderly and ethical international monetary system was a tremendous boon to economic prosperity for the middle class.
What a striking difference from our current levels of economic performance and the inequities caused by monetary favoritism. The IMF today openly advocates currency depreciation as an effective way for member nations to become more “competitive” in selling their exports. Meanwhile, central bankers debase money through unwarranted pumping with scarce regard for how it skews exchange rates and distorts capital flows.
What monetary authorities fail to acknowledge is that manipulating your currency is not competing — it’s cheating.
It’s bad enough when workers do their best to produce high-quality goods that provide good value to consumers, only to be priced out of the market when the exchange rate abruptly shifts due to government intervention or the latest central bank pronouncement. It’s even more galling to realize that the beneficiaries of monetary stimulus efforts that lower credit standards and devalue currencies are the wealthiest hedge fund traders who snatch profits by gaming the next round of quantitative easing instead of offering goods and services that actually benefit people and raise living standards.
It’s time to restore sanity to international monetary relations — indeed, we need to reaffirm the morality of money itself. Currencies should not be used as weapons to undercut the honest efforts of workers in competing countries. It will take bold leadership and vision to restore the fundamental role of money as a meaningful unit of account and reliable store of value. Money is meant to provide a useful measuring tool for free enterprise — not to serve as an instrument of government policy.
Shelton, an economist, is co-director of the Sound Money Project for the Atlas Network and author of Money Meltdown: Restoring Order to the Global Currency System.