The ‘Reserve’ Dollar: An Austrian Approach
The dollar first became the “reserve currency” of the world at the end of WWII. We, the US, still held a gold standard, and the dollar was regarded as “good as gold” for trading purposes among trading nations via the Bretton Woods Agreement. But though a few decades later, in September 1971, we abandoned the gold standard, the dollar still retained its position internationally primarily because of the relative strength of the US economy (1). That is beginning to change today, in main, due to the inflation of the dollar and the closing gap between the US economy and other economies internationally, but the US is still in a position to take advantage of the position of the dollar to continue enormous government deficit spending, and has done so consistently since abandoning the gold standard (3). Is this situation a problem for the US economy?
Some are beginning to answer yes. Surprisingly, many of the critics of this state of affairs come from the Keynesian persuasion. They look to the weakness of job growth, the rather large government budget and deficit spending, trade deficits, and financial bubbles as consequences of our dedication to the status quo regarding the reserve dollar. Several of these critics call for a return to the gold standard, which one proponent calls “the least imperfect monetary system of history” (3). On the other side of the argument, lie those that think that a return to the gold standard and thus a fixed exchange rate, would lead to further imbalances between trading nations internationally and cite the troubles of smaller nations within the euro zone as a modern example of these troubles with the exchange rate and recovery from the boom and bust cycle (4). And a third perspective is that yes, the dollar is declining in prominence as the reserve currency of choice, particularly in China and Europe, but this cycle of reserve currencies is nothing new, as it is the currency of the dominant economic force that fills this role, a position that has continuously shifted throughout history, and only since the twentieth century rests with the US (5).
The discussion at the root of this debate is money, particularly as it relates to our current fiat money vs. the classical gold standard. Austrian thought would certainly hold that our current monetary situation is far from ideal. And the gold standard is certainly moving in the right direction, one of diminished government intervention in the money supply, and the allowance of the variability of this money supply due to changes in the supply and demand of it and purely independent of intervention. Mises, in his The Theory of Money and Credit, clearly expands on the inevitable problems that arise alongside intervention; namely the impossibility in determining both the need for, and the proper amount and application of this intervention where the exchange-value of money is concerned. And the ability of a metallic, perhaps gold, system to remain more easily outside government force is one of its primary strengths from an Austrian perspective (2).
This strength is perhaps one of the reasons that is was abandoned. The government has an agenda outside of monetary security, and the ability to influence so thoroughly the money supply is invaluable in pursuing these goals (2). So, until the concerns with our current situation are vocal enough and widespread enough to outweigh the comfort and naively implicit trust in our government, we should not expect to see any changes in it. Particularly ones that would challenge and diminish the control and power of our government institutions, and power that the 'reserve' dollar cannot help but perpetuate.
3. Lehrman, Lewis E. & Mueller, John D. “How the ‘Reserve’ Dollar Harms America.” Opinion. The Wall Street Journal 21 November 2014: A13. Print.
4. Miles, William. “Gold Standard Wont Solve ‘Reserve’ Dollar Problem.” Opinion. The Wall Street Journal 25 November 2014: A12. Print.