Vice President JD Vance’s recently resurfaced comments rightly question whether the U.S. dollar should continue to be the world’s reserve currency. He has also recognized that the problem dates back 40-some years, thereby indicting President Reagan and his Fed chairman, Paul Volcker. Equal blame should go to President Carter, who appointed Volcker in 1979. And the system’s deep origin was President Nixon’s 1974 agreement that Saudi Arabia could charge whatever it wanted for oil, provided it traded in dollars. But it was under Reagan and Volcker, in 1981, that the hammer fell.
I became executive director of the congressional Joint Economic Committee in January 1981, as interest rates hit 20%, driving the economy to the wall. It fell to my intrepid members, chaired by Henry Reuss (D-Wis.) — along with a few brave Republicans like Jack Kemp (R-N.Y.) — to oppose the policy. We saw that whipping inflation meant defeating America’s trade unions by destroying the industries they worked for. Reuss’ Milwaukee, a capital of machine shops, was hard hit. Ohio, then the heart of manufacturing, was devastated. Vance, born in 1984, grew up in the Rust Belt wreckage of those years.
The same high interest rates that battered industry did save the dollar, which soared in value. German and Japanese cars and machinery conquered U.S. markets, while the supposed threat of the deutschemark and yen to the dollar receded. In 1985 the Treasury engineered a depreciation, but the industrial damage was irreversible, and the dollar’s supremacy was locked in. Eventually Europe would adopt the euro, and industrial power would shift to China, yielding the world we inhabit today.
For many years the “end of history” crowd argued that as “benign hegemon,” the U.S. would reap financial rewards and also supply the thin edge of the most advanced technologies to the world. Regular Americans could buy and consume the fruits of other people’s industrial and farm labor. China would become a well-behaved liberal democracy. If any nation tried to move off the dollar exchange-reserve system, the military was available, as Libya and Iraq would find out.
However, military strength rests on industrial power. New technologies emerge by practice and perfection of skills and by selection from many options. Industrial and engineering decline erode the skills and sap the options. Eventually, leadership passes elsewhere. A military built on obsolete doctrines and supplied from a depleted base cannot cope.
What remains is the hollowed-out edifice of financial power. Perhaps this too will one day fall — as it did for the previous hegemon, Great Britain, bankrupted by two world wars. But one day is not now, or necessarily soon. President Franklin D. Roosevelt insisted on subordinating the sterling area — those nations and colonies that used the British pound as a reserve currency — to the dollar, because the U.S. was ready and willing to take over. The U.S. back then had no industrial peer.
