Note John Tamny contributed to this column.
President Donald Trump’s assertion this week that the “dollar is getting too strong” led to a sharp decline in the value of the greenback. The market’s reaction to Trump was a reminder that presidents often get the dollar they want. This has us worried that Trump and his Treasury Department will pursue a weaker currency in the mistaken belief that this will boost the economy and his presidency.
The irony here is that the anticipation of many of his other policies, such as his proposed tax cuts, deregulation plans and Obamacare reform, have already strengthened the dollar since the election, because those policies would make the U.S. a more attractive destination for investment. Trump was partly right when he noted the irony that his policies are somewhat responsible for the higher dollar that he doesn’t want.
Here’s what he seems not to get: The investment in new factories and businesses here won’t be as great – and job creation won’t be as robust – if he gets his way and the dollar is weakened or unstable. Investors want to send their money to places where the currencies don’t erode in value, reducing the real return on their investments.
For evidence of this, consider history. Strong-dollar presidents have been economically successful and weak-dollar presidents have been mostly unsuccessful. Correlation is not causation, but it is instructive.
Start with the economic boom in the 1960s that began with John F. Kennedy. Real growth rates hit 5 and 6 percent. Kennedy laid the groundwork by rejecting an emerging and wrongheaded consensus that a weaker dollar free of its golden anchor would enhance economic growth. Kennedy’s declaration on the dollar was bullish and unequivocal: “This nation will maintain the dollar as good as gold at $35 an ounce, the foundation stone of the free world’s trade and payments system.”
Under President Richard Nixon, confidence in the dollar eroded. In 1971, Nixon made dollar devaluation explicit when he severed its link to gold. The consequence of this action was a greenback that went into free-fall. This was the start of the inflation of the 1970s, with surging gold, oil and commodity prices across the board. Under Jimmy Carter the weak-dollar policy became more pronounced. Treasury Secretary Michael Blumenthal publicly urged a weaker dollar – and weak it became, as inflation eventually topped 13 percent.
Under Nixon, Ford and Carter, the dollar was battered, and real living standards took a big hit – especially for the poor and middle classes. Stocks lost more than half their value (adjusted for inflation) in the worst bear market since the Great Depression. The price of gold surged from $35 to $875 during a rather forgettable economic decade.
Ronald Reagan’s policies changed all that. He frequently expressed a desire for a stronger, more stable dollar and less inflation. This, paired with his tax cuts and deregulation, made the U.S. a magnet for investment in the ’80s.
Bill Clinton’s presidency was arguably an enhancement on Reagan’s strong dollar.
Unfortunately, George W. Bush reverted to a weak-dollar policy. Gold, the best measure of a currency’s value, had been largely stable in price in the prosperous ’80s and ’90s, only for it to more than triple against the dollar. Another weak-dollar era began, and with predictable results: subpar economic growth and a crash.
The dollar’s sharp decline continued throughout much of Barack Obama’s first term in office, though his administration eventually – and wisely – retreated from currency brinkmanship. By 2011 the dollar began a long march upward, and the gold price began a gradual decline. The latter gave legs to what had been a steady stock-market rally. While we disagreed with Obama on most of his fiscal and regulatory policies, his dollar policy was a winner.
The weak-dollar advocates in the Trump White House seem to forget that American workers are paid in dollars in return for their toil. If the dollar falls, the purchasing power of American paychecks will shrink with the devaluation. This is, in effect, a pay cut for the tens of millions of working-class Americans who voted for Trump.
If Trump wants to implement policies that boost prosperity, he should focus on tax cuts, deregulation and a strong and stable dollar. Those are the policies that worked for the three most economically successful presidents of modern times: JFK, Reagan and Clinton. A strong dollar makes for a strong and popular president.