As I read about the demise of the U.S. dollar's status in world trade, I'm struck by the misdirection and irrational "thinking" employed by our politicians and bureaucrats.  In this article, legislators think another law, rule or regulation will solve the underlying problem.  

Going back on the gold standard is not a bad solution.  Had we been on the gold standard in 2008, the Fed Reserve could not have printed 8 trillion U.S. dollars and driven us into such extreme debt, resulting in dollar devaluation and inflation.  In fact, the gold standard is a good way to limit the Federal Reserve's ability to print dollars, but this is not the long-term solution.   

Today's dollar problems are avoidable, with or without the gold standard.  The long-lasting solution is a mindset, a way of thinking, a principle.

First, we need to understand why the U.S. dollar is the reserve or safe harbor currency on which the vast majority of nations and businesses rely for safe, steady transactions.  They must be certain of two things: first, that the value of the currency will not fluctuate rapidly, and second, that the currency remains strong for the duration.  Will the trading currency remain stable so they don't lose value in the transaction?

The question is, how do nations and businesses evaluate the safety of a particular currency?  Contrary to federal thinking, it is not only government action, or inaction, that sustains the value of currency.  In fact, federal action can more easily devalue the dollar than sustain its worth.  

We have seen the Federal Reserve's Monetary Policy, specifically printing U.S. dollars under Quantitative Easing, devalue the dollar significantly and thereby cause the inflation we see today.  This is truly a tax on earnings due to inflation, which is simply devaluation of the dollar's purchasing power.  In other words the consumer must spend more dollars for the same product.  That is a direct cost to all, a tax brought on us by Fed Reserve action and government spending.

The most powerful force to increase the value of the dollar is the private sector, or private business and citizens, building a strong economy through capitalistic markets: free trade between a willing buyer and willing seller that establishes a fair price.  The private economy is a function of transactions between individuals, not a federal construct.  Its foundation is the freedom of the individual to decide for himself.

Unfortunately, government's nature is to expand and control through taxation and regulation.  These actions are antithetical to free enterprise.  That is the reason for our Constitution.  It established the Rule of Law and restricts the government to limited powers in order to protect the rights and freedom of the individual.  Too bad our current government has forgotten that lesson.

If we want to protect the value of the U.S. dollar, and that is very important, we need to restrict government incursion in the private sector, especially the individual.  We do so, first, by reducing government spending and borrowing.  These actions take from the individual.  Next we need to reduce the regulatory burden on citizens and businesses and stop the unholy alliance (subsidies) between government and large corporations.  The strength of the dollar relies on individual freedom, not control by the government.

Even if individuals don't engage in foreign transactions, all are affected by the dollar's status in two ways.  First, since our government spends more than it takes in, government debt is a precursor to federal spending.  That debt is in the form of Treasury Bonds.  Citizens pay back that debt through income tax and inflation tax (we pay more dollars due to inflation).  

Second, debt requires a larger amount of money supply or liquidity.  That increased liquidity causes dollar devaluation and inflation.  Inflation means that we can't buy as much with the same income, hence the inflation tax.  We are hit from two sides: massive debt, which we pay, and lower value on the dollar as we pay debt back.

Just about all Democrats and many Republicans think we need to raise the debt ceiling to fund government spending.  That is wrong.  They ignore the other half of the equation — namely, reduce government spending.  Spending reduction benefits the private citizen and our economy.  Think about this when a politician talks about expanding another government program.  Nobody and no nation can borrow forever.

Our nation can work its way out of this dead end.  It requires that all citizens demand a cessation to debt and spending and thereby allow the private economy to thrive and save the day, as it has done in the past.

Jay Davidson is founder and CEO of a commercial bank.  He is a student of the Austrian School of Economics and a rabid capitalist.  He believes there is a direct connection linking individual right and responsibility, our Constitution, capitalism, and the intent of our Creator.

Image: pasja1000 via Pixabay, Pixabay License.