Altering Foreign Exchange
The United States has actually both enjoyed the benefits and incurred the costs of being a reserve currency in different time periods.
Until about 1958, the United States enjoyed the benefits. Other nations were happy to acquire dollar holdings and the American position was thought to be impregnable.
However, since 1858, because the U.S. deficits have continued to run at higher levels, and due to the convertibility of European currencies, the United States has faced the costs.
In addition, much of the discontent in Europe, particularly in France, with American policies stems from the dollar's status as a reserve currency.
This allows the Americans to run perpetual deficits in their balance of payments. It enables the United States, even in deficit, to export long-term capital with which it can buy out or take over French industry.
Moreover, this system is said to 'export inflation' to France, and other countries. This happens, according to the French, because France, running a payments surplus, is constantly selling dollars on the foreign exchange market.
These are paid for in francs which add to the French money supply and drive up prices in France.
American authorities reject this theory. They say the French are attempting to blame their own inflation on the American balance of payments deficit and the world monetary system, whereas in fact France or any nation can readily adjust its internal money supply to offset any influence from the balance of payments.
Nevertheless, the theory is held tenaciously in France and many other European countries.
In response to this theory, the Europeans have made demands for 'discipline' on the United States to end its balance of payments deficit, have demanded a restriction of long-term capital inflows, and have made demands for reform of the system.
The favorite de Gaulle theory, a return to the gold standard, would of course eliminate all reserve currencies; other reforms espoused in Europe would replace the dollar as a reserve currency with a new unit.
In these areas, each man can be his own expert. The difficulty of arriving at a consensus on the proper U.S. approach lies in the different social valuations placed on various goals by various groups.
To a military man, the maintenance or even expansion of the military expenditures is a paramount value--- to be cut only at great peril; similarly, those involved in aid programs do not desire to see aid cut.
To cut internal growth not only hurts all Americans, but since unemployment falls most heavily on Negroes, it exacerbates racial tensions.
Every component of the national economy relevant to the balance of payments problem has its claimant, and within its own purview every claim seems just.