Reply To: Doesn't Keynesianism work when you control the world's reserve currency?


It has long been realized that having the world’s reserve currency permits a country to engage in a policy of “inflation without tears.” The British did this when the pound was the world’s reserve currency before the First World War. The USA did this under Bretton-Woods and in the 1980s and 1990s.

Take a look at Murray Rothbard’s book, What Has Government Done to Our Money:

For “inflation without tears” to operate, there must be an international monetary regime of pegged exchange rates and coordinated world inflation. Under Bretton-Woods, for example, monetary inflation and credit expansion of the dollar becomes the base of monetary inflation and credit expansion of the domestic currencies in other countries. Their central banks increase their holdings of dollars as a reserve upon which they inflate their own currencies. This increase demand for the dollar prevents price inflation from choking off the boom which is induced by credit expansion. When price inflation occurs in the domestic currencies the booms their collapse and there is a rush to liquidity in which the central banks hold even more dollars further insulating the US economy from price inflation.

Take a look at Henry Hazlitt’s book on Bretton-Woods:

Keynesianism doesn’t work for the country having the world’s reserve currency, just look at the UK and the trajectory of the US economy. If the policy is pushed far enough we get world monetary inflation and credit expansion, as the title of Hazlitt’s book indicates, and as the booms and busts of the last several decades illustrate.