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  • Writer's pictureAlan Stevens - AWAH - Libertarianism, Freedom.

Paper Money and Manufacturing Decline

Updated: Jan 6, 2021

Western states moved away from sound money and towards paper money or FIAT currency which is created out of thin air. The most feckless money creating states draw in resources from saver societies without admitting that this crushes manufacturing.

All my life manufacturing in Britain has been in decline. Britain has entire regions that used to be devoted to manufacturing but are now sustained by government transfers. In the northern half of England, the heartland of the Industrial Revolution, regional economies typically have state sectors equivalent to around 60% of total activity. In Wales and Northern Ireland, the state is almost the only game in town.

Similar declines have become apparent in the United States. Hollowed-out former manufacturing power houses have become despairing ‘rust belt’ states. In Europe manufacturing activity has been stagnant or declining in most western European EU members, with the partial and instructive exception of Germany.

It seems reasonable to suppose that advanced societies as economically similar as Germany, Britain and America are, and as China will be soon, would have roughly the same size manufacturing sectors in their economies. One might hazard a guess that the norm might currently be, say, around 15% of recorded GDP. Whatever the number might be, it is clear that big divergences above and below it have developed:

There is a secular trend for manufacturing to become a smaller share of all economies. But the share of manufacturing in some economies has fallen much more than in others. The USA and Britain have experienced disproportionately greater declines in manufacturing.

It is true that the US and Britain are respectively the biggest and second biggest exporters of tradeable services globally, and America is a significant net exporter of agricultural products. Nevertheless, these sectors account for much smaller shares of tradeable goods exports than manufacturing. There still seems to be a big divergence between the expected shares of tradeable goods and services output.

This post is an attempt to explain how persistent politically directed international capital flows, enabled by unsound FIAT money, have depressed manufacturing in the USA and Britain, and indeed most of Europe, to the temporary advantage of countries with over-expanded manufacturing sectors such as China and Germany.

There are of other reasons why western manufacturing would be struggling, all of them related to the disruptive antics of predatory groups clustered around the state. These include ‘corrupt corporates’ who use state regulation to cartelise product markets. That prevents competition and drives down their products’ value for money (see post ‘Regulation, Fascism and Crony Capitalism'). There is also high taxation whose costs make the West’s products poorer value (see post ‘Is the Tax Wedge Becoming Unaffordable?’). But these factors would not shift the relative importance of the tradeable goods sector in each national economy away from the advanced economy norm.


Why does this manufacturing decline matter? There are two main reasons.

Goods-producing jobs tend to be high productivity, STEM (science, technology, engineering and mathematics) based jobs. Industrial jobs overall are more likely to be breadwinner, family sustaining occupations. For example, the average income in US manufacturing is over $60,000 per year whereas it is less than $25,000 in the hospitality sector (admittedly for fewer hours per week). This helps explain why the contraction of goods producing industries has hurt former industrial regions, and given voice to so-called ‘populism’.

Secondly, manufactured goods are by far the largest part - in most advanced economies - of the tradeable goods sector, along with typically smaller agricultural and mining and energy extraction sectors. These sectors’ output is in principle internationally ‘tradeable’. Goods produced can be moved to and sold abroad to earn money to import foreign goods and services.

The point is: If there are imports or exports of capital going on between two jurisdictions or currency areas, then these capital movements have to be reflected in actual movements of resources. Only international movements of tradeable goods (and services) can bring about the physical transfer of these resources. If a country is consistently importing or exporting capital, the entire burden of trade adjustment to these flows is focused on the relatively small tradeable goods and services sector, i.e. in most places on manufacturing.

The tradeable goods sector appears to be small in GDP terms because most of the economic activity recorded in modern Keynesian inspired measurements of the economy, i.e. measurements of Gross Domestic Product (GDP) is in the so-called service sector. These include the state’s activities which are classed as services. In most western countries the state accounts for 40% or more of the ‘economy’. Linked to the state is its privileged money creating banking sector. In hyper-financialized and indebted societies like Britain and the US, the recorded financial sector is comparable to, or larger than, manufacturing.

Vested political interests in the state sector generate international money flows. They may look small in comparison to overall GDP. But they are often big in relation to the tradeable goods sectors which have to cope on their own with their trade and exchange rate effects. To understand how this works an explanation of how international balance of payments work would be useful here.


Britain’s experience under the Bretton Woods regime was one of constant official concern about the so-called ‘Balance of Payments deficits’ and whether Britain could pay its way internationally. The result was a series of crises as the British establishment’s enthusiasm for money creation out of thin air undermined post war ‘fixed’ exchange rates tying the pound to the officially gold-backed dollar. First it was $4 to the pound, then $2,80 from the late forties to 1968 and then $2.40. Like most narratives benefitting state structures which use legal immunity to extract value from productive people, this one is not what it seems.

Crucially, the balance of payments between two countries, strictly speaking two currency zones, always balances. If I pay somebody in Portugal £1,000 for some vintage Port, let’s say, the balance of payments effect is one payor (me) for £1,000, and one payee (the Port producer) also for £1,000. The sum of payments has increased by £1,000 above what it would otherwise have been, but there is no imbalance.

You may be rolling your eyes and thinking, yes, actually everybody really means ‘balance of trade deficit’. That’s when a country imports more tradeable goods and services than it exports. The balance of payments is just a technicality and therefore beside the point.

However it does matter. All international payments are allocated to one of the two sub-categories or ‘accounts’ of the balance of payments; the Current or ‘trade’ Account, and the Capital Account. The overall balance of payments balances, by definition, as we have seen. Therefore, if there is an imbalance on either the current (‘trade’) account or the capital account, there must always be an equal and opposite imbalance on the other account.

At one level the statement above is just a mathematical tautology; an accounting balancing item without importance. But it has two real world implications. One is straightforward. The other is quite counter-intuitive and much less understood.


The first, reasonably obvious, implication of the balance of payments always balancing is that countries with current account or ‘trade’ deficits must have matching capital account surpluses to pay for the excess imports of tradeable goods. Overseas exporters need paying. If there are not enough export earnings the importing country must draw in money from aboard to meet the bills.

A capital account surplus means money flowing into a country. The capital flows generally take the form of foreigners buying physical or financial assets in the country experiencing the trade deficit. Financial assets could be shares in companies but also different types of debt. Buying debt in the (trade) deficit country could involve buying government or buying corporate bonds or mortgages, or making bank loans, or just accepting its currency.

In a gold standard world, short-term capital inflows (surpluses) would generally take the form of accepting the local currency, i.e. gold. Trade deficits stemming from a population buying more imports than they could afford (a current account deficit) would simply result in an outflow of gold. Prices in the importing country would fall as gold money leaves the country until demand for foreign goods falls back to the correct, affordable level.

With paper money this doesn’t happen. A society with an acceptable currency, especially one that has a role as a reserve currency such as the US Dollar, and to some extent the Pound, can issue more currency and create an unintended capital inflow to the extent that creditor individuals and governments are willing to accumulate and lend it.

Countries’ central banks hold foreign reserves in the form of overseas currencies, overwhelmingly US Dollars, but also Pounds, Euros etc. Countries whose currencies are accepted by other countries’ governments or inhabitants as stores of value can indulge disproportionately in money creation in their banking sectors. They can go on attracting excessive imports almost indefinitely. By now foreigners hold US Dollars and US Dollar denominated financial assets to a much higher value than the USA’s roughly $20 trillion annual GDP – which is why if they lose faith in the Dollar the downdraft would be biblical.

Western, especially American and British, politicians love this ability to create money to draw in overseas resources. It enables voters and vested interests to spend more. Eastern mercantilist leaders like the way it props up their over-expanded manufacturing bases.

The outcome is the post gold-standard phenomenon of permanent trade deficit (debtor – e.g. USA & UK) countries and corresponding permanent surplus (creditor – e.g. Germany, Japan & China) countries. Almost all foreign exchange trading – a London dominated business that would not exist in a gold-based world – relates to buying and selling short-term debt which has accumulated as a result of persistent uncorrected current account imbalances. It has little to do with facilitating, still less balancing, international trade.


The second implication of the fact that international capital and current account imbalances must be equal and opposite is not intuitively obvious. Nevertheless, here goes:

If a country naturally, or as a result of state policy, runs a capital account deficit with the rest of the world (in other words it is exporting capital, to buy overseas assets, debt or currency), it must have a balance of trade surplus with the rest of the world too. It must be a perennial net exporter of goods and services, willy-nilly. This is a reflection of the fact that the only way that the financial flows represented by a capital account deficit (inflow) can happen in reality is by an equivalent net inflow of tradeable goods.

Contrary to Keynesian teaching, the degree to which a country’s stock of physical capital is maintained or expanded depends on the level of savings available to a society, whether these savings are generated at home or abroad. The relationship between genuine savings, resulting from some people consuming less than they produce, and investment in fixed (and working) capital is relevant to the capital account driven trade deficit problem. To the extent that savings are greater than a country’s domestic investment opportunities, the extra savings must go abroad, which means a capital account deficit. That country must therefore have a matching trade surplus.

In contrast, all countries with a natural, or state-induced, tendency to run perennial capital account surpluses (importing capital from abroad) must, unavoidably, run current account (‘trade’) deficits. Countries like the UK and America, and indeed most western welfare states, systematically discourage savings and destroy home grown wealth. In short, they reward ‘dissaving’ and borrowing and improvident consumption. They then try to plug the investment gap by creating capital account inflows (‘attracting overseas investors’ in the jargon) from societies that still believe in saving like Germany, Japan and China.

Therefore, the feckless borrower culture countries also must have perpetual trade deficits. These changes in trade balances caused by debt driven international capital flows are brought about automatically by the price mechanism. In FIAT currency terms, exchange rates change to stifle and undermine the manufacturing sector in the borrowing society until enough manufacturing capacity has been destroyed. The way is cleared for the imported goods which represent the real transfer of resources from perpetual creditors to perpetual debtors, sought by borrower states.

The trade balance has nothing necessarily to do with whether the manufacturing companies in one country or the other are ‘better’ or more ‘dynamic’. Although over time capital and talented people avoid working in manufacturing in debtor nations because it is being crushed. It is better to go into booming financial service sectors feeding on all that debt.


The key point is really about our increasingly unsound money. It is now simply ‘FIAT’ or ‘paper’ money, enabling perennial state-sponsored, manufacturing crushing, capital account imbalances. The whole world has had this unstable FIAT money since the end of the post-war Bretton Woods Dollar Gold Exchange in 1971 (see post ‘Hyperinflation, Bitcoin, Gold and FIAT Currencies’).

By the way, this is the first time ever that there has been no formal use of gold and silver as money anywhere in the world. This experiment may well be coming to an end in a country near you very soon. But in the meantime woe betide anyone, such as the late Libyan leader Muammar Gadafi, proposing to create their own gold currency (which he did just before his ‘unexpected’ overthrow by the West) and threatening the US Dollar’s primacy.

The subtext of this post is the harm that the USA, and Britain as its side-kick, have unwittingly done to their productive bases through inflationary, debt funded, FIAT currency enabled pursuit of global hegemony. The USA clings to the privilege of creating more and more of the world’s principal reserve currency. It uses new dollars to acquire goods from overseas in something-for-nothing deals – offering zero-cost money for goods and services.

What the US and UK deep state elite do not appear to understand is that imperial projects to extract and transfer resources towards the home nations necessarily depress their own productive tradeable goods bases and alienate voters. Which is where the Americans and British are now. That’s why Americans voted Trump in, twice. And why Britain voted for Brexit, twice.

FIAT money has enabled governments and other borrowers indefinitely to increase their debt. The countries where debt grows faster run capital account surpluses, and therefore also have matching perpetual ‘trade’ deficits. It represents a type of exploitation of less profligate, more responsible countries. They are dragged into the unpopular trade surplus role as borrowing nations suck in their goods in return for depreciating paper currency.


Under a gold standard (and its future free society equivalents) this outcome isn’t possible. Gold is money. It is the same element everywhere so it is basically worth the same everywhere. Perpetual borrowers cannot inflate their debts away. They go bust or they have to stop borrowing – which both have the same effect of cutting off capital account surpluses. In practice the gold standard tended to confine long term international movements of private capital to investment in productive projects overseas, typically in the form of equity or long-term debt which is expected to be repaid out of profits.


Private flows of Investment capital represent a perfectly natural, healthy way in which some countries run persistent current account deficits as a result of having capital account surpluses under a sound money regime.

In the nineteenth century British savers constantly invested in building up the productive physical capital of the daughter societies in Canada, Autralasia, the United States and South Africa. This allowed them to achieve a much faster rate of development, and higher incomes, than could have been funded by local savings. They also invested in places like Latin America which had little indigenous ability to save (See post ‘Thought Experiment 1 – Do Capitalists Oppress Savers’).

These ‘healthy’ inflows of capital from 19th century British investors to build up the stock of productive fixed capital of the host country represented ‘surpluses’ on the capital accounts of recipient countries like Australia or Argentina. They were matched by ‘deficits’ on their current, trade accounts. The goods accounting for these trade deficits constituted a flood of British-made locomotives, machinery, and capital equipment of all kinds, and textile and other consumables needed for the sustenance of workers employed on capital projects.

These transactions were all wholly voluntary and created wealth for all participants. Britain built up a fabulous capital goods export sector in 1914 as a result of spearheading investment growth globally. By then Britain had net overseas investments four times the size of its GDP. (If this were still the case UK residents would have over $10 trillion of net overseas assets). Not surprisingly Britain’s industrial regions hummed with activity. Glasgow, for example, made some extraordinary proportion of the world’s locomotives, and indeed of the ships that carried them abroad.

But Britain’s participation in the Great War was funded by a fire sale of our overseas assets. The flow of orders from them dried up. Northern Britain entered its long twilight.


The lamentable history of 18th century Ireland provides a remarkable demonstration of the key principle that any country generating an outflow of capital (capital deficit), whether caused by high levels of natural or forced savings, must inevitably become a net exporter (i.e. have a current account surplus), regardless of anything politicians or bankers may do.

There the situation was anything but healthy. The accidents of the 17th century in England culminated in the Glorious Revolution of 1688 and the centuries long economic boom known as the Industrial Revolution (see post ‘Liberty’s triumph – the Industrial Revolution’). But in Ireland, the flip side of the same accidents of history led to most of the country being in the hands of British landowners receiving rents paid by a resentful and impoverished native peasantry. Many of the wealthiest landowners were absentees living in Britain. They were influential in the British Parliament, where Ireland itself was not represented until the Act of Union of 1801.

Very large rent payments therefore had to be made from underdeveloped Ireland to prosperous Britain. These amounted to forced savings made by the miserable Irish whose consumption had to be further reduced below their meagre incomes. The rent payments represented a large export of capital (i.e. a capital account ‘deficit’ in balance of payments terms) which was quite unavoidably matched by a large current account trade surplus. This naturally took the form of shipments of Irish agricultural produce.

The political result was agitation in England for protection from ‘unfair competition’ from Irish produce. The British establishment represented in Parliament, many of whose members had Irish lands, nevertheless passed protectionist measures successively banning the import of Irish produce, to the great distress of Ireland. But the Irish trade surplus never went away. So long as rents were paid to England, tradeable Irish goods had to follow. As one export trade was hamstrung by economic illiterates in the British Parliament, prices and wages fell in Ireland until a new, so far unrestricted, export trade opened up.

This sorry tale is a demonstration, if any were needed, that members of legally privileged state establishments are mostly ignorant of economics, and largely uncaring to boot. It does also show that long term ‘unhealthy’ capital flows can persist even under the naturally self-correcting regime of precious metal money if they are the result of state coercion. This could be because the Irish lands were taken from their original owners by the English state, or because landlords’ rents in agrarian societies are not exactly the result of voluntary cooperation. They are the proceeds of cooperation between landlords and rulers to extract maximum value from unfree peasantries.


A major modern-day example of the way that capital flows drive trade flows is the decline in American manufacturing brought about by US federal government deficits. This has led to the former industrial heartlands of the United States being termed the Rustbelt.

Here is how it was working recently. In very round numbers indeed, the United States’ federal government spent around $1 trillion ($1,000 bn) more annually than it raised in taxation. Very roughly this $1 trillion was also the cost of asserting America’s hegemony over most of the world, once one includes not just the official defence budget but also Homeland Security, 17 intelligence agencies, the Veterans Administration, nuclear weapons related costs in the energy department etc., etc.

America’s political classes have long operated the standard western savings-killing combination of inflation and taxation for their own benefit. American households, like British ones, therefore rationally but perhaps unwisely don’t save much. The US corporate sector struggle to keep capital expenditure at more or less the level of 20 years ago, and has leveraged itself (i.e. borrowed a lot) to pay for share buy-backs designed to make fortunes for their top managers. Neither the household nor the corporate sectors in America have spare resources to fund much of their government’s imperial budget deficits.

These have had to be mostly funded overseas. In other words, America has run a big surplus on its capital account because it is drawing in overseas savings to fund consumption and indeed destruction by its welfare/warfare state. This capital inflow is completely different in nature from the gold standard era’s inflows of British investment capital which helped increase America’s stock of physical capital. The capital inflow means, as we have learned, that there must be a matching current account (trade) deficit. The US trade deficit has also been running at the better part of $1 trillion annually. The federal government’s deficit and the American trade deficit are the famous, and clearly related, ‘twin deficits’.

President Trump has been ill-advisedly trying to close the trade deficit through protectionist measures, particularly against China, while at the same time increasing the size of the US government’s budget deficit to try more of that Keynesian ‘stimulus’ that has never worked (except to juice GDP statistics) and never will. He doesn’t realise, and nor do nearly all the denizens of the Capitol Hill, that this is a logical impossibility. As the reader will hopefully now understand, a bigger US government budget deficit – so long as it is largely funded by importing capital from abroad - must mean a bigger US trade deficit. This is quite regardless of the actions or desires of foreign governments.

Let’s look at this from the point of view of American manufacturing. America’s overall economic output under the GDP measure is about $20 trillion annually. Its manufacturing output is a little north of $2 trillion. This is about $1 trillion smaller than it would be if there were no net goods imports from abroad displacing US production – hence the Rustbelt.

What would happen if there were no capital inflows into the USA because there were no budget deficits – and incidentally no money printing – because of the destruction of the US Dollar? Well, the capital account surplus would vanish as the US stopped importing capital to fund its suddenly unaffordable imperial ambitions.

The US trade deficit, representing the net import of getting on for a $1 trillion worth of foreign manufactured goods, would also disappear because it was always simply driven by the state-induced capital account inflows. The $1 trillion change in net manufacturing imports could of course comprise a lesser fall in gross imports and a greater rise in gross exports. But the $1 trillion net change would occur. It could not be prevented or delayed.

The result? American industry would go back to supplying the normal, say 15%, net share of GDP attributable to manufacturing in an advanced economy. There would have to be a 50% ($2 trillion to $3 trillion) increase in net annual industrial production. It would transform the wealth producing sector in America – including any Rustbelt states with pro-investment policies. The only question in the short term would be how far real wages and prices in America would have to fall, and real interest and rates of return would have to rise. The answer could be a lot. Acute and abrupt adjustments would occur to reach the point where the price mechanism made massive US manufacturing expansion viable.


It is worth looking at the issue from the point of higher saving, and therefore goods exporting, countries such as Germany. Germany is a major exporter to Britain which has a spectacularly indebted household sector and a pretty feckless government. Britain basically has had approximately a £100bn annual trade deficit with the EU but a balanced position with the rest of the world. Britain has been, I believe, the EU’s biggest customer. This is the consequence of Britain perennial dissaving compared to Germany’s higher savings. It is also the consequence of regulation and protectionism designed to make Britain a captive market for EU exports.

Once again, as with America, if and when aberrant, unviable popular attitudes to public and private consumption end here, probably when FIAT money and the welfare state it enabled have been abandoned, the UK would also experience a crash re-industrialisation against a background of falling real wages. The ending of state transfers to the North would kick-start the deflation there.

The picture is not wholly rosy from Germany’s point of view. Germany has become dependent on maintaining an over-large manufacturing sector at around 20% of GDP. It is partly the result of having a less anti-savings political culture. But this is also the result of Germany having secured a permanent fixed exchange rate advantage against other EU manufacturing sectors when it joined the Euro.

In a gold standard system, there would be a rapid adjustment as gold flowed into the country from Mediterranean countries to drive up German wages and living standards. But in a common Euro (i.e. FIAT) currency area money creation muffles and defers adjustment.

At the moment Germany is exporting goods to other EU countries. But they don’t pay for them, not exactly anyway. Instead a strange debt is building up. The European Central Bank (ECB) is a grouping of the national central banks. They operate a clearing house for Euro payments between national banking systems and their customers. Likely any clearing house, at the end of the day all payments are netted off and net credits or debits redeemed. Only, inside the ECB system, so-called Target 2 balances have not been cleared but allowed to accumulate. Germany is in some sense owed around a trillion Euros, which must mean that somewhere, somehow, people in Germany have lent other Europeans this huge sum to go on buying German manufactured products on credit – rather than making their own.

What will happen when all this political manipulation of capital flows inevitably unwinds? That trillion Euros write-off is going to be somebody’s loss. Presumably those somebodies will be savers in Germany in some shape or form. In the absence of big capital outflows, once countries like Britain and America have been obliged to rediscover the joys of saving and manufacturing, Germany’s manufacturing sector will necessarily contract relative to its GDP. It will tend to match the share of GDP normal in the free(r) societies of the future.

The process would be quite muted in comparison to the wrenching effects of deflationary Anglo-Saxon re-industrialisation. Real wages and incomes in Germany would belatedly rise until enough of its industry had been off-shored, probably still in German ownership.


Once again, we have been treated for decades to conflicting, false narratives of industrial decline, unfair trading practices and a general failure of ‘capitalism’ to deliver the goods, at least to the inhabitants of some regions or countries. All along the problem has been yet another outcome of popular devotion to that strange ‘collective hallucination, the state.

The state has everywhere progressively undermined sound money and promoted fake FIAT currencies. These enable states to borrow constantly without fear of bankruptcy – until they destroy their currencies that is. International borrowing and money printing have resulted in permanent creditor and debtor nations. This has only been possible because the gold standard is no longer there to ensure spendthrift governments and irresponsible bankers go bust and thus to automatically resolve imbalances. Because there are permanent debtor countries, international debt grows exponentially. It now dominates foreign exchange markets. They no longer facilitate trade, but rather merely reflect international interest rate arbitrage.

Crucially, permanent large scale unintended (i.e. not investment led) international capital flows have either over-expanded or crushed national tradeable goods sectors, with serious political and economic consequences, in the past and to come.

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