Funny Money Business

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The Washington Post reports that the Bush administration has decided that China is not manipulating its currency to gain economic advantage, which, in the language of politics, means that Washington believes that China is doing precisely that. Oh, the shock and horror!

Senator Schumer is distraught. "The administration’s lack of action today hurts all Americans by refusing to acknowledge the obvious — that China manipulates its currency," cried the Senator, proving another obvious fact: that he’s a blithering idiot. To demonstrate his concern for the American public, Schumer, with Senator Graham, is sponsoring a bill that would put a 27.5% tariff on all imports from China.

Wait a minute! What is bothering these heroic Senators is that Americans are buying too many Chinese goods. And why are Americans doing that? Because the price is right, of course! If the legislators have their way, those prices will be raised, by, perhaps, 27.5%, if the full cost of the tariff is passed along to the consumer. This will result in an increase in the cost of living for the very Americans whose "plight" now causes such hand-wringing by the Schumers among us. True, cheap Chinese goods may put some American workers out of work, but the buyers of Chinese goods far outnumber the American workers who would produce similar goods — and those workers are consumers, as well. The Senator’s concern about Americans being hurt by Chinese imports is not for the great disorganized mass of Americans, but for the much smaller, but tightly organized union membership.

American manufacturers believe that the Chinese yuan is undervalued by about 40 percent. How did they arrive at this figure? I suspect they did so by calculating how much more expensive the yuan would have to become in order to discourage the sale of Chinese goods in competition with similar goods manufactured here. How else?

If I printed paper money in my basement, calling it Hein notes, and you did the same in your basement, calling it Smith notes, how would we arrive at an exchange rate between the two currencies? Holders of my notes would have no claim upon anything of mine; the same would be true of holders of your notes against you. The numbers printed on my notes would have no relation whatsoever with amounts of anything; ditto for yours. My notes would not be issued in response to any deposit of anything; the same with yours. And, of course, my "notes" would not be actual notes at all, any more than yours. So how would we arrive at an exchange rate? The Bush administration thinks that, when it comes to the yuan vs. the dollar, that the market should decide. But how? How would a manufacturer selling his product for Hein notes know how much to charge in terms of Smith notes? Weigh them? Measure them? Compare their buying power? But there could be no buying power prior to the establishment of a conversion rate. Otherwise, the seller of goods in Hein-land, with a fistful of Smith notes, wouldn’t know what he could get for them in Hein notes when he took them to the bank; and not knowing that, he wouldn’t sell his goods for Smith notes.

Treasury undersecretary Tim Adams thinks it "absolutely critical" that the Chinese authorities establish a flexible type of currency system. He declined to say how China could do that, admitting, "I don’t have a particular standard in mind." Well, maybe that’s because standards have nothing to do with it. A standard is a fixed amount, a reference point. What possible standard could exist between currencies, neither of which have reference to any amount of anything? To bemoan the manipulation of fiat currencies is to bemoan the fact that north is opposite of south. How could it be otherwise?

I seem to recall reading the aphorism: freedom and fiat are incompatible. If the people about whom Schumer and his ilk express such concern are to be free and prosperous, they must use their own wealth as a medium of exchange. There can be no "exchange rate" between an ounce of silver and an ounce of silver, regardless of what you call them. Politics would have nothing to say about it — which explains why we have fiat, and the problems that are inescapable with its use.

Dr. Hein [send him mail] is a retired ophthalmologist in St. Louis, and the author of All Work & No Pay.

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