Former President Ronald Reagan always believed that a great nation needed a strong currency. So, in one of his first moves back in the early 1980s, he gave Fed Chairman Paul Volcker a green light to do whatever it took to restore the dollar’s value and vanquish the hyper-inflation that had sunk the economy during the stagflationary 1970s. To Reagan the plunging U.S. dollar was also the mirror image of a rising Soviet Union, another trend that had to be stopped.
The Gipper was right on the need for a strong dollar. And with a program of tax cuts, deregulation, and military buildup, he succeeded in restoring dollar-based peace and prosperity around the world.
Today, the dollar is again in the news. Various short-sighted Wall Street economists — along with a bunch of whining U.S. manufacturing companies and a flock of European Union central planners whose sole desire is to take America down a peg — want to see the American currency devalued. It’s a terrible vision, one that must be devoutly opposed. Fortunately, the Bush administration has thus far stayed with a strong-dollar policy.
Treasury Secretary Paul O’Neill refuses to cave into the National Association of Manufacturers or Euro commissars or Wall Street traders. Former Clinton Treasury man Robert Rubin, who helped revive the dollar in the mid-1990s, testified before Congress that he agrees with Secretary O’Neill. “A weak dollar would adversely affect inflation, interest rates, and capital inflow,” he said.
Make no mistake, the fate of the dollar is tied to the outlook for world economic health. Over the past two decades the dollar has resumed its historic role as the world currency of choice. It is used every day by literally hundreds of millions of people across the planet. When dollars flow in, U.S. businesses and their technological know-how soon follow.
Therefore it’s no surprise that the revival of the dollar coincides with the world revival of economic growth and democracy and peace over the past twenty years. As the dollar stood tall, the Soviet Union evaporated. This too is no coincidence. The dollar, standing atop the globe, reflects the victory of American values — not only a free-market economy, but also political freedom and democracy.
Toward the close of the 19th century, Otto von Bismarck told his biographer that the most important historic event of the century was that the U.S. and Britain spoke the same language. What the German autocrat foresaw, I think, was a 20th-century victory for the English-speaking values of democracy and freedom. He was right.
A while back the New York Times ran a Sunday front-page story on the spread of English around the world. “English is the language of the Internet, of movies and music, of air traffic controllers and captains at sea,” the story read. “It is essential to international business, the means of communications between Japan and Brazil, Germany and Egypt.”
Greater use of U.S. dollars will accompany the worldwide spread of the English language. Because the Internet is an English-speaking technology, the dollar will solidify its role as world money in today’s Internet economy. It is King dollar that will finance global trade and transactions in the new economy of Internet commerce.
Greenbacks already circulate heavily in Moscow and St. Petersburg, in the Shanghai provinces of China, through the Pac Rim, in Mexico City, throughout the Caribbean, all the way down through the southern cone of Latin America, in Rio and Buenos Aires.
Individual governments are in denial about this. They continue to defend their national currencies. But pesos never float, they sink. And ordinary people know full well what economist Arthur Laffer coined years ago: only the U.S. dollar has the moneyness of money.
So it would be foolish for policymakers to attempt dollar devaluation; there’s an unstoppable historical tide of people and markets who are voting daily for dollars. Even a mild form of dollar tinkering turned out to be an absolute disaster in the late 1980s, ultimately leading to the 1987 stock-market crash that foreshadowed a half-dozen years of stagnant growth. Rubin and Greenspan were absolutely right to revive the dollar in the mid-’90s. And Bush and O’Neill today would be making a huge mistake if they change this policy.
Instead, U.S. policymakers should refocus on the importance of preserving dollar value based on a broad market-basket of commodities — including gold. This would stabilize the greenback’s purchasing power, rule out inflation and deflation, and maintain a pro-growth standard of dollar stability worldwide. Then, President Bush can take the stable dollar and promote it throughout this hemisphere as the currency anchor for an American free-trade zone. Dollarization would quickly spread from Canada to Argentina. And other nations throughout the world would be encouraged to do likewise.
Think of this: in the next ten or twenty years, the greenback — and its values of free-market economics and democratic human freedoms — could become the currency of choice throughout Russia and China, both of whom are currently linked to the dollar. This kind of dollarization would promote world peace and prosperity in ways never envisioned by even the greatest practitioners of statecraft. In the post-Cold War era, as George Bush puts his imprint on American foreign policy, this is a thought that our financial experts should hold dear.