Financial markets have been acting skittish since the Federal Reserve chairman, Jerome Powell, announced an interest rate cut last month even as he cast a hawkish outlook on future actions. While Mr. Powell insisted it was premature to assess the impact of President Trump’s policies, he nevertheless alluded to “tariff-driven inflation” and indicated that Fed officials were already discussing its potential economic impact and the appropriate policy response.

Yet the key to confronting our broken system of international trade — and seeking appropriate remedies — is to understand how central banks impact trade and investment flows through divergent monetary policy stances. In the absence of a stable monetary order, different interest-rate paths are a primary cause of exchange-rate shifts among the currencies of trade partners. This creates unfair trade advantages and exacerbates tensions leading to tariffs.

The 1930s era of “beggar-thy-neighbor” policies is often cited in discussion of the Smoot-Hawley Tariff Act as an example of damaging protectionism. Yet it is important to remember that currency devaluations were being strategically employed by exporting nations for short-term competitive advantage.

When a nation deliberately cheapens its currency relative to the currency of its target market, its exported goods are priced lower than those of domestic producers. Without a level international monetary playing field, the rationale for free trade — endorsed by philosopher and economist Adam Smith based on comparative advantage — loses its moral underpinning.

It was not until the adoption of the Bretton Woods international monetary system, hammered out in July 1944 as World War II raged, that the logic and proper monetary foundation for free trade was reaffirmed through a rules-based approach to currency stability. It provided what Treasury Secretary Henry Morgenthau described as “the indispensable cornerstone of freedom and security.”  

The Bretton Woods rules mandated that participating nations keep their own currencies at a fixed exchange rate against the American dollar. International monetary stability was anchored by our dollars convertible into gold at $35 an ounce. The Bretton Woods era from 1945 through 1971, hailed as the Golden Age of Capitalism, featured a historic postwar economic boom.

The boom delivered accelerating labor productivity, falling income inequality, and increasing workforce participation. Productive economic growth surged, both domestically and internationally, as stable exchange rates facilitated trade and capital movements.  

Yet today, with central banks acting as the main catalysts for currency fluctuations, one nation’s monetary hawkishness is another nation’s export advantage. Suppliers of agricultural and manufactured products competing in world markets are unfairly penalized by interest-rate decisions that shift exchange rates in favor of foreign competitors.

Consider that the currencies of America’s biggest trade partners — Mexico, Canada, and China — have been depreciating significantly against the dollar. Mexico’s peso weakened 23 percent against the dollar in 2024, its deepest drop since 2008; meanwhile, the Canadian dollar is inching toward its weakest point in nearly five years. China’s yuan has now weakened past a key threshold of 7.3 per dollar as China’s central bank seeks to loosen monetary policy, widening the interest-rate differential with the Fed’s rate.

President-elect Trump has long recognized how currency devaluation distorts the prices of competitive goods and undermines American producers. On August 5, 2019, President Trump instructed his treasury secretary, Steven Mnuchin, to formally label the People’s Republic of China a currency manipulator after its central bank purposely let its currency weaken to seven yuan to the dollar.

That was in retaliation for President Trump’s imposition of broader American tariffs on Chinese goods. Frustrated by Beijing’s exchange-rate maneuvering and the Fed’s hesitation to lower interest rates to counter its impact, President Trump questioned on August 23, 2019: “Who is our bigger enemy, Jay Powell or Chairman Xi?”

It turns out, of course, that cheapening currencies through interest-rate cuts is a race-to-the-bottom strategy that worsens global monetary dissonance by inflating asset-price bubbles. It’s time to think bigger. The president-elect has vowed to usher in a new Golden Age for innovation and entrepreneurship that would fortify the position of the United States as the world’s leading economy and issuer of its dominant reserve currency.

By bringing attention to the incongruence of current monetary arrangements with the principles of free trade, the president-elect  has succeeded in highlighting what broke when President Nixon ended dollar-gold convertibility — terminating the Bretton Woods fixed-exchange rate system. An initiative by the 47th president to establish a new stable monetary order would demonstrate visionary leadership at home and abroad.

It’s vital to avoid a tit-for-tat downward trade and economic spiral precipitated by central bank gamesmanship and retaliatory tariffs. America alone can define the terms for a new trade alliance based on a common reference point for stable money. Establishing a new link between the dollar and gold would be a bold statement of intent reflecting America’s determination to achieve fiscal and monetary soundness.

Imagine if President Trump were to direct his Treasury secretary to issue a 50-year debt obligation that could be redeemed in gold on July 4, 2076. It could end up illuminating a path away from fiat money and toward an honest dollar. It would showcase the importance of monetary integrity for America — and the world.