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Dollar may be doomed as the world's currency
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The Atlantic, 1492 - The lure of treasure set three little ships a-sail from Spain, ships the crew felt could be attacked and swallowed up by sea dragons or fall off of the edge of the world. The captain of the voyage was forced to lie to the crew to keep them going until it was too late to turn back. This small crew in their pathetic little ships sailed across a very rich as well as very round planet alright.
What they could never know is that their voyage opened up an exceedingly complex world monetary system, a system now teetering on the edge, at risk of falling off, of being devoured, devalued, destroyed.
It was 1492 when the sailors landed - Christopher Columbus and his crew met strange natives wearing bright yellow ornaments made of pure gold. Thanks to those three ships that found the earth to be round, over the next 5 years tons of gold and silver poured into Spain. Spain started coining the gold and silver. One unintended outcome was the birth of the first world currency, a " Piece of Eight" or Spanish Dollar. Everybody used them for trade. It later became widespread in America, Europe, and Asia. The Spanish Dollar was legal tender in the United States until an Act of the United States Congress discontinued the practice in 1857. Spain was the economic top dog for 3 centuries.
England became the new top trader with the British Sovereign, its gold coin introduced in 1817. Struck in 22-carat gold, the Sovereign contained 113 grains (7.3 g) of gold. All trading nations eventually measured their currency against the Gold Sovereign. For the next century Britain, with its Royal Navy, ruled the sea and the civilized world. The United Kingdom had one of the world's strongest economies and held 40% of the world's overseas investments.
After two world wars, Britain inevvitably sunk into debtor nation status. Something new was needed. In 1944, the Allies met in Bretton Woods, New Hampshire to try to set an anchor to the world's wayward monetary system. It was decided that each country would adopt a monetary policy that maintained the exchange rate of its currency within a fixed value in terms of gold and the ability of the International Monetary Fund (the IMF) to bridge temporary imbalances of payments. No one currency was officially announced as the new benchmark, but the dollar (unofficially) became the standard reserve currency. The United States Dollar is the most widely-held reserve currency in the world today. Throughout the last decade, an average of two thirds of the total allocated foreign exchange reserves of the world’s countries has been in U.S. dollars. For this reason, the U.S. dollar is said to have "reserve-currency status", making it easier for the United States to run high trade deficits with greatly postponed economic impact.
In the face of increasing financial strain, the 1944 Bretton Woods system collapsed in 1971 after the United States went off the gold standard and stopped convertibility of U.S. dollars to gold. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the 1944 agreement. This has been the state of affairs for over 35 years. Oil, gold, trade goods and countless other world trade products are denominated and measured against the U.S. Dollar.
Recently, tide changing events have occurred as outlined here:
- On March 5, 2009, the Bank of England announced that they would pump between £75 and 100 billion of new capital into the British economy, through a process known as quantitative easing, i.e. printing money. This is the first time in the United Kingdom's history that this measure has been used. The process will see Britain creating new money for itself, which it will then use to purchase assets such as government bonds, bank loans, or mortgages. Despite the fear that quantitative easing involves printing money, it is hoped that Britain is unlikely to do this and instead money will be created electronically and thus not actually enter the cash circulation system.
- On March 16, 2009, in connection with the April 2009 G20 summit, the Russian Kremlin called for a supranational reserve currency as part of a reform of the global financial system.
- On March 18, 2009, the Federal Reserve announced that it would print up an additional $Trillion + in new currency and use the new money to purchase its own Treasury Bonds as well as mortgage backed securities.
- On March 24, 2009, the governor of the People's Bank of China, called for "creative reform of the existing international monetary system towards an international reserve currency," believing it would "significantly reduce the risks of a future crisis and enhance crisis management capability." The governor suggested that the IMF's Special Drawing Rights, a currency basket comprising dollars, euros, sterling and yet, could serve as a super-sovereign reserve currency, not easily influenced by the policies of individual countries.
- On March 26, 2009, a UN panel called for a new global currency reserve scheme which with "greatly expanded SDR (Special Drawing Rights), with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, could contribute to global stability, economic strength and global equity."
- On May 18, 2009, Brazil’s President da Silva announced that Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar.
If the U.S. Dollar loses its position as the world's reserve currency, Mr. Obama's budget plans to borrow and spend an additional Ten Trillion dollars over the next decade is in jeopardy. Sometimes it only seems we have come a long way from Columbus' voyage. At least we can be certain of one thing: The earth is round.
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