America came within weeks -- or months at the most -- of bankruptcy 40
years ago. It very much looks as though it's close to happening again.
What happened then? America had been printing so many dollars to pay for
its imports that European central banks had become increasingly fearful
that they were becoming too cheap, and thus too risky, to keep in their
foreign exchange reserves. (The general policy of central banks is that
they have enough foreign currencies to pay for about three months' supply
of food and essential commodities in case of world wide catastrophe.)
So, during the late 1960s, European central banks increasingly asked
America to exchange their surplus dollars for gold. After all, the Bretton
Woods "agreement" of 1944 had established the American dollar to be "as
good as gold" (at the rate of $35 an ounce). Now, more and more European
countries were asking for the real thing. Sometimes they were paid in gold,
sometimes they were sent away with a flea in their ear. Whichever way in
individual cases, the result was that the great stock of American gold in
Fort Knox (80% of the total national reserves of the whole world in 1944)
started to decrease (it's now about 25%).
By 1971, the US Treasury, the US Fed and President Nixon were in a state of
panic. If the requests for gold had continued then America would have no
more gold left in Fort Knox within a few more years, perhaps even months or
weeks. Never mind that, officially, gold was a "medieval relic", as Keynes
and almost all other economists had been wont to say to a gullible public
in 1944, gold obviously still meant something in the higher reaches of the
American establishment. Nixon and co were going to hang onto what remained
by hook or by crook!
President Nixon had three choices. Firstly, he could raise American
interest rates substantially in order to encourage foreign owners of
dollars to buy American government bonds and receive high dividends instead
of gold. But high interest rates might also have stalled the American
economy. Secondly, he could have devalued the American dollar against gold
so that foreign central banks would receive far less gold for their dollars
-- and then, hopefully stop their demands altogether. But that would have
meant a tremendous loss of face for the mighty American dollar, and thus
America. And, besides, foreign goods -- on which America was increasingly
dependent -- would be much more costly for the ordinary American consumer.
Nixon was left only with a third alternative. This was to detach the
American dollar from gold completely. In other words, to renege on the
world-wide Bretton Woods agreement. There was now nothing to stop America
printing as many dollars as it liked. It had been printing too many
previously -- the dollar had been depreciating for many years -- but from
Nixon's time onwards it began to turn into an avalanche, particularly to
pay for American army bases all round the world and the various wars that
America was given to.
So where are we now? Most world trade is still denominated in American
dollars but the dollar itself is becoming extremely shakey, its value now
being only one tenth of what it was in 1971 and still diminishing. In the
last ten years even an upstart quasi-currency, the euro, can contend
against the dollar every now and again -- though it, too, now faces
problems of its own. Interestingly, European central banks, hitherto
sellers of gold, are also now hanging onto their gold reserves as fiercely
as America is -- and, indeed, trying to buy more.
"Medieval relic" or not, if central banks are hanging onto their gold for
security's sake against increasingly problematical paper currencies then
other large investors are also now buying gold as a hedge against disaster.
Since about 2001 the price of gold has gone up four-fold -- steadily --
definitely not a bubble-like spike. And other sovereign states are buying
gold, too, particularly China, Russia, India, the Middle East oil
countries. They are also calling for a world trading currency to take the
place of the American dollar.
The American dollar has had its day, and America itself also, just as all
other empires have. So far, no American economist has had the courage to
say so, so it took an English economist and a Scottish economist to make
the case in recent years (in, respectively, "The Rise and Fall of the Great
Powers", 1988, and "Colossus: the Rise and Fall of the American Empire", 2004).
Written by a "Little Englander" who, when at school, faced a huge classroom
map of the world every day with the British Empire painted in red across a
great deal of it, today's piece has not been written with any sense of
jubilation over Obama's dilemma. But he would do well to take time out for
a while and start reading some good books on world history rather than
listen to his economic advisors such as Geithner or Bernanke. Let them, and
Congress, get on with it and decide whichever way they want for the future
of the dollar. None of them knows whether there'll be raging inflation or
the misery of deflation ahead. Either way, America will have to start to
decide whether it believes in, or not believes in, gold as the ultra-secure
currency -- but not both at the same time as it contrives to do now.
Keith Hudson, Saltford, England
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