Dr Oliver Hartwich: Why Trump's tariffs may not be worth the paper money they're written on - nor ours

Almost two decades ago, I published my first journalistic article. It was a short piece on the nature of money, inspired by Roland Baader, a German economist and student of Nobel laureate Friedrich Hayek.

Even back then, I was concerned about the inherent instability of our global fiat money system – currencies backed by nothing but government promises and public trust.

Still, I believed this fundamentally flawed monetary arrangement would nevertheless persist through our lifetimes. What kept it afloat, despite all its weaknesses, was a combination of public trust and political will.

Recent developments have made me reconsider this assumption. Donald Trump’s aggressive trade stance could inadvertently undermine the foundations of the global economic and monetary order.

While aiming to address America’s trade imbalances, Trump’s policies might trigger something far more consequential: a crisis of confidence in the US dollar that could cascade into a broader collapse of trust in fiat currencies worldwide.

Trump’s proposed trade remedies are straightforward, if dangerously misguided. He advocates for substantial tariffs on imports, especially from countries with large trade surpluses with the US.

On monetary policy, he continues to pressure the Federal Reserve to maintain low interest rates. He has also explored imposing fees on foreign holdings of US Treasury securities to discourage what his team perceives as currency manipulation.

These policies reflect a fundamental misdiagnosis of America’s economic challenges. Trade deficits are not primarily the result of unfair practices by trading partners. Rather, they reflect domestic imbalances. Simply put, Americans spend more than they save while their government borrows excessively. US public debt now exceeds $30 trillion, and annual deficits routinely surpass a trillion US dollars.

Trump’s interventions in trade and monetary policy represent exactly the kind of political manipulation that Austrian economists like Hayek and his mentor Ludwig von Mises warned would eventually destabilise monetary systems. Such policy interventionism has the potential to erode global confidence in the dollar, which has long served as the world’s primary reserve currency.

Foreign central banks hold trillions in US Treasury bonds. If they now begin to regard these holdings as politically vulnerable – subject to special fees or at risk of devaluation through currency manipulation – they will look for alternatives.

This process is already underway. The US dollar’s share of global reserves has declined from around 70% in 2000 to about 58% today. This gradual trend could become a sudden decline if confidence is shaken by aggressive US policy actions.

These concerns are not limited to dead Austrian economists. Berkeley economist Barry Eichengreen recently argued that the dollar’s continued dominance depends as much on “relationships and reciprocity” as it does on the size of the US economy. But Trump’s policies risk destroying these relationships.

The Austrian school of economics has long regarded government-created money with suspicion. In his book The Denationalization of Money, Hayek warned that “with the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” Trump’s willingness to weaponise the dollar for trade advantages exemplifies exactly this tendency.

Ludwig von Mises meanwhile cautioned against the result of prolonged periods of money creation. “There is no means of avoiding the final collapse of a boom brought about by credit expansion,” he wrote.

So far, the US has consistently postponed this reckoning, even in the 2008 Global Financial Crisis and during the period of pandemic-related inflation. But it could only do so because there was still sufficient trust in the ongoing viability of the system.

Indeed, the world’s US dollar-centred system has survived since the end of the Bretton Woods system in the early 1970s because of three main factors: American political stability and geopolitical dominance; global economic cooperation and shared interest in maintaining the system; and the absence of viable alternatives. Trump’s policies risk undermining all three simultaneously.

The security dimension is particularly important. Countries often hold their allies’ currencies as reserves. But Trump’s unpredictable approach to alliances – questioning NATO commitments and suggesting allies should “pay for protection” – weakens this crucial foundation of dollar dominance.

By using the dollar as a trade weapon, Trump also erodes trust in US monetary stewardship. Combined with the structural vulnerability of massive US government debt, these policies could trigger a crisis of confidence in the dollar.

Once foreign holders believe others are selling, a self-reinforcing panic could develop – exactly the scenario Mises was concerned about. That is because money, particularly fiat money, is fundamentally a confidence game. Once trust is gone, the entire system can collapse with surprising speed.

There is thus a tragic irony in Trump’s policies. While claiming to strengthen America’s position, he may inadvertently validate Austrian economists’ most dire predictions about political manipulation of money – and wreck his economy and the world’s monetary system with it.

Hayek would not be surprised. Indeed, he was so alarmed at politicians’ habit of meddling with money, that he wanted to take it away from them completely. “The only way to save civilisation will be to deprive governments of the power over the supply of money,” Hayek wrote.

Still, which politician would ever want to give up that power voluntarily? Especially when presiding over the world’s leading currency has long been the US’s exorbitant privilege.

But that power loss may be forced on politicians once markets and the public lose faith in the banknotes, coins and accounting entries which they had long regarded as money.

And so, the end of our paper money era – predicted by Austrian economists for decades – may arrive much sooner than anyone, myself included, expected.

But what would come next might not be the ordered monetary reform that Austrian school economists would hope for. Instead, we could face a chaotic period, perhaps even temporarily returning to primitive barter in some cases.

When the foundations of trust crumble, they rarely give way to elegant new structures. More often, they collapse into rubble that takes generations to rebuild. And that is the danger of Trump’s trade and monetary policies.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE