PBoC Governor Pan Gongsheng just dropped a bomb: "The US deficit of the past 40 years stems from a congenital defect in the dollar system." The West fired back: "No - the fault lies with Beijing suppressing its exchange rate and repressing consumption." Both are partly right - which is exactly why this trade war will have no clean winner.
Scope: This piece dissects PBoC Governor Pan Gongsheng's remarks (Yicai, 04/2026) through the lens of 500 years of monetary history - from the Dutch guilder to the British pound to the US dollar - and the Triffin Dilemma (1960). It is not an advocacy piece; the goal is to unpack both sides' narratives so readers can judge for themselves.
Note: The model "reserve currency β structural deficit β deindustrialization" is a simplification. In reality, fiscal policy, demographics, and technology all play a role. As Dalio puts it: every model is wrong somewhere - but some models are still useful.
40 Years of Deficits - 1 System - 0 Solutions
Governor of the People's Bank of China (PBoC) since 07/2023. Holds a PhD in economics from Cambridge, and previously oversaw the handling of the Evergrande crisis. This remark marks the first time a senior Chinese official has formally pinned the blame on the dollar's architecture itself - not merely on "US policy."
At an international finance forum in 04/2026, Pan Gongsheng declared: "The world's large deficit-running nations have stayed the same for 40 years - because of a congenital defect in the international monetary system." Translated into plain language: "Hey America, the very privilege of printing the world's money is quietly killing your own factories."
A kind of "concern that cuts like a blade." But Mr. Pan isn't the first to say this - the Belgian-American economist Robert Triffin prophesied exactly this back in 1960, before the US Congress. 65 years later, the debate is still unresolved.
Two Camps - Two Narratives
Both sides are smart, both have data, and both have an interest in seeing their narrative win. Here is each camp's argument in condensed form - there is no neutral "summary" that satisfies both.
A monetary system built around a single currency (USD) has a congenital defect. 40 years of unchanged deficit-nations = structural evidence.
A strong dollar β expensive American goods β factories close. That's an inevitable consequence of the whole world pumping capital into the US, not a "Chinese conspiracy."
China will gradually become the "global demand hub" - be patient, don't build tariff walls. Give it another few decades.
Mr. Pan is deflecting: blaming the system to dodge criticism over EV, battery, and steel subsidies and a suppressed yuan. The promise of becoming a "demand hub" is a Soviet-style pipe dream.
If Chinese workers had free unions, the right to strike, the right to demand wages - production costs would rise and export subsidies would collapse. The problem is domestic consumption repression, not the dollar.
1988β95: the US ran twin deficits, yet the dollar was weak. "Reserve currency = always strong" is simply false. Everything changed only after China devalued 25% (1994) plus the 1997 Asian crisis.
The system does carry structural pressure (Triffin, 1960). China also suppresses its exchange rate and represses consumption. These two issues are not mutually exclusive - they reinforce each other. But admitting both means both sides would have to fix it together, and that's exactly what neither side wants to do.
The Mechanism - Where Does the Money Flow?
It sounds backwards: the whole world "pumps money" into the US - yet it's Americans who carry the debt. This is the world's most sophisticated economic trap. Below is the 5-step loop - from privilege to curse.
China, Germany, Japan save aggressively. They take their excess dollars and invest them in America. The US becomes the world's "savings dumping ground" - politely called a "safe haven."
The economy has to absorb this flood of foreign capital. But instead of flowing into factories and technology, it pushes interest rates down and fuels consumption and borrowing. Americans are "encouraged" to swipe their cards freely.
The US prints cheap dollars to service its debt. But a strong dollar means expensive American goods, closed factories, lost jobs. Manufacturing employment fell from 17 million (2000) to 12.3 million (2023).
The US plays "absorber of last resort" - unable to digest it all, it grows obese. Symptoms: $36T in public debt, extreme inequality, hollowed-out factories.
When both sides have a reason to blame the other, neither one corrects course. The trade war escalates. Tariffs go 25% β 50% β 145%. Both sides suffer - but neither backs down first.
The Counterpunch - What Does History Say?
If Mr. Pan's theory holds, why was the dollar weak during 1988β95 despite the US running twin deficits? This is the Western camp's strongest argument.
The problem didn't start from a "congenital defect" in the dollar. It started when Asian nations actively devalued and intervened in their exchange rates to keep exports cheap. The system was exploited - the system itself wasn't at fault.
Three Reserve Currencies - The Same Script
If there were only one case of "reserve currency β deindustrialization," you could blame the one who pulled the trigger. When there are three cases in a row (guilder β pound β dollar), maybe the gun really does have a problem.
π³π± Dutch Guilder (~1600β1780) World's #1 reserve Β· ~180 years Fallen
The Netherlands was the world's #1 trading power, and Amsterdam was the global financial center. The VOC (Dutch East India Company) was the largest corporation in human history by inflation-adjusted value.
π¬π§ British Pound (~1815β1945) World's #1 reserve Β· ~130 years Fallen
After the Napoleonic Wars, the pound became the world's reserve currency. London was the financial center, and Britain controlled a quarter of the Earth's landmass.
The gold standard (1821), a Royal Navy that ruled the seas, ~25% of global GDP. Every nation came to London to borrow.
A strong pound plus inbound capital β Britain invested more abroad than at home. "Banker to the world," but with aging factories.
By 1900, Germany and the US had overtaken Britain in industrial output. Britain was still "rich" - but rich on dividends, not on factories.
Two World Wars drained its wealth. By 1945: Britain was deep in debt, its industry outdated. Bretton Woods (1944) passed the crown to the dollar.
130 years of dominance, ending in decline and loss of status. There was no "China" to blame for suppressing an exchange rate. Britain declined because of its own privilege - exactly the mechanism Mr. Pan describes for America today.
πΊπΈ US Dollar (1944 β Present) World's #1 reserve Β· 80 years and countingβ¦ Currently sitting
Bretton Woods (1944) - the dollar was pegged to gold, and every other currency was pegged to the dollar. The US accounted for 50% of global GDP (1945), an absolute industrial superpower.
Manufacturing employment fell from 30% (1950) to 8% (2024) of the labor force. The US pivoted to finance and services - exactly as the Netherlands and Britain did before it.
Reserve currency β capital inflows β strong currency β manufacturing dies β shift to finance β debt rises β decline β loss of status. The Netherlands, Britain, and now America - 3 for 3, all following the same script. You could blame the "trigger-puller" in one case. But when it's broken down 3 out of 3 times - maybe the gun really does have a problem.
Japan - China's Beta Version
Before China, Japan was once "public economic enemy No. 1" of the United States. 1985: the Plaza Accord. The result? Japan lost 30 years. Now the US is doing the exact same thing to China - and Beijing knows it.
Japanese cars dominated the US market, American factories closed en masse. The US Congress smashed a Toyota in front of the Capitol. Sound familiar?
The US forced Japan (along with Germany, France, and the UK) to sign an agreement: devalue the dollar, strengthen the yen. The yen doubled in two years (240 β 120 yen/dollar). Japanese goods got twice as expensive overnight.
To offset the strong yen, the Bank of Japan cut rates from 5% to 2.5%. Cheap money flowed into real estate and stocks. The Nikkei peaked at 38,916 (1989). The land beneath the Tokyo Imperial Palace was worth more than all of California.
Governor Yasushi Mieno raised rates from 2.5% to 6% over 15 months. The Nikkei crashed from 38,916 to 14,309 (β63% in 2.5 years). $10β15 trillion in wealth evaporated - two to three times Japan's GDP.
Japanese banks refused to write off bad debt - keeping zombie companies alive for 30 years. The Nikkei lost 82% from its peak. It wasn't until 02/2024 that the Nikkei finally reclaimed its 1989 high - 34 years later.
An unsettling parallel: Japan in the 1980s vs. China in the 2020s
Plot Twist - America Was Once "China," Too
Before becoming the "victim" of an import glut, the US grew rich on export surpluses - exactly like China does today. History has a taste for irony: nearly every accusation the US now levels at China, America once did in full to Britain.
Britain banned the export of textile machinery and blueprints. Samuel Slater - a British mechanic - smuggled himself to America and built the first textile mill (Rhode Island, 1793) purely from memory. Britain called him a "traitor." America calls him the "Father of the American Industrial Revolution."
Hamilton (America's first Treasury Secretary) wrote his Report on Manufactures (1791): protect industry with tariffs. The Tariff of Abominations (1828): 62% duties - higher than even Trump's tariffs on China. The exact playbook China is using now.
America became the world's largest exporter - steel, oil, food, weapons, especially during the two World Wars. By 1945: 50% of global GDP, two-thirds of the world's gold reserves. Grew rich on export surpluses - exactly like China today.
Bretton Woods: the US voluntarily shifted from export surplus to import deficit. It opened its market to Japan, Germany, and South Korea in exchange for an anti-Soviet alliance. The dollar became the global reserve currency. Privilege came bundled with a curse.
The irony - America accuses China of doing precisely what America once did
| Accusation leveled at China | What did America once do? |
|---|---|
| "Intellectual property theft" | Samuel Slater (1793). Charles Dickens complained throughout the 19th century that America pirated British books. The US didn't join an international copyright convention until 1891. |
| "Protectionist tariffs" | Import duties of 40β50% throughout 1816β1913. The Tariff of Abominations (1828): 62% duties - higher than even Trump's tariffs on China. |
| "Industrial subsidies" | The Pacific Railroad Act (1862): free land and money to build railroads. The Morrill Act: funded technical universities. A systematic industrial policy. |
| "Currency manipulation" | 19th-century gold standard β dollar weak against the pound β export advantage. The National Banking Acts (1863β64) controlled the money supply. After 1944, the US designed Bretton Woods itself, with the dollar at its center. |
| "Repressing consumption to boost exports" | No labor laws until 1938. Four million enslaved people in the South produced 60% of US exports before the Civil War. Child labor in mines and textile mills was routine. |
The Cambridge economist named this exact behavior: "kicking away the ladder after you've climbed it." America got rich using precisely the strategy China uses now. Now that it's rich, it turns around and bans others from doing the same. Every superpower does this - it's the privilege of whoever won first.
The Triffin Dilemma - A Curse Prophesied Since 1960
This is the original theory Mr. Pan is echoing. Robert Triffin - a Belgian-American economist - testified before the US Congress in 1960 and laid out a paradox that cannot be solved. Eleven years later (1971), Nixon was forced to abandon the gold standard - exactly as Triffin predicted.
Like a village with only one well. Everyone in the village needs water - only your house has one. You're forced to let everyone draw from it (the deficit). Lock the well β the whole village goes thirsty. Let too many draw β the well runs dry (loss of confidence in the dollar).
1960 prediction: Bretton Woods would collapse. 1971 reality: Nixon abandoned the gold standard. Prediction: the issuing nation would run persistent deficits. Reality: the US has run a continuous trade deficit since 1975 - 50 years unbroken.
If Triffin is right β Mr. Pan is right: the system forces the US to run deficits, regardless of whether China intervenes. The Western camp counters: Triffin explains the tendency, but the current magnitude of the deficit is a product of policy.
The Truth Lies in the Middle - Which Nobody Wants to Admit
The Triffin Dilemma is real. All 3 of the 3 reserve currencies (guilder, pound, dollar) walked the same road to deindustrialization. That can't be coincidence - it's structural.
But structural pressure is one thing - the current magnitude of the imbalance is another. The 2024 USβChina trade deficit of $280B/year is 5.5 times larger than the USβJapan deficit at its 1987 peak. Triffin doesn't explain that "5.5 times larger" part - that's specific policy: China suppressing the yuan, repressing consumption, subsidizing exports.
The 1988β95 period (weak dollar despite deficits) proves the system doesn't automatically produce a strong dollar. A policy factor has to be present. That's the hole in Mr. Pan's argument.
Like a traffic accident: a badly designed road (the dollar system / Triffin) AND a reckless driver (currency-suppression policy). Both contribute. But each side only wants to blame the other - because admitting both means both have to fix it together, and that's what neither side wants to do.
The Same Mirror - Three Different Reflections
Japan is the mirror both sides look into - but each side sees a different reflection.
"Japan listened to America and revalued its currency = 30 years of decline. Never again."
"The Plaza Accord worked - Japan's surplus shrank. We need a Plaza Accord 2.0 for China."
The US deficit never shrank - it just moved from Japan to China. Fixing one country doesn't fix the structural problem.
Comparing the Two Viewpoints
| Criterion | π¨π³ Beijing's Camp (Mr. Pan) | πΊπΈ The Western Camp |
|---|---|---|
| Culprit | The dollar-based monetary system - a congenital defect | China's currency-suppression + industrial-subsidy policy |
| Solution | Multipolarize the monetary order (yuan, SDR, BRICS) | Free Chinese labor, let the market set the exchange rate |
| Root cause | America brought this on itself via dollar privilege | China deliberately "siphons" global demand |
| Strongest point | Explains the 50-year persistence of US deficits - 3 out of 3 reserve currencies followed the same path | 1988β95 proves the dollar can be weak despite a deficit - the theory isn't universal |
| Weakest point | Can't explain the weak dollar of 1988β95. Glosses over China's own currency suppression | Can't deny that the dollar system does create structural pressure |
| Hidden agenda | Deflect criticism of industrial subsidies, forestall tariffs | Force China to open its markets and revalue the yuan |
The Strangest Details
π America pirated Charles Dickens's books for 50 years Before 1891 Β· no international copyright FUN FACT
Dickens toured America in 1842 and was infuriated to find pirated editions of his books selling everywhere - without a single cent in royalties. He campaigned for copyright law, but Congress refused for 50 years. Only in 1891 did the US finally sign a copyright convention. If China "steals IP" today, America was once the master thief.
π―π΅ The Nikkei took 34 years to reclaim its 1989 peak 02/2024 Β· A "lost decade" that became three FUN FACT
In late February 2024, the Nikkei finally topped 38,916 - its old high set in 1989. 34 years later. Over the same span, the S&P 500 rose roughly 13-fold. This is why Beijing fears a Plaza Accord 2.0 more than almost anything else: it looks at Japan and sees a future more frightening than being hit with tariffs.
π° Triffin prophesied Bretton Woods' collapse 11 years early 1960 β 1971 Β· The Nixon Shock FUN FACT
Triffin's 1960 testimony before Congress showed that Bretton Woods couldn't survive long-term. Congress listened, nodded, and⦠did nothing. Eleven years later, on August 15, 1971, Nixon announced that the dollar would no longer convert into gold. The entire global monetary system since has been "fiat money" - and we're all still living with the consequences.
π³π± The Dutch lent Britain the money toβ¦ fight the Dutch Late 17th century Β· the birth of "financialization" FUN FACT
As the Netherlands grew rich on trade, its rentier class poured capital abroad chasing higher returns - and the biggest borrower was a rising Britain. Britain used that money to build its navy, then turned around and fought three Anglo-Dutch wars (1652β1674). The Dutch had literally financed their own killer. Today China holds $800B in US Treasuries - history has its own rhyme.
ποΈ Alexander Hamilton - the "father" of American industrial policy 1791 Β· Report on Manufactures FUN FACT
In 1791, America's first Treasury Secretary wrote the Report on Manufactures - arguing that the young United States had to protect its manufacturing with tariffs, subsidies, and infrastructure investment. This is precisely the playbook Deng Xiaoping read and applied 180 years later. Hamilton is the spiritual father of both modern America and modern China - an irony nobody in Washington much cares to mention.
Sources
Original remarks & speeches
- Pan Gongsheng - remarks at an international finance forum, Yicai (第δΈθ΄’η», 04/2026)
- Robert Triffin - testimony before the US Congress (1960), Gold and the Dollar Crisis
- Ha-Joon Chang - Kicking Away the Ladder (2002)
Theoretical framework
- Michael Pettis - Trade Wars Are Class Wars (2020)
- Niall Ferguson - The Ascent of Money (2008)
- Richard Koo - The Holy Grail of Macroeconomics (2008, on Japan)
- See also in this series: Ray Dalio Β· The 700-Year World Order - the imperial-cycle framework this piece fits neatly inside
03 Discussion
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