Back to Economics 101: The US economy and the functions of money

Daily Maverick

21-05-2025

Part 3 in a five-part series. Read Part 1 here, and Part 2 here.
It has only recently become clearer as to what probably happened to America in the period since the Gold Standard was suspended in the early 1970s and fiat money came to rule global finance. At the risk of being academic, the unleashing of global capital flows from the 1970s fragmented the functions of money as embodied in the US dollar.
In 1875, economist William Stanley Jevons expounded his four functions of money, encapsulated in the 1919 rhyme, 'Money's a matter of functions four, A Medium, a Measure, a Standard, a Store.'
Of these four money functions, the two most important are money as a Medium of exchange and money as a Store of value. Money as a Measure is a metric like centimetre, litre or kilogramme: we use it for counting. Money as a Standard of deferred payment deals with the financial denomination of debt to be settled in the future, a function some modern economists subsume within the money as a store of value function.
What happened after the Nixon Shock for the US dollar was that the 'medium' and 'store' functions — and more importantly the underlying values they represented — started to diverge. At the risk of overgeneralising, the US dollar's medium of exchange function became more related to trade transactions, while the US dollar's store of value function became more related to capital transactions.
The value of money breathes two atmospheres
A world of two financial atmospheres began to emerge: an Atmosphere of Capital centred squarely on the US, and the Atmosphere of Trade whose centre of gravity began migrating towards Asia and, in particular, China.
The end result today, as Gillian Tett noted in the Financial Times: 'America (has) hegemonic power in finance, via the dollar-based system… China has hegemonic power over global manufacturing, via its dominance of supply chains.'
Yes, the 'measure of money' of both these two atmospheres was and is mostly still in US dollars — trade is still overwhelmingly invoiced in US dollars — but the intrinsic value they reflected started to diverge.
Today the Atmosphere of Trade largely determines movements on a nation's current account and its value is more akin to (though not precisely measured by) Purchasing Power Parity (PPP). The Atmosphere of Capital is the one with which global financial markets are most familiar: value is reflected by 'free market' exchange rates. The latter's net flows show up mostly on a nation's capital account.
Thus, the valuations of each of these two functions of the US dollar — were they able to be separated — would be very different. Bloombergia and CNBC-land think mostly in terms of market values: yet most Chinese exporters effectively invoice (even if most do not realise it) in PPP dollars.
China's current GDP — dominated as it is by trade flows reinforced by a closed capital account — is at market rates of about $18-trillion to the US' $30-trillion. But at PPP rates, China's GDP is rather closer to $40-trillion again to the US's $30-trillion.
American politicians wearing trade-oriented glasses see China's currency as fundamentally undervalued, its free-market value manipulated lower by the Bank of China. But few have noticed that were a revaluation of the Chinese renminbi to occur (so triggering a relative devaluation of the US dollar to realign cross rates more closely to PPP values), China's economy could become quite a bit larger than the US economy.
China wanted 'competitive' renminbi, US wanted 'strong' dollar
Even as the exchange rate management behaviour of the Bank of China has been (and still is) aimed at keeping the value of China's renminbi lower than its 'free market' value, thereby allowing China to continue enlarging its global trade footprint, vested interests representing big capital in the US have long had a complementary yet opposite agenda: both US public and US private sector actors mostly wanted to keep the value of the US dollar higher (the 'Strong Dollar Policy') despite the pleadings of US industry (and US agriculture) for a more competitive exchange rate.
Even the US Treasury long favoured a strong dollar… until now. Under Donald Trump, this era is over. In the words of US Treasury Secretary Scott Bessent, the US will now put Main Street before Wall Street, thus ending a multi-decade practice where the US capital tail has been wagging the US trade dog.
Though not expressed as such, the Trump Administration is trying to narrow the difference of the store of value and medium of exchange rates of the US dollar, bringing its 'capital' value down to a rate closer to what they perceive the 'trade' value of the US dollar should be. The hope is that this will reverse the hollowing out of US industry and — to paraphrase Trump — make US manufacturing great again.
How the US economy got tied up in today's Gordian knot
In 1959, the Netherlands discovered natural gas in the North Sea. Over the next two decades, gas grew to have an outsized influence on Dutch exports and in the process drove up the value of the Dutch guilder. Most low-value-added manufacturing in the Netherlands simply could not compete at the higher exchange rate, and much of Dutch industry was hollowed out. Thus was born the economic term 'Dutch Disease'.
Since then, commodity exporters worldwide have been wary of the fallout that would probably result from a commodity price bonanza that would increase the value of their currency and so in turn boost their terms of trade.
When this appreciation was allowed to happen, export-oriented domestic manufacturing industries invariably suffered… and rarely recovered in the aftermath, even when and if commodity prices settled lower again, bringing the exchange rate down as well. Manufacturing export markets once lost were hard to recover.
The US has, since the 1970s, experienced its own form of Dutch Disease, albeit driven by a unique 'commodity': the attractiveness of its currency, its capital markets and most especially its government bond market, offering as the latter did a store of value with very little downside currency risk.
This was highlighted by Brendan Greeley in a 2019 Financial Times opinion titled 'How to diagnose your own Dutch Disease'. Greeley noted that 'around 1980 the United States discovered that it was the Saudi Arabia of money'.
This non-resource 'commodity' supercharged the post-1980 financialisation of the American economy, particularly since the Global Financial Crisis. Since the valuation lows of 2008/2009, the St Louis Fed's broad-based value of the US dollar has risen over 46%.
Already 'infected', the US contracted a 'double case' of Dutch Disease, further laying waste what remained of its industrial manufacturing infrastructure. Result? From 2020 to 2024, none of the top 10 industrial export sectors — five of which were energy-related — achieved revenue growth above inflation.
[Parenthetically, in 2008 the Shale Revolution began in the US. It has since turned the US from being a net importer of oil and gas (2008: $452-billion) to being a big net exporter (2024: $176-billion). As happened in the Netherlands, carbon played its part in the post-GFC intensification of the US's Dutch Disease. But the true underlying cause of the affliction has been the 'export' of that most unusual of 'commodities': the US Treasury Bill.]
What is left of US industry today? Of the top 20 industrial plants by employment in the US today, 11 are in defence and aerospace, four are in autos (of which two are Tesla), four in tech and one in pharma. Given the defence bias of this list, this is hardly what one might call a world-class, globally competitive, broad-based industrial foundation for a modern United States.
Economists' defence: US consumers won more than US producers lost
Many economists have dismissed the negative consequences of this seismic shift, reasoning the gains to US consumers far outweighed the losses to US producers. Hard evidence to support this cost-benefit analysis however has been sketchy, particularly because the losses to employment — not just the economic ones but the social ones as well — are hard to measure. Besides, many of those gains were in effect only secured by running up the US' national debt, owed to both domestic and foreign investors.
Stock and bond market-oriented economists further rationalised the fallout with the offsetting gains from product price deflation (from cheaper imports) and even more so from the gains in stock prices — $10,000 invested in an S&P 500 index fund in 1992 would have risen to $270,000 at the end of 2024: 27 times growth in 33 years, a 10% compound annual growth rate. Bond prices performed well too, rising strongly from 1981 to 2020: over this four-decade period, bond yields fell from just under 16% to just over 2%.
Contrast this gain to what happened to GDP: over the same period, it rose from $6.5-trillion to $29.7-trillion: only 4.6 times or a compound annual growth rate of 4.7%.
Given these stock and bond market gains, what's not to like? For the captains of capital (including the tech-oriented companies who displaced the industrial titans of 1980 when the top 10 were composed of six oil companies, two car assemblers, GE and the 'old' IBM), capital gains from the stock market have resulted in a massive wealth windfall to both management and shareholders.
Federal debt and wealth inequality
The undersides to these halcyon days were many, but two need highlighting. Firstly, federal debt rose almost twice as fast as GDP, from $918-billion in 1980 to near $37-trillion today, a compound annual growth rate of 8.6%. Much of this debt went into funding defence, social security and Medicare/Medicaid with — in today's ageing US — an ever-larger share also going into pensions.
Expenditure growth (favoured more by Democratic than Republican administrations, unless it was on defence) coupled with tax cuts (often favouring the rich, mostly sponsored by Republican administrations) naturally increased deficits, which thereby rolled into higher aggregate federal debt.
With interest rates falling, the carried-forward overall debt resulted in a bearable debt interest burden: in Dick Cheney's words, ' deficits didn't matter '. But not when in 2022 the Fed Fund's rate began rising again: the burden grew quickly to be $881-billion in 2024. (This interest bill was capitalised and added to the outstanding federal debt load.)
In 2024, this $881-billion payment overtook the US defence budget for the first time, breaching Niall Ferguson's Law: 'Any great power that spends more on interest payments on the national debt than on defence will not stay great for very long.'
(It should also be noted that the US government's off-balance sheet liabilities now top $80-trillion. Entitlement programmes are rapidly approaching bankruptcy: Medicare is forecast to go under before Trump leaves office, Social Security during the tenure of his successor.)
Secondly, US wealth inequality has widened, especially benefitting the ultra-rich.
In 1980, the top 1% owned 24% of US wealth, the next 9% owned 44% and the bottom 50% only 2.5%. By 2024, the top 1% owned 31% of US wealth, the next 9% owned 36% and the bottom 50% still only 2.4%.
The social and political implications of this concentration of wealth at the top and dearth of wealth for the 'Left Behinds' and 'Never Caught Ups' at the bottom needs little elaboration. Suffice it to say, the latter fuelled the rise of the Steve Bannon/MAGA wing of today's Republican Party. DM