As noted earlier, the dollar continues to be used by most of the world as the main monetary reserve currency, despite the demonetarization of gold and the loss of U.S. hegemony in the global financial market. Reserves are the final asset that bridges the gap between sales and purchases of goods and services and stocks and bonds. When the dollar is used as a reserve currency, the official reserves of such countries as West Germany and Japan are held not in Bonn and Tokyo but in New York. This means, of course, that the ability of other countries to increase their assets by investing their reserves depends on the United States' willingness to accept an increase in its liabilities to offset the increase in its assets made possible by the foreign banks' investment. In other words, other countries can increase their reserves only if the United States increases its net reserve indebtedness with a balance-of-payments deficit.
This situation might seem harmless if it didn't have some side effects that exacerbate the problem. The dollar-reserve currency has two attractions. First, it allows other countries to earn interest on their reserves (which they could not do on gold reserves), thereby motivating them to accumulate dollar reserves. Second, it permits the United States to acquire foreign and domestic wealth with all the reserves lent to it by other countries, thereby promoting a false sense of national wealth or richness, and encouraging consumption of both domestic and foreign goods at the expense of domestic saving. Acquiring foreign goods requires, of course, more foreign currencies and more international indebtedness in the balance of payments. In other words, the dollar reserve currency system makes the United States behave as if it were richer than it really is and the other countries as if they were poorer than they really are.
The "American solution" is for the world's three major trading partners (the United States, Japan, and West Germany), which combined account for over 45% of the world's exports and over 47% of its imports, to settle their accounts with one another, using gold as the medium of exchange. In addition to getting the United States off the hook, the gold-reserve system would solve the surplus problem plaguing the developed countries.
John Muller, economic advisor to U.S. Representative Jack Kemp (R-NY), put it as follows:
Ending the dollar's official reserve currency role would make official reserves "portable" again; instead of being mechanically recycled to the U.S.-perpetuating the disadvantage for American farmers and manufacturers-part of the surpluses of West Germany and Japan would naturally be routed to growing nations with the most investment-friendly policies. These countries would, in turn, find more congenial Japanese and West German markets for their goods. If we are to restore an equilibrium of balances, noninflationary growth, we need to restore a money which is a real asset to the world: gold. 1
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