classical economics
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Free Trade Fair Money

Tariffs are Flip Side of Currency Devaluation
By Wayne Jett © March 21, 2017

     China’s entry into the World Trade Organization in December, 2001, is often cited these days as causing the demise of U. S. prosperity. A better case can be made that free and fair trade was ended in 1971 when the Nixon administration closed the gold window in Europe, thus ending the assured value of the dollar, and then “floated” the dollar’s value the following year. Free trade cannot co-exist with currencies which may fluctuate in value from day to day at the whim of the nation issuing it.

                                                                     Keeping Currency and Trade Fair

     This is no surprise to those familiar with international trade practices. History’s lesson on the point occurred in mid-summer 1933 in London. The new U. S. Secretary of State Cordell Hull had convened a world economic conference to roll back the Smoot-Hawley tariffs. Those high tariffs had collapsed U. S. imports and exports by nearly 70% between June, 1930, and the end of 1931.

     Secretary Hull was on the verge of success when his president, Franklin Roosevelt, announced from Washington, D.C., that he would accept no limitation on U. S. discretion to devalue the dollar. Every trading nation understood immediately that any agreement to reduce tariffs would be meaningless unless coupled with specified currency value for each party involved. Headlines blared that FDR had “torpedoed” tariff reduction talks.

     Another way of stating this widely acknowledged principle is this: tariffs are the flip side of currency devaluation. A nation which devalues its currency will sell more abroad because its products will be cheaper when priced in foreign currencies. The same nation with a devalued currency will buy fewer imported products because their prices will be more expensive than before the devaluation.

                                                                                    China and the WTO

     This principle of international trade could not have gone unnoticed when China was permitted entry into the WTO. Certainly China would adjust its currency value to its own advantage if other nations, especially the U. S., were doing so, and if no express limits were placed on China.

    Why were no express limits placed on China’s currency value when the Clinton administration agreed to its admission to WTO? Consider the possibility of “pay to play” such as has become evident in more recent years, which is more commonly called bribes and payoffs.

     With the U. S. as its largest and most important market, China set its currency at a value relative to the dollar which made its products cheap and attractive to U. S. customers. China kept that relative value continuously by “pegging” the yuan to the dollar. This outcome was fully predictable, considering the terms of entry into the WTO.

                                                                                      Trump’s Fair Trade

     President Donald Trump has announced he is ending existing U. S. trade agreements, and new terms will be negotiated bilaterally. In other words, he will negotiate a separate deal with each other nation interested in selling into the U. S. market. You can be certain each deal will set the value of each nation’s currency so that the two parties have a balanced opportunity to sell to the other.

     In 1933, trading nations could clearly state the value of their currencies in terms of how much gold each currency unit would buy. Thanks largely to FDR and Nixon, and the shadow government which controlled them, this is not presently possible. FDR starved Americans while using higher taxes to buy gold sold by other nations to feed their people. With the U. S. as the only gold-owning nation left at the time, the gold standard for currencies collapsed, as planned.

     Now the tables have turned. Other nations own more gold than the U. S, most notably China and Russia. The U. S. probably has none, but the facts are kept secret. Secrecy still hides corrupt practices which depleted these assets and, also, assists maintaining the dollar as the reserve currency used in paying for goods sold in international trade. 

                                                                                 The Global Currency Reset

     A global reset of currency exchange rates is coming soon. The dollar’s falling value with intermittent periods of deflation during the past 45 years has damaged Americans and smaller nations wishing to compete in the big U. S. market. With the coming reset, others will offer innovations better able to retain stable value.

     One such innovation is a “gold trade note,” meaning essentially a certified check entitling the holder to exchange it for a stated quantity of gold, to be given in payment for goods delivered in international trade. General use of this gold trade note by the BRICS nations and their allied trading partners would lay the groundwork of a gold-backed currency for general use in commercial and personal business. 

     President Trump’s goal to restore free and fair trade, and with it more job opportunities for American workers, would be aided greatly by sound money – which the dollar certainly is not. Rebuilding American industry and jobs will, therefore, necessarily require an adroit approach to negotiating fair trade deals which enable us to afford sound money again.

     With all this underway, is it too much to hope that he (and we) can proceed simultaneously to audit, liquidate and wind up the Federal Reserve?