A recurrent theme over the last couple of years, in financial circles, has been the imminent collapse of the dollar.
Everyone has a theory as to why this is going to happen.
China and the balance of payments deficit along with money printing, is causing the dollar to lose its place as the world reserve currency.
One surprising thing is that this is being sold as a recent phenomenon – but there is actually a precedent from the 1970s.
In 1978, the dollar came close to losing its place as the world’s reserve currency. The US Treasury had to issue government bonds in Swiss France.
At the time, nobody trusted the US government – and certainly not the US dollar as it had halved its purchasing power between 1977 and 1981.
During the same period gold rose 500% and inflation was running at over 50%.
The dollar was in so much trouble that the International Monetary Fund (IMF) had to issue special drawing rights – 12.1 billion of them – to preserve liquidity in world markets.
Richard Nixon – the president of the US at the time – decided to take the dollar off of its gold backing and let it float. It was a time of absolute turmoil.
When Nixon resigned because of the Watergate scandal and Reagan was elected, the Federal reserve chairman Paul Volcker raised interest rates to 19% to stop the resulting inflation and Reagan cut taxes which made the US attractive to foreign investment and restored business confidence throughout the world.
A quick look at “Fiat Paper Money,” a book by Ralph T Foster, shows that currency collapse is not a rare event. From the Romans, whose empire collapsed because it neglected to look after its currency – right up to today – where countries like Zimbabwe and Venezuela are the most recent victims of currency destruction. Foster shows, on pages 216- 217, a list of those countries whose notes have become worthless across all decades from 1900 to 2010 There are hundreds of them – including China, Germany, Russia and most European countries. Between, 1971 and 1980 alone, 40 countries lost their currencies!
Bad management of their economies was the reason for these failures. Hyperinflation – where a central bank prints ever increasing amounts of its country’s currency to cover debts which it cannot repay – seems to be the most common factor in the demise of fiat money.
By “Fiat money” we mean money which is not tied to a precious metal. Before the late 20th century coins had a value of their own. Paper money was rarely used except as promissory notes for larger amounts because of the transport and risk involved in moving large quantities of physical gold or silver.
In the US, in 1968, Congress withdrew silver backing from silver certificates. Silver had been an intrinsic part of the money of the United States since its inception. The public were given just a year to redeem their silver coins.
As we mentioned above, this was followed by the unhitching of gold from the monetary system – the US dollar had become a “fiat” currency.
Now the US finds itself at the other end of this story. It has printed trillions of dollars against its national debt – inflation is beginning to arrive again after being kept in check for almost a decade. Unfortunately, just as prices are rising higher, more people are finding themselves jobless because of coronavirus and companies are filing record applications for bankruptcy petitions.
The whole situation is playing out as a very bad and protracted version of the 2008 crash – indeed, comparisons have been made with the 2008 crash and that of 1929.
Higher inflation seems to be the US Federal Reserves only answer to the current debt crisis. With almost no inflation, since 2008, the Fed has seen fit to increase the base money supply by over 400%. This has increased markedly with the bailouts and safety nets put in place after the coronavirus pandemic.
This is a kind of structural damage to the US economy which has been inflicted since 1913 when the Federal Reserve came into being in a plan hatched up on Jekyll island, Georgia. It has operated against the public interest from the off – set up as a cartel to destabilize the entire economy.
To quote G. Edward Griffin, in his book “The Creature From Jekyll Island,“ “Americans have allowed their nation to be stolen from right under their noses because they did not understand what was happening.”