Alan Reynolds

A recent headline in The Washington Times: "Snow's words boost dollar, interest rates." A few days earlier, Treasury Secretary John Snow's words were being criticized for sinking the dollar. It sometimes seems as if a treasury secretary can't even sneeze without someone seeing that as an invitation to speculate on the dollar.

Still, silence is often the best policy. As The Wall Street Journal's wise veteran George Melloan wrote, "Giving monetary lectures to trading partners just makes the markets nervous." Trying to influence exchange rates is sometimes dangerous and never successful. Just take a look at the sorry efforts of previous treasury secretaries.

Nearly every treasury secretary since George Shultz (1972-'74), with the notable exception of Robert Rubin, has made some effort to negotiate or talk the dollar down. This was always due to misplaced anxiety about trade deficits and misplaced confidence on a weaker dollar as a means of fixing that phony problem.

I propose looking at what was happening at the time of major turning points in the dollar, using the Federal Reserve Board's broad index of the dollar's value against 26 other currencies. The broad index is needed to include such major trading partners as Mexico, China, South Korea and Singapore. Even if pushing the dollar down against one currency reduced imports from that country (say, Japan), the United States would just import more from another (South Korea).

To digress into complex economics, the overall current account deficit is equal to the gap between domestic investment and savings. That means a weaker dollar could only reduce the deficit by raising U.S. savings (which makes no sense at all) or reducing U.S. investment (which is an odd definition of improvement).

Economics aside, the first political push to devalue the dollar began with President Nixon closing the gold window and imposing tariffs and price controls in August 1971, with the explicit goal of pushing the dollar down. All that atrocious federal intrusion left us with double-digit inflation in 1973, followed by a nasty inflationary recession. Yet the dollar index merely dropped from 31.9 in January 1973 to 28.7 in July, before starting back up again.


Alan Reynolds

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