America Enters a Jacques Rueff Moment

Published May 20, 2020

The New York Sun

Producer and consumer prices have fallen sharply, along with employment and consumption. The crude oil price briefly turned negative. But one price is up by more than one-third in the past year: gold.

As President Trump charts his course back to prosperity, the confusing economic situation is signaling that the best sage for him to consult would be Jacques Rueff. He was the French economist who, during a long career, advised Premier Henri Poincarè in the 1920s and President de Gaulle in the years after World War II.

It was Rueff who first explained the relationship between monetary policy of central banks and inflation and between the fiscal policies of elected governments and unemployment. He steered France to prosperity not once but twice by hewing to a policy of honest money defined in gold.

What is so apt about Rueff is that he emerged in the wake of one of the worst pandemics in history. The Spanish flu of 1918 killed 50 million persons, 675,000 in America. It superimposed medical insult upon monetary injury.

World War I price inflation reached 50%, peaking in mid-1917. It was followed by a 40% deflation, bottoming in mid-1921. Rueff diagnosed both as the result of a practice ratified by a 1922 agreement to replace gold with foreign exchange as “reserves.” Then as chronic unemployment first appeared immediately after the war, Rueff developed what became known as ‘‘Rueff’s Law’’ of Unemployment.

That “law,” which showed that unemployment rises or falls with “net unit labor costs” — the share of national income received by workers and their dependents, after subtracting taxes and (especially) adding social benefits — led to Rueff’s correction of his better known debating partner John Maynard Keynes’s economic theory.

Come the global depression in the 1930s, Rueff was in London working for the French central bank, only to be ousted by the Vichy regime anti-Semitism. It would not be until the rise of DeGaulle that Rueff devised the plan that restored France, then an economic basket case, as a world power.

The next president — and also the current one — is going to need someone with the vision of Jacques Rueff. What should policymakers do now?

First, Congress should allow additional unemployment benefits to expire at the end of July. Congress enacted a fiscal package including a flat payment of an extra $600 in unemployment benefits on top of the usual benefit equal to half of previous wages (averaging $371 a week).

The extra benefit is scheduled to run out at the end of July. Far from stimulating the economy, extending unemployment benefits again would extend the unemployment. Congress and the Obama administration made exactly that mistake in responding to the 2008 financial crisis, resulting in an unnecessary increase of about three percentage points in the unemployment rate.

Second, strange as it may seem, the United States should begin repaying the trillions in foreign dollar reserves with gold reserves, ultimately restoring an international gold standard. The cure would start by scheduling the settlement of today’s official liabilities, just as Alexander Hamilton arranged to settle the massive Revolutionary War debt, which was fully repaid over four to five decades.

Though it might seem counterintuitive, such a plan would have several advantages. Doing so would end the current world-wide commodity deflation and give a countercyclical boost to the world economy — pulling other commodity prices up while defining the dollar again as a weight of gold fixed its reciprocal gold “price.”

Such a plan would also give the United States, China, Russia, and other major countries a strong incentive to cooperate in rebuilding the world financial order despite their mutual distrust. It would also remove the threat of further deflation due to the prospect of liquidating existing dollar reserves, which would cut the price level back to where it was before the dollar securities were purchased.

Plus, paying off existing dollar reserves would provide the incentives necessary to restore a United States trade surplus and revive American manufacturing. It would end the so-called “Triffin Dilemma”— the fact that any increase in foreign official dollar reserves must match an equal deficit in the U.S. current account (the broadest measure of the balance in international trade).

Finally, restoring honesty as the best monetary policy would restore discipline to American federal finances. Restoring a gold dollar would end the practice of financing the federal budget by endless borrowing from the Federal Reserve and foreign monetary authorities. This wouldn’t prevent emergency borrowing, but while America was on a metallic standard, the federal budget ran cumulative surpluses.

Democrats and Republicans would be forced to cooperate, including on fiscal matters. The rate which would maximize tax collections from high earners is almost certainly less than 20% if nearly all deductions or credits were eliminated. A gold standard would force members of Congress to figure that out. The kinds of shocks our system is now going through are setting the stage for Rueff’s principles to once again be put into practice.


Mr. Mueller is the Lehrman Institute Fellow in Economics at the Ethics and Public Policy Center.

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