Management of the U.S. Dollar 1971–2022

This paper asks whether the policy of benign neglect that the United States (U.S.) government adopted in the 1970s toward foreign purchases of U.S. dollar securities and the price of the U.S. dollar has advanced the ability of the U.S. to achieve its employment, price level, growth, and national security objectives. The dominant objective of some members of the U.S. team at Camp David in August 1971 was to secure an increase in the U.S. trade surplus. One choice for the U.S. government was to increase the U.S. dollar price of gold to $100 or $140 an ounce, much like the increase to $35 an ounce in 1934. The competing choice was to close the gold window. Some members of this team believed that this choice would facilitate the move to a flexible exchange rate arrangement and that the U.S. trade surplus would increase as the price of the U.S. dollar fell. The price of the U.S. dollar has increased since the late 1970s and the purchase of U.S. dollar securities by foreign central banks, sovereign wealth funds, mutual funds, insurance companies, pension funds, and families have meant that U.S. exports of securities have displaced U.S. exports of goods. The U.S. trade surplus morphed into a U.S. trade deficit in the early 1980s, which has increased secularly, and now is nearly four percent of U.S. GDP. U.S manufacturing employment declined from 20 million in 1980 to 13 million in 2020. The increasingly large U.S. trade deficit led to the loss of three million U.S. manufacturing jobs (ball park estimate). Hundreds of factory towns in the Northeast and Midwest were decimated by the increase in the U.S. trade deficit.