Flexible currencies are killing US manufacturing

Trade wars are coming back from the dead. Donald Trump is talking about scuttling free trade arrangements as he contemplates a presidential run. It’s fair to ask why so much manufacturing in the US has been abstracted to places like East Asia. The decline of trade barriers is not the reason; the failure to return to fixed exchange rates and gold convertibility are at fault.

There is no reason why major countries with similar low inflation rates should not have their currencies trade at fixed rates of exchange. After all, if the real purchasing power of currencies is not changing, why should the exchange rates of the currencies themselves be anything but stable? And yet over the last 30 years, as inflation rates in the first world converged, wild swings in the exchange rates of the major currencies were the norm. The result was that worldwide, people hoarded dollars, because in an era of flexible rates, the greenback was most likely among all competitors to maintain its value and prestige.

Well, the only way foreigners are going to get dollars to hold is to pay for them with real goods of their own. Hence the decline of American manufacturing. If only, back in the 1980s, when inflation rates first fell and converged, the further step of fixing exchange rates had been taken! The easiest way would have been for everyone adopt gold convertibility. But the go-go prosperity of the 1980s and then 1990s put the issue on the back-back burner.

It's on the front burner now, what with Made In China, and especially if we’re thinking about killing international trade in the name of domestic manufacturing. Take the easy route: fix the dollar to gold, demonstrate to everyone else to follow suit, and even under a robust system of free trade, those factory jobs will rush back to the US.