The Yuan, The Dollar: Repeating the Policy Mistakes of the Great Depression

by: Bob McTeer

In several recent speeches, I’ve mentioned that our policy makers seem intent on repeating the policy mistakes of the depression.

I mention the clamor for the Fed to withdraw or mop up excess reserves even though bankers feel the need to hold them without significant incentive. Doing that very thing during the depression caused bank retrenchment and a worsening of the economy.

I mention tax increases during the depression, which also had a very negative impact on the economy. The scheduled expiration of the Bush marginal tax-rate cuts next year is only one of several tax increases in the current pipeline.

I mention big business bashing during the depression as a blatant and counter-productive effort to stoke the flames of populism and generate class warfare. We have similar big-business bashing today, although it’s directed primarily at evil bankers or Wall Street bankers.

Then I mention depression-era protectionism and the Smoot-Hawley tariff that triggered retaliation and led to a world-wide trade war and competitive currency devaluations that spread and deepened the depression.

I usually follow that by saying we haven’t gone that far on protectionism yet, but we are on a slippery slope with our negotiated trade agreements languishing unadopted, our imposition of tariffs on Chinese tires and steel, our abrogation of the trucking deal in the NAFTA, and buy America clauses in stimulus spending. We have now accelerated our slide into serious protectionism with our incessant public calls for the Chinese to appreciate its currency, and, by implication, depreciate the dollar relative to the Yuan. Was it 130 Congressmen that signed a letter to the Treasury Secretary demanding strong action on this delicate issue?

We shouldn’t forget that what they are calling “currency manipulation” today was the law of the land between WWII and the early 1970s. The Bretton Woods system was a system of currency manipulation (i.e. currency fixing or pegging) and movements away from its rules were considered breaking the rules.

The fact that China is a major holder of dollar denominated assets means, as they say on financial TV, that we are poking a stick in our banker’s eye. It appears that we are determined not to learn anything from past mistakes. Appreciation of the Yuan would be very helpful in many respects both to China and the United States, but they have a hard time doing it as long as we are publicly clamoring for them to do it.