Economies of Faith
The Future of the Dollar as Reserve Currency

by Pedro Cardoso

What is Currency?

Gurunsi Currency bracelets

In its simplest form, Capitalism is trade. One person trades something of value for another. Early in our history, people had to overcome the first 'inconvenience' of trade; the discrepancy of one thing being worth more than another. For example, if one trades water for wood but the wood supplier isn't thirsty; water is useless in that trade. But if it took place in the desert, water would hold a higher value and thus could be used for trade. The fluctuation of 'value' assigned to trading objects was overcome with 'currency'. By inventing an intermediary object of value, people could trade un-equal things. One sheep, six shells, one apple, one shell, one chicken 2 shells and so on; shells, in this case, is currency.

With the modernization and expansion of society, currency needed to hold value across borders. The Roman Empire is a perfect example of this. Pre-measured pieces of gold and silver were stamped as currency and used across vast continents throughout their empire. Ultimately, others accepted these coins mainly because they were made of silver and not necessarily because of what was printed on them. A Roman silver coin, even today, still holds its value

Roman Silver Coin

Understanding the Dollar

By the time the Americans started producing their own silver coins; the Spanish peso had already been used and accepted throughout the country. When the United States designed its own silver Thaler (dollar), it was the same size coin and had the same silver content as the Spanish dólar. The 1792 Coinage Act established gold and silver as the monetary standards of the United States with the gold standard regulated at 15 times the value of silver. The dollar was established as the basic monetary unit, and the Act also allowed for the creation of a national mint. The US had its own Dollar.

U.S. Silver Dollar

Spanish Coat of Arms

The actual dollar sign ($) has a more interesting story. Up to 1500, the Phoenicians has crowned the Strait of Gibraltar with two silver pillars on each side. Beyond the Strait was the open Atlantic and, according to legend, the end of the flat world. Inscribed on the columns was the Latin phrase Non Plus Ultra or (No Farther Away). That was effectively the end of the known world. With the discoveries of the new world, the Spanish crossed that point into the new American continent so they celebrated that feat by changing their national coat of arms. In it, they added those same two silver columns but with a ribbon saying Plus Ultra (meaning, Farther Away). That symbolized their breaking through the Straits and into the new world. Those two columns with a ribbon through is known as the $ sign. http://www2.uah.es/asi/amcana/DOLLAR.HTM

Representative Currency
An interesting detail is that at the time of the US Coinage act, free gold or silver minting privileges were given to all citizens. This was pretty popular with the gold and silver miners of that era. (Remember the Gold Rush?)

It wasn't until 1913 that the US Government replaced the common Thaler (dólar) system with notes. These documents were a promise by the Government to redeem it in gold or silver on demand. That way, people could deal in paper instead of metal, and the Government could stockpile gold and keep it in reserve. The idea is pretty simple. A note is just a receipt for the gold you have stored in the governments bank!

One Dollar Silver Certificate - Printed by the US Treasury This document certifies that the bearer can redeem it for on Thaler worth in silver at any time. In essence, this note is a 'receipt' for the deposited equivalent in silver. Notice it says 'payable to the bearer on demand'

The Gold Reserve Act of 1933 Posters like this one were put up in post offices across the country. It threatened $10,000 fine or 10 in jail!

Although these two systems went on in tandem (silver Thalers and silver dollar Certificates) things soon changed. The Great Depression came about and President Roosevelt panicked. Everyone thought that the failure of banks had led to massive deflation. The common feeling was that "there wasn't enough money" so Congress gave Roosevelt the power to confiscate all the gold coinage held by the public in order to "regulate the Value therefore," and create more money. The Gold Reserve Act of 1933 required that all gold coins and gold certificates be surrendered to the Treasury. This was initially said to be a temporary measure but it would last more than thirty years. Americans were soon forbidden to hold gold (or gold certificates). Basically this act pulled all gold out of the street and into the US Treasury reserves. People did have their redeemable certificates which were worth the exact amount in silver or gold. But soon that changed too. Nine months later, on January 30th, 1934, the Gold Reserve Act was passed, giving the Federal Reserve title to all the gold which had been collected. This act also changed the value/price of gold from $20.67 per ounce to $35 per ounce, which meant that all of the silver certificates the people had recently received for their gold now were worth 40 percent less. But what were they going to do, riot? The truth was Americans were forbidden to own gold anyways. The Government then had the liberty to print more notes than there was gold to redeem. Certainly no one was going to show up turn in his note and ask for his gold. It was illegal! The 1933 Act stated that the government was required to keep at least %40 of the gold represented by notes (certificates) in circulation. But eventually even that changed!

It wasn't long before Federal Reserve started printing money that WASN'T redeemable in gold or silver at all. The actual gold ratio was so degraded that, by November 2nd, 1963, all new Federal Reserve notes were printed with no promise to pay in silver or gold. No guarantees, no value. This is the Dollar we have today.

The Natural Trade-balance of Gold

By selling tobacco, the US farmer caused silver to leave France and end up in US coffers. With gold and silver backing a currency, there is a limit to what a nation can import. If in return, US businesses imported French wine at huge quantities, US coffers would be depleted because French banks would cash in their Silver Certificates (dollars).
This is where Capitalism shows its genius. It turns out that the in-flow of money into a heavy exporter like our example effects prices. In this case, everything in France would start to become more expensive. There's lots of money in the economy, French wine growers have cashed in their American dollars and are running around with lots of Francs. Labour and materials become more expensive and ultimately, the wine they've been exporting to America becomes pricier, and less attractive to importers. Conversely, the opposite happens back in the US. There is less money to go around (recession); the pain of poverty and less consumer-spending brings down prices. Labor becomes cheaper and therefore the cost of production goes down. Huge pressure to produce and make money rallies industry and the public. Cheaper labor coupled with falling prices make the US a better candidate for export. In the global market, French wine becomes expensive while American wine becomes cheaper and better. Gold starts flowing the other way and a balance is naturally achieved. This is how the world economy worked up until the summer of 1914.

Then all hell broke loose. World War I had started.

The Economic Rules of War

There are none. There's no room here to discuss the origins of that war but economic antagonism was widespread at the beginning of the century. Since there were no solid international agreements, one country could trade another into poverty. Gold reserves could be raided when one country 'cashed in' their gold certificates from all the purchases of exports. Some say the 1906-1911 Pig War was one of the catalysts for World War I. It's definitely a good example of predatory Capitalism. Some could further argue that this economic state of affairs later led to radical concepts of Communism. The very first thing European nations did when war broke out was make it illegal for citizens to cash in their certificates. They could trade all they wanted to, but they couldn't take the gold from the government's central banks. Conversely, central banks raided civilian commercial banks and took all their gold in order to fight the Great War. Paper notes were still as valuable as the silver they promised to redeem; it was just illegal for citizens to redeem them. Gold was used only as currency between nations.

The Genoa Conference of 1922

As soon as the war was over, Europe tried to put a 'fix' on the problem of depleted gold reserves. The Genoa agreement wanted to make the British Pound and the United States Dollar "as good as gold". The new pact would say that citizens and countries would be able to redeem their certificates for Dollars and Pounds. In effect, countries would trade, then cash in their notes and not deplete each others gold. Banks would load up on Dollar certificates or Pound certificates instead of gold. If they needed actual gold, they could cash in their paper notes with US or British banks. Why these two currencies? Well, they were the victors and the strongest producing economies at the time. It didn't work.

Genoa Conference of 1922

Germany pulled out of the conference and made a pact with the USSR. This pact, (besides rebuffing the US and UK), allowed them to produce and perfect, (in the USSR), weapons forbidden by the Treaty of Versailles.
We all know what that led to. World War II came next.

Bretton Woods

In 1944 the world came together again; weary from war, to establish a system that would prevent nations from collapsing again into horrible recessions. With gold limiting a nation's purchasing power, any nation that spent too much money importing simply got poorer. By purchasing foreign goods, citizens would send their notes (certificates) to other countries which then would turn around and redeem them in gold. Central banks would have to ship the gold away and therefore not be able to put money into its own circulation. There would literally be less money to go around. The ONLY way out was to sell more stuff to other nations. That way, gold would flow back into the country. World War II turned everything upside down. Europe was devastated. The British Empire was gone. Factories and fields were burned. The modern world needed help; they simply couldn't produce themselves out of recession. That's when the United States stepped in. Practically untouched from the war and with a booming war economy, Washington met world leaders at Bretton Woods and proposed a solution; a revival of the same Genoa Conference that failed in 1922.

Bretton Woods Conference of 1944

The Bretton Woods Agreement stated that every currency in the world would be redeemable for gold, or US Dollars. America promised that dollar certificates would then be redeemable for gold at $35 an ounce. The idea was that dollars could substitute for gold. Central banks of foreign nations could stockpile in dollars or US Treasury bonds or, if they chose, in gold. Because US Treasury bonds earned interest, The US hoped they would be more attractive. The idea was to wean the world off of gold reserves and into American dollars or US Treasury Notes. No one need worry, the US promised to pay an ounce of gold for every 35 dollars that foreigners decided to cash in.

To level the playing field for all countries, the Agreement required that participating foreign currencies have a fixed value in dollars. For example, if 100 Franks were redeemable for 1 ounce of gold before, then 100 Francs were worth $35 now. Since dollars were redeemable at $35 an ounce, the two currencies were 'pegged' at that value. 100 Franks and 35 Dollars were both worth an ounce of gold.

FRANCE, 100 FRANCS, WWII, 1944

IMF

Bretton Woods also created the IMF (International Monetary Fund). The IMF promised to lend dollars to any member nation that was experiencing a run on its dollar reserves, but only if that nation met certain IMF requirements. If a country started running low on dollars, the IMF would loan them the money only if that country purposefully pulled currency from their market and created a recession. This recession would ideally lead to lower domestic prices - waves of bankruptcies produce that effect, after all - which would make the nation's goods attractive to foreign buyers.

Just like the old Gold Standard effect, cheaper labor and increased exports would bring dollars back into their economy. In theory, nothing had changed; the world had only substituted gold for dollars because gold wasn't working anymore. Some say that this is like the evolution from stone and bracelet currency, which was cumbersome, to gold and silver, which was more practical. Other would say that our civilization crossed a dangerous line.

Print

And print they did. The United States, after World War II became the only country in history to literally 'print gold'. At the time, no one cared; the whole world wanted dollars. Europe was being rebuilt, goods were being sold, bank reserves were growing, no time to dig for gold, print dollars. The United States had come out of World War II as the leading economy on earth. Its currency was trusted by foreign central bankers because (1) the U.S. government promised full redeemability, and (2) the U.S. economy had so many goods for sale. Foreigners wanted dollars to buy things made in America. But it all went too far. US consumers started buying up the world! Imports started coming in, dollars were sent overseas. But, unlike other countries which were regulated by the IMF, the American dollar shortage didn't require a loan. All the US government had to do was PRINT MORE MONEY! The Treasury Department never allowed money reserves to get too low and thus cause a recession; they simply printed more money to make up for it.

Sheets of one dollar bills are fed through the final press at the Bureau of Engraving and Printing.

Had each dollar represented its value in gold, the US would have to go dig it up, stop buying foreign stuff, or produce more to sell overseas. Instead of dealing with those natural pressures, the US simply printed more money.

Of course, each printed dollar didn't mean more gold was added to the vault. The Vietnam War pushed the whole thing over the top. The US printed so much money to finance that war that foreign governments started loosing faith in their stockpiles of dollars. Everyone knew that there wasn't that much gold in US vaults to make up for all those dollars running around. Since foreign banks could, (under the Agreement), redeem their dollars for gold; around 1970 that's exactly what they did! France, Germany, Italy, all those countries that had piles of US Treasury notes (instead of gold) stuck in their safes, decided to cash in.

The US refused to pay.

Closing the Window

On Sunday, August 15, 1971, Nixon unilaterally announced to world that the United States of America was reneging on the promise to pay and ounce of gold for every 35 dollars out there. Pretty much, the US was betraying the Bretton Woods Agreement. One can imagine what that did to the world. There were Trillions of dollars in European safes, Japanese safes, and Russian safes; dollars which now were NOT redeemable for gold. This is historically called Nixon's "Closing the Gold Window". Again, what were they going to do, riot?

The Macroeconomic Dollar

So this is the catch. Because the vaults of the world were filled with US dollars, no one could sell them in great quantities without lowering the value of the whole system. It's as if the world was forced to swallow the dollar pill. Everyone grudgingly had to accept the dollar as the new standard. (Even now, that's a sour pill the world hates to swallow). Today, all currencies are valued in dollars, every barrel of oil is purchased in dollars (petrodollar), and all nations build up cash reserves in dollars (not gold). Under the current system the United States buys goods from foreign countries and pays them in dollars. Foreign countries then try to turn those dollars into the best investment they can. (One thing is for sure, they CAN'T get gold for them). So they buy US land. They buy US Treasury Notes (these notes are a US Government promise to pay in dollars with some interest within 10 years). They also buy US stocks in IBM, Microsoft, Mc Donald's, etc. (which will be redeemed for dollars whenever they cash them in). Get the picture? It's nothing like the old Gold Standard balance! It used to be that the more the US would import the less cash it would have in its vaults and on the streets. With the new system, dollars that go overseas don't come back to be redeemed for gold. They come back to be redeemed for MORE DOLLARS. As long as the Federal Reserve has ink in its printers, the US can continue to buy up the world!

" Without the ability to settle foreign exchange transactions in gold, the rest of the world had no choice but to continue to fund U.S. indebtedness with the proceeds earned from U.S. consumption. As the dollars return home, they enter the U.S. banking system, where they can serve as the base of the money creation pyramid resulting in U.S. credit expansion, which can fund more U.S. imports, thereby continuing the cycle."

US Dollar as Substitute for Gold Natural pressures of trade vanish when the reserve valuable isn't really rare

"How much longer will the rest of the world be willing to accept debt instruments from the United States in exchange for real goods and services? It is only a matter of time before the United States will no longer be considered creditworthy."
- The Dollar Crisis: Causes, Consequences, Cure by Richard Duncan.

Currently, the US trade deficit for 2003 will be a historical record of 500 billion dollars. Even though the US exports in great quantities to other countries, nothing can balance the huge appetite of the American consumer. Americans buy, buy and buy; but they don't produce and equivalent quota. Foreign countries (like China) who sell goods to the US don't have the same need to buy anything back. They're left with a bunch of dollars in their hands. They can't just go to the French and buy up French assets because then the French will want to know what to do with those dollars. The solution is to redeem those paper dollars for something of value back FROM THE UNITED STATES.

Well, what's considered valuable in the United States?
Land is a good choice (Foreign investment increased from $2.763 trillion in 1992 to $8.144 trillion in 2001 Realtors.org). US Treasury notes are something the Chinese can put in the bank because it earns interest; it's a debt instrument that says the US owes China the value of that note sometime soon. Plus interest. (But it will eventually be paid in dollars).
US stocks work in the same way; purchasing stock forces a US company to owe China the value of that stock on demand (in dollars of course). The only factor that makes foreigners accept the dollar as payment at all is faith that when they buy US stocks and Treasury Notes, they will generate more dollars. If, for some reason, foreign banks DIDN'T see a potential for return, the dollar would NOT be accepted as payment. The dollar, in essence, would plummet in value.

Also, the dollar itself is a necessary paper to have in the bank. Today, not a single barrel of oil worldwide can be sold without first exchanging to dollars. The petrodollar has sustained the demand for dollars across the whole world so banks just hold on to them for use. That stops many countries from wanting to redeem them for something of value back in the US. But in 2003, things changed.


2003

For those of us paying attention, the sudden devaluation of the dollar was an ominous sign. When the US Treasury department announced that the US owed more than 6 TRILLION dollars to all those countries that had sold us stuff, everyone got the same sinking feeling. Well, those of us who knew what that meant, of course.

This meant that US consumers and companies had bought a record amount of stuff from other nations and had in turn given them I.O.U.'s as payment. Foreign banks now had stockpiles of Treasury Notes (some of which automatically were coming due) that would add up to more than HALF of what the US could domestically produce. And the US just kept on spending!

By the end of 2003, foreign banks knew very well where all this money was coming from, the Federal Reserve was printing it!

The dollar just kept on falling.

What's happening is a loss of confidence in the dollar. A Chinese businessman, who just sold a car-load of shoes to America, brings home a bunch of paper dollars. He trades those dollars in for Chinese currency and goes home. Now the Chinese bank must decide what to do with that paper. They can't redeem it for gold, that option is long gone. They have to invest it in something safe that gives it some kind of return.

US Trade Deficit at record levels

The problem is, the US is printing money like crazy, they are spending more than any country on earth, and they are NOT exporting that equivalent. Add Enron, Worldcom and an air of financial dishonesty to the mix and you have an economy that isn't looking too good for investment. But exporting countries like China are STILL caught in the old catch 22. Remember that banks all over the world had trusted the dollar as good as gold. They had stockpiled it. Up until today, every country in the world had a vested interest in maintaining the US economy booming. If US companies didn't profit and US Treasury Notes didn't pay, what were foreign banks going to do with all those dollars? If the US dollar looses value, ALL central banks worldwide loose money and fall into recession. Most likely, the Chinese bank in our example, would still invest in the US. It's the old sour pill. There isn't any other choice because they want the dollar to stay up. They need to prop up the US economy. The pain of a run on the dollar would be too much.

Unless there was an alternate currency.

The Euro

On January 1st 2002, the European Union launched its new, unified currency, the Euro. Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland all joined the new currency. For the first time since Bretton Woods, there was a possible alternative to the US dollar. How can the Euro be an alternative when European banks are also loaded up with dollar reserves? Well, the answer is in European trade. Here is some of the data: in 2002, the European Union imported $931 Billion worth of stuff, but then turned around and exported $939 Billion to other countries. The United States, on the other hand, bought $1202 Billion from foreigners but only sold them $693 Billion in goods (link). There was about 509 Billion paper dollars left in foreign hands. What were they supposed to do with them? They'd already bought all the US products they could! They needed something of value for all those TV's, shoes, shirts and cars they built and sold! The US economy simply isn't producing enough exports to make it worthwhile to hold on to dollars. The only other thing foreign banks could buy from Americans is land, or IOU's (stocks and Treasury notes).

Dollar vs. Euro Trade Equivalent When compared side by side in terms of exports. There are more dollars in the market than there are US exported goods to be bought. The 'left over' dollars in the market are invested back into the US economy as an attempt to keep them valuable

Conversely, the Europeans are NOT overwhelmingly printing more Euros than the goods they export. All Euros out there can be used to buy European products with only a little bit of paper money left. Pretty much, for every Euro outside Europe, there's a product it can buy. As for the amount of dollars out there, even after you buy all the products the US is exporting, you'd still end up with leftover dollars in your pocket. Foreign banks used to turn around and buy US Stocks or T-notes in order to keep all those dollars in their vaults still valuable. In 2003, things started to change:

Why are foreign banks bailing on the dollar? We're talking from 49 to just 4 Billion! Every time the dollar goes down in value the stacks of dollars in their vault loose value too! Well, they have to. If foreign banks invest in the US but the US turns around and spends and prints. How confident are they that the system won't fail them. Remember, they'll get paid in dollars for their investment. Not to mention the fact that for years, the performance of US major corporations were based on less-than-honest accounting. It's like an ominous storm. For example, let's say France wants to unload its dollars but without flooding the market with them, problem is; so does Germany and so does China. If one country starts obviously dumping dollars, the rest will think "This is it! If we don't dump they'll be worthless by noon!' and a run on the dollar occurs.

Like a vicious circle, countries like China dedicated their exports to the huge appetite of US consumers. If the dollars in the hands of US consumers started being worth less and less, Americans wouldn't be able to buy Chinese goods anymore! So China invests in the US to give the dollar its worth. They also 'peg' the value of their own currency to the dollar so it's stays cheaper to produce at home. Every time the dollar lowers in value, so does the Renminbi. Politicians in the US usually see that as a target US citizens can relate to and attack such devaluation policies:

Renminbi (CNY) In Chinese "Renminbi" means "People's Currency"

The other barrier that props the dollar is oil.


Understanding the Petrodollar

The simple fact is that trading oil in dollars causes the whole world to need them. Without paper dollars no one can trade oil, that's the rule (petrodollar). All oil producing countries accepted the petrodollar not only because there was no better regulating alternative, but because OPEC, (through the influence of Saudi Arabia), wouldn't even consider using anything else. That's why, even though Americans kept on printing money and buying more than their exports, banks were willing to accept their paper dollars in return. Simply put, those paper dollars were good for buying oil. When the Euro came about, some countries started slowly switching their stacks of dollars in their vaults for Euros, but no one had the balls to defy the petrodollar!

OPEC & Saudi Arabia - Bush meets Prince Abdalla

Until one country did.

On November of 2000 Iraq declared that ALL their oil sales must be done in Euros, furthermore, all the stacks of paper dollars in Iraqi banks were to be switched for Euros. Iraq was officially switching. The sanctions had become so imposing that Saddam Hussein decided to hit back. The central banks of the world started ridiculing the idea:

No one wanted to follow Saddam into that hole. US officials laughed it off as 'angry tactics' of a madman. It just so happened that he decided to switch when the Euro was at its lowest and, as we now know, 2 years later he made a killing!

That could have been the straw that broke the camel's back. Even thought it was probably pure luck, the rest of the world could actually see for themselves that the Euro was not only a viable option as an economic substitute; it could be used successfully in oil trade! The 'petroeuro' became a possibility.

It's hard to tell if the result was a retaliation on the 'sour pill' of Bretton Woods, or if the Euro became a form of 'protest' against Bush's anti-UN unilateralism; the reality is that everyone started to either switch outright, or contemplate it publicly:

The only giant that stood to tip the balance was OPEC.

If OPEC decided to switch, the whole world would run on the dollar! The reason is that the petrodollar is the last barrier! Because of the value decline of the dollar, countries have slowly switched their vaults from stacks of paper dollars to stacks of Euros. The petrodollar actually didn't let everyone go nuts and start dumping. If OPEC, the de-facto controller of world oil, decides to switch, there is no more reason to do anything slowly! Why hold on to dollars? They'd be good only for purchasing American goods, and we know there aren't enough of those running around!

Here's the scary part. OPEC actually contemplated the possibility right when the Euro came out!

The truth is, OPEC can't declare a switch and hope the cartel just obeys, true market forces have to be in place to make the whole group go along. Unfortunately, those market conditions faded into place starting at the end of 2002. The dollar is dropping; the Euro is gaining, politics aside, that's the reality. The United States tried as much as possible to tighten its alliance to Saudi Arabia, but September 11 put a wedge between them. The attack was a direct hit on their relationship and a direct hit on US influence over OPEC. It was an attack on the dollar (not counting the symbolism of an attack on the World Trade Center)

Politics and War

If the invasion of Iraq wasn't a related to the petrodollar it sure seemed like it! By canceling Iraq's Euro demand, by placing a pro-dollar country into the oil market and by putting military pressure on Syria (OPEC member) and Iran (3rd largest OPEC member), the US is betting on keeping dollars in high demand. Countries are going to need dollar notes to buy that oil. At the same time, the US is putting pressure and influence on all other non-OPEC countries in order to steer them away from the Euro. That could be one of the reasons why the US was so interested in rushing Iraqi refineries to production. Do you think the first barrels of oil coming out of Iraq were sold in Euros or dollars? Take a wild guess

US Military Invasion to 'disarm' Iraq

A very strong ally of the United States also gambled on Iraq and refuses to switch to the Euro. The lines have been drawn.

The Implications of Iraq

Today the world is in a wait-and-see state. The US CANNOT lose in Iraq. The repercussions of a 'Vietnam' in Iraq would directly affect world status of the dollar. If the war keeps dragging on, if people keep dying and if it keeps getting more and more expensive, world banks will switch to Euros. Foreigners will see the war as a huge money pit in which not even Iraqi oil can balance (notice how guerrillas keep hitting the oil pipelines?). They will also see the US printing more and more money to fight it (as they recently did with the approval of $87 billion for Iraq). Foreigners are witnessing a world-wide negative reaction to the conflict. That reaction steers anti-US countries to the Euro simply out of anger (like North Korea and Iran) The Euro could become the world's protest money. Eventually they will see no reason to accept dollars for TV's, shoes, shirts, cars and electronics. What are they going to do with that paper?

Children throw rocks at a US Armored vehicle. A long and drawn-out occupation?

How does it end?

Capitalism is a genius concept because no one owns it and no one can really control it. The United States stepped in as the dominant most coveted currency in 1945 because it naturally was the best option. In 1945 everyone saw the United States as a revolutionary concept in itself. The country and its society had grown out of true hard work. By the end of World War II, the European concept of 'civilization' had hit a brick wall. Countries and their banks had dominated whole societies through powerful families and old royalty. By the time everyone thought they had achieved the pinnacle of civilization. The bottom dropped. The United States was the only country left standing, both economically and in principle. They produced!One can argue that pure production won that war. Everyone associated the US with the liberation of Paris, with American movies, with American products and with American culture. A currency backed by those things doesn't need gold!

But Americans are also humans. How can a society who has the power to print its own gold restrain itself? The printing of all those dollars reversed US culture from producers to consumers. Capitalism naturally has done its work. Had it been any other country the same would have happened. If Italy or Switzerland had become the dominant currency, they would have printed Liras like crazy. Today, even if the Euro naturally replaces the dollar, the Europeans will NOT be able to restrain themselves. They will print themselves into this situation again.
There is one aspect of fiat money that seems to always eventually poison the system. Government-controlled money runs against democratic principles. Democracies CANNOT allow governments to control money. If the market is free, people are going to figure out the value of trade on their own. Be it shells, bracelets or gold. When governments confiscate the natural true value of trade and put it in the vault, citizens are forced to trust that no one will tinker with it. Well, historically, governments have NEVER been trustworthy in that sense. If citizens are walking the streets with receipts for their gold in the bank, that's a contract with the government. If citizens instead are walking the streets with a receipt for something that changes value at the government's whim, that's price control. In other words, that's not a free market. The reason Democracies flounder under that system is because no elected official will have the balls to provoke a recession in order to balance the trade deficit. (Watch this video of how much courage it takes- Chapter 15) If the country spends too much, it gets poor. Elected officials cannot resist the temptation to print money and make the public suffer as least as possible. After all, they'll be voting soon

The only American president to actually try to reign in the fiat dollar was Kennedy. He actually issued new dollars backed by gold independently of the Federal Reserve. On June 4th 1963, Executive Order number 11110 allowed the Treasury department to issue Silver Certificates based on the silver they had in the vault. No need for the Federal Reserve, no more printing money. Kennedy was able to put into circulation almost $4.3 billion in silver certificates. 5 months later he was killed.

Kennedy Dollar - Ironically, Executive Order 11110 has never been repealed. Good luck finding one of these notes though.

That's a road civilization might not yet be ready to take.

Pedro Cardoso

Warren Buffett, the billionaire investment guru, has predicted the dollar will continue to weaken and said he has for the first time been buying foreign currencies Tuesday, 28 October, 2003 Mr Buffett, who in the 1990s famously preferred investing in "bricks-and-mortar" companies to the booming dot.coms, said he was hedging against the dollar because he was worried about the size of the US trade deficit. He said the deficit had "greatly worsened, to the point that our country's 'net worth' so to speak, is now being transferred abroad at an alarming rate". BBC

OPEC Has Already Turned to the Euro
June 1 2004
As the dollar's rate of exchange continues to fall against the world's major currencies, there has been much speculation about the likely knock-on effect. One area receiving a lot of attention is crude oil in general, and OPEC in particular.
It has been suggested that OPEC may begin pricing crude oil in terms of the euro, and further, that OPEC may actually begin invoicing its crude oil exports in terms of euros. This latter step would require shifting out of dollars, with OPEC receiving euros in payment.
These possibilities have been scoffed at by many whose interests are tied to the fate of the dollar, but it seems that OPEC has already taken the first step - it appears to be pricing crude oil in terms of the euro. This conclusion is apparent from the following table. The import data is from the Department of Commerce report entitled U.S. International Trade in Goods and Services. The source for the euro exchange rate is the Federal Reserve, and I have calculated the euro's average exchange rate to the dollar for each year based on daily data.
SEE THE FULL CHART: Gold Money


America's Growing Trade Deficit Is Selling the Nation Out From Under Us. Here's a Way to Fix the Problem—And We Need to Do It Now.
- by Warren Buffet
...Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in—and today holds—several currencies. I won't give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline.

...Both as an American and as an investor, I actually hope these commitments prove to be a mistake
Fortune.com

OPEC mulls move to euro for pricing crude oil
Monday, Jan. 12, 2004
Calgary — OPEC is considering a move away from using the U.S. dollar — and to the euro — to set its price targets for crude oil, the highest-profile manifestation of the debilitating effect of depreciation on the greenback's standing as the currency of international commerce.
http://www.globeandmail.com/servlet/story/RTGAM.20040112.wopec0112/BNStory/Business/

Dollar Doldrums
Where have all the European investors gone?
By Daniel Gross
Posted Wednesday, Dec. 10, 2003, at 2:24 PM PT
...the United States needs European cooperation to finance something even more crucial than the reconstruction of Iraq. We rely on Europe—Old and New—to finance our private companies and, to a lesser extent, our government. After all, the United States' biggest exports today aren't movies or software programs. They're paper products—stocks, bonds, and other securities

...But in September, as chart CM-V-1 shows, net foreign purchases of U.S. assets were less than $16 billion, down dramatically from $62.4 billion in August and $75 billion in July. In September, Europeans collectively sold about $400 million in U.S.-denominated assets.
MSN.Slate

Euro: New Record High vs. the Dollar Mon December 29, 2003 07:45 AM ET LONDON (Reuters) - The euro powered to fresh record highs against the dollar on Monday, rising above the psychological $1.25 level, as short term traders capitalized on a holiday-thinned market to give the dollar a further beating. The euro rose more than half a percent to $1.2511 in the European midsession, bringing its gains since the start of the year to more than 19 percent. The dollar has been under broad-based pressure in recent months as investors have fretted about the United States' ability to fund its current account deficit, currently running at some five percent of gross domestic product.

The dollar also touched an 11-year low against sterling and came within sight of last week's seven-year low against the Swiss franc
Reuters

U.S.: As Economy Recovers, Dollar's Drop Seems To Defy Logic
By Mark Baker
The dollar's dive against the euro on currency markets has analysts puzzled. While the U.S. economy shows strong signs of recovery, the European Union's eurozone is relatively flat. Yet the dollar remains in free fall, touching a record low against the European common currency just this week. Traders say it could fall still further. RFE/RL asked analysts what could be going wrong for the United States or, indeed, right for Europe?
Radio Free Europe




US backs off from 'strong dollar'
Monday, 12 May, 2003
US Treasury Secretary John Snow has broken with the long tradition of backing a strong dollar, hinting that the boost to exports from a weaker greenback is a welcome change.

"When the dollar is at a lower level, it helps exports, and I think exports are getting stronger as a result," he said.
BBC

Stability is built into the Eurozone: Deficit spending over a certain amount is illegal!

Under the Growth and Stability Pact, EU members must limit deficit spending to 3 percent of GDP and public debt to 60 percent of GDP. Countries in violation of the pact can face fines and even sanctions. In 2003, 11 of the
25 EU members breached that limit: the Czech Republic, Cyprus, France, Germany, Greece, Hungary, Malta, the Netherlands, Poland, Slovakia and the United Kingdom. In 2004, France, Germany and Greece already are set to exceed
3 percent; Germany recently revised economic forecasts to reflect a deficit of 3.7 percent, while the Olympics have pushed Greek spending to nearly 4 percent of GDP. (From STRATFOR)

What is EU Growth and Stability Pact: ...preventive elements which through regular surveillance aim at preventing budget deficits going above the 3% reference value.
http://europa.eu.int/comm/economy_finance/about/activities/sgp/sgp_en.htm

Dollar expected to fall amid China's rumoured selling
By Steve Johnson in London and Andrew Balls in Washington
Published: November 7 2004 19:43 | Last updated: November 7 2004 19:43

...The dollar sell-off has resumed amid fears among traders that Mr Bush's victory will bring four more years of widening US budget and current account deficits, heightened geopolitical risks and a policy of "benign neglect" of the dollar.

Many currency traders were taken aback on Friday when the greenback fell in spite of bullish data showing the US economy created 337,000 jobs in October.

"If this can't cause the dollar to strengthen you have to tell me what will. This is a big green light to sell the dollar," said David Bloom, currency analyst at HSBC, as the greenback fell to a nine-year low in trade-weighted terms.

...However, the market has been rife with rumours that the latest wave of selling has been led by foreign governments seeking to cut their exposure to US assets.

India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors.

China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher
http://news.ft.com/cms/s/257979a6-30f4-11d9-a595-00000e2511c8.html

FORBES VIDEO:
Video: The Dollar's Dip Spells Disaster

Central banks shift reserves away from US
By Chris Giles
Published: January 24 2005 00:03 | Last updated: January 24 2005 00:03

Central banks are shifting reserves away from the US and towards the eurozone in a move that looks set to deepen the Bush administration's difficulties in financing its ballooning current account deficit.

In actions likely to undermine the dollar's value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. The majority thought eurozone money and debt markets were as attractive a destination for investment as the US.

...Alan Greenspan, the chairman of the Federal Reserve, warned in November that there was a limit to the willingness of foreign governments to finance the US current account deficit.
http://news.ft.com/cms/s/9ef63678-6d7d-11d9-9b69-00000e2511c8.html

Dollar at mercy of central banks
By Chris Giles, Economics Editor
Published: January 24 2005 02:00 | Last updated: January 24 2005 02:00

Members of the Organisation of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 per cent to 61.5 per cent in the past three years.

The Bank of Thailand said this month it was considering reducing the proportion of its $50bn reserves held in dollars from 80 per cent to 50 per cent. Russian officials have made similar noises.

A detailed survey out today suggests that central banks are increasingly moving official reserves out of the dollar and into the euro.

Asian central banks are unlikely to pull the plug on dollar assets altogether. But they may be close to ending their willingness to provide cheap financing for an ever increasing US current account deficit.
http://news.ft.com/cms/s/bd52ee06-6dad-11d9-ae0d-00000e2511c8.html

Bush to seek $80B for war efforts
Last Updated Tue, 25 Jan 2005 11:19:25 EST
CBC News
WASHINGTON - U.S. President George W. Bush is expected to tell Congress he needs $80 billion US more for the conflicts in Iraq and Afghanistan.
http://www.cbc.ca/storyview/MSN/world/national/2005/01/25/war-iraq-bush-money050125.html

Greenspan issues stark message on budget deficits
April 22 2005
ALAN Greenspan, the US Federal Reserve chairman, delivered a stark warning to the country's politicians yesterday – they must come to grips with bloated budget deficits or else face a stagnating economy "or worse".
http://www.theherald.co.uk/business/37775.html