The analogy between Richard Nixon and Donald Trump
America cannot cope with all of the world’s problems in an increasingly interdependent world and act as its policeman, fireman, garbage collector, social welfare agency and rain shelter for the whole world. Some of her problems are intellectual, but others have to do with the excessive overflow of US money abroad.”
This reads as though it is a newly minted comment on the currently underway putative realignment by the Donald Trump administration of America’s traditional role in the global political economy. In fact, it was written in 1971, following the decision by then president Richard Nixon to close the “gold window” and effectively end a quarter-century of fixed exchange rates under the Bretton Woods system.
In a prescient essay, The Dollar Glut And The Tariff War, from which this quote derives, the author, Nobel economist Robert Mundell, considered the impacts of the apparent abandonment of its global leadership role by America under Nixon, exemplified by the global currency crisis unleashed by the severing of the US dollar’s link with gold, in addition to a surcharge on imports, the latter described as a baring of the “fangs of neomercantilism” in Mundell’s essay.
Fast forward to the present day, and the danger of a neomercantilist, protectionist relapse in the US remains real, as does US non-leadership on matters of global monetary management. Indeed, like Nixon, Trump, too, has bared the fangs of America’s economic might, and threatened to tear up trade deals left and right, starting with the North American Free Trade Agreement (Nafta) which ties together the US, Canada and Mexico. But while Nixon’s tilt towards protectionism was not systemic, and America was yet able to lead the world towards the creation of the World Trade Organization (WTO) some decades later, his abandonment of American leadership over the global monetary order has turned out to be permanent—or, at any rate, has lasted from 1971 until the present day.
On international trade, Trump’s protectionist rhetoric has been held in check, and little protectionist action has followed—perhaps driven by his better judgement, perhaps by his economic policy advisers, or perhaps simply by the fact that he is at present beleaguered politically and has little appetite or energy for economic policy.
On international money and finance, apart from periodic sabre-rattling on alleged Chinese currency manipulation by US trade and treasury officials, there has, likewise, been no leadership offered by the Trump administration. The problem of remaking the global monetary order, after its collapse in 1971, remains open-ended.
Could there be a possible linkage between the absence of leadership in the trade sphere on the one hand and the monetary sphere on the other? In a classic 1971 essay, The Dollar And The Policy Mix, written before the closing of the gold window, Mundell wrote: “Monetary isolationism would bring in its wake isolationism in trade and surrender American influence on the evolving world system, and it would do so for benefits that have never been adequately explained or defended.” In other words, abrogating global monetary leadership might presage such an abrogation in global trade, and the two could only serve to diminish America’s influence in the world, without any counteracting benefits from the retreat into isolation.
(Parenthetically, for those interested in the history of economic thought, this 1971 essay by Mundell contains the seeds, indeed even the actual blooms, of what has come to be called “supply-side economics”, and, in particular, the radical policy proposal that fiscal loosening and monetary tightening, rather than the reverse, was the correct policy mix at the time.)
Mundell’s warning to the Nixon administration in 1971 applies pari passu to the Trump administration in 2017. The failure to act on his protectionist bluster is at least a start on the trade file, if only a very tentative one, for Trump. If he has the courage, he and his administration must rediscover the cause of freer trade rather than raise the spectre of a tariff war which would be nugatory, at best, and minatory, at worst, in its consequences.
On the international money and finance file, Trump has the unique opportunity to take up the challenge left by Nixon, and left untouched by his successors, which is to create a genuine replacement to the defunct Bretton Woods system—not the current mirage of a non-system of national inflation-targeting currencies tied together by floating exchange rates.
On this question, too, Mundell’s insights show the way. In The Dollar Glut And The Tariff War, he proposed that following the possible creation of a European common currency, a new global unit of account ought to be created, one which would have the properties of a “genuine world currency”. His proposal was to use a composite of gold and of the International Monetary Funds’s Special Drawing Rights (SDRs) as the basis for this new currency, which could thus be seen as an “alloy” of gold and of SDRs.
The analogy between Nixon and Trump is appealing. The former pulled the plug on the global monetary system, while the latter has threatened to do so to the global trade system. Let us hope that Trump learns the right, not the wrong, lessons from Nixon.
Vivek Dehejia is a Mint columnist and resident senior fellow at IDFC Institute, Mumbai. Read Vivek’s Mint columns at www.livemint.com/vivekdehejia
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