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Question 4

Hu Jintao (yes--Hu Jintao!) raises an important issue.

9:38 AM, Jan 17, 2011 • By WILLIAM KRISTOL
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The Chinese government chose to answer some questions (though not others) submitted by the Wall Street Journal and the Washington Post, ahead of the visit by Chinese President Hu Jintao to the U.S.. The first paragraph of Hu Jintao's response to Question 4 could turn out to be historically important.

"Q: What do you think will be the U.S. dollar's future role in the world? How do you see the issue of making the RMB an international currency? Some think that RMB appreciation may curb China's inflation, what's your view on that?

A: The current international currency system is the product of the past. As a major reserve currency, the U.S. dollar is used in considerable amount of global trade in commodities as well as in most of the investment and financial transactions. The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level."

Hu goes on to discuss the RMB and inflation, but that's not particularly interesting. What's thought-provoking is his claim that "the current international currency system is the product of the past." China hawks and American hegemonists (I'm both) will be tempted to jump on this statement as a challenge to the U.S., which in a way it is. But it's worth overcoming for a minute our (justified) distaste for the Chinese regime, and pausing to ask this: Isn't Hu in this one respect right? And does the current international currency system of fiat money, with the U.S. as the reserve currency, serve U.S. or world interests?

And it's worth further asking--as more and more people are beginning to ask--whether a modernized international gold standard, which anchors currencies to a standard outside government manipulation, wouldn't better serve the interests of free and limited government both at home and abroad. After all, it's the dollar's status as a reserve currency that has allowed the U.S. government to amass huge debts, debts which the legislatively imposed debt ceiling has been unsuccessful in limiting. Fiat currency seems to be related to bloated and unlimited government, and to speculative bubbles, and to international instability. Do we just to have to live with this, or simply hope for better Fed chairmen?

Read also Paul Krugman's New York Times magazine article on Europe and the euro. Step outside Krugman's Keynesian managerialist perspective, and step back from his account of all the particular factors that led to misjudgments and bubbles. Consider what structural factors made what he calls "the Euromess" possible, and ask whether he doesn't implicitly make a strong case for a trans-national monetary standard not subject to government manipulation.

Then read a book Niall Ferguson calls "a revelatory historical essay on the relationship between money and the state," Benn Steil and Manuel Hinds' Money, Markets and Sovereignty (Yale U. Press, 2009). And get ready for an interesting and important debate over the next months and years on international monetary policy--which, I predict, we'll increasingly see as something that needs to be reformed in the direction of a modernized international gold standard, as part of the broader project of re-limiting government, re-establishing sound money and a sound international financial system, and restoring stable and strong economic growth.

Update:An economist friend writes to make the important (if somewhat counterintuitive) point that ending the reserve currency status of the dollar could well strengthen America in the world, not weaken us:

“The main issue really is whether the United States will maintain its global pre-eminence or be supplanted by China. America's official reserve currency status has demonstrably reduced the relative importance of the U.S. But that process is reversible.

Meanwhile China has also shot itself in the foot with policies that drove its birth rate (1.8) below ours (2.1). If we can avoid the same fate while ending the dollar's reserve currency role, the U.S. can maintain its global preeminence.”

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