Can international trade be free while the international payments system that drives it is based upon monetary protectionism.
During the late 1960s and early 1970s US bank credit grew rapidly. This lending financed expenditure in excess of income and generated additional imports. As a result, US gold and foreign reserves were plundered to meet the international commitments that these fiscal deficits placed upon the US monetary system.
By 1971, US gold reserves were about half the level they were after the Second World War. President Richard Nixon and the Federal Reserve were pressured to act to protect them. But instead of reducing bank credit, Nixon and the Fed closed the gold window (discontinued to offer to convert US dollars to gold). Then in 1973, to protect official US foreign reserves, Nixon floated the US dollar.
It was not possible for the US to float the dollar while the value of other major world currencies were tied to the value of the US dollar. So the US encouraged these other economies to float their currencies. They would not be convinced to float to protect US gold reserves. So the US government hailed the floating exchange rate system as a solution to the current international payments imbalances and as the ultimate international payments system that would bring prosperity to the world.
Instead of prosperity, the float brought recession (the 1970’s “oil crisis”) and the rate of economic growth in the US declined. US manufacturing industries collapsed. These industries were told that they were to blame for their own demise.
They were destroyed by protectionism: policies designed to protect the banks' ability to lend and the official gold and foreign reserves.
Australia adopted the floating exchange rate system in 1983, when Treasurer Paul Keating sought to protect Australian foreign reserves from the ravages of domestic and international speculators.
Countries established the floating exchange rate system as a barrier to prevent money flowing out of the economy. It requires the exchange rate to adjust to ensure that the money leaving the country is equal to the money entering a country.
But the floating exchange rate system is also a barrier that prevents money flowing into a country. When exports rise, the exchange rate rises to prevent extra money entering the economy. It lowers the incomes of exporters and raises imports by making them cheaper than domestic products.
Economists convinced of the benefits of the floating exchange rate system have hailed the advantages of the floating exchange rate system when exports fall, such as during the Asian economic crisis. During such times the floating exchange rate system compensates the economy for the reduction in exports by shifting demand from imports to domestic products. The growth in import competing industries compensates for the decline in export industries.
When exports increase and cause imports to rise and displace Australian industries such as agriculture and manufacturing, these same economists sit quiet about the benefits of the floating exchange rate system. Instead they accuse the ailing industries of being inefficient and unproductive. They urge them to lift their game.
Free trade cannot exist while the international monetary system continues to be manipulated to protect the banks and foreign reserves. If countries are to engage in free trade, they must first remove the constraints on the monetary system that distort trade prices and created perverse trade outcomes.
The foreign exchange market may vary exchange rates. But there is no need for that market to be constrained in the way that it has been. If Australian exporters raise their exports, they must be permitted to bring the extra money and income they earn into the economy. The country must be able to raise foreign reserves and save its export incomes to spend in its own economy.
Currently, the only source of monetary growth is bank credit. This raises domestic debt. Also, because it raises national expenditure above national income, it raises imports above exports. To pay for those additional imports, the country raises foreign debt. So bank credit raises both domestic and foreign debt.
These debts are growing faster than the economy. That is debt is growing faster than the capacity of the economy to repay that debt. Eventually, the debt must exceed the capacity of the economy to repay its debt. At that point, the whole financial system will collapse. But before then, many other businesses and industries will collapse because their debts have exceeded their capacity to service that debt.
This is most evident in the agricultural sector where farms that have been held in families for many generations are being sold. Many of these farms are being purchased by foreign interests.
Until the monetary system is changed, trade will continue to be biased against against export and import competing industries. To pretend that this is not happening is to be complicit in the destruction of Australian industries; particularly the agriculture and manufacturing industries.
Last update: 17 August 2013