The Dollar as a Source of Power
Published in El Tiempo
(Ecuador) on 9 February 2009
by Burgos Carlos Simancas (link to original)
(Ecuador) on 9 February 2009
by Burgos Carlos Simancas (link to original)
Translated from
by Norma L. Colyer.
Edited by Annie Moulton.
The U.S. dollar is the official currency of several countries, but the U.S. version has the largest circulation in the world. Its history is tied to a political and commercial pragmatism created by the U.S. since its conception.
Benjamin Franklin traveled to London in 1751 to seek permission to issue paper bills instead of pounds sterling, a request that was denied. The so-called ‘Continental’ note whose indiscriminate printing financed the War of Independence was issued against the will of the English Parliament.
George Washington, through a decree of April 4, 1792, adopted the Mexican ‘Daller’ as the new currency. English phonetics soon morphed the term into ‘Dollar.’ The nascent dollar was backed up by silver until March 1, 1900, at which time President William McKinley declared its support and price in gold. As industrial development, commercial markets, and the accumulation of wealth advanced more rapidly in the United States than in other countries, international confidence grew in the dollar. An exchange rate of an ounce of gold for each 35 dollars was eventually established.
The duration and aftermath of the Second World War had negatively affected all major economies, with the notable exception of the U.S. Arms sales, war supplies, food, and money loans buttressed the U.S. economy. But before that, some postwar conditions were created in 1941 in the Atlantic Charter signed by President Franklin D. Roosevelt and the British Prime Minister Winston Churchill to strengthen the economies of allied powers after the war.
From its new dominant position, the U.S. worked to establish the dollar as the world’s defacto currency to standardize global supply and demand. Following the Bretton Woods Agreement in 1944 between 44 countries, the accord that gave rise to the World Bank (WB) and the International Monetary Fund (IMF), New York displaced London as the international financial capital.
On August 15, 1971, President Richard Nixon presented the world with a revolutionary monetary change by taking the U.S. off the gold standard. Based on an alleged shortage of gold necessary to support the dollar’s established exchange rate, gold would no longer denominate U.S. currency. Other member countries of the WB and the IMF followed the U.S. in repealing the gold standard for their currencies, often with great institutional difficulties. Countries with less exchange rate power found this process to be especially burdensome. This conversion immediately gave rise to a terrible rate of inflation, the main concern of the world’s central banks.
With the emergence of inflation, the dollar, acting as the world’s transactional currency, automatically lost its neutral quality and established winners and losers in the capital markets. Because the United States can devalue the dollar at its convenience, a value backed up only by the productive capacity, consumption, technology, and by the U.S. economy’s creation of wealth, countries with varying dollar reserves stand to benefit or be harmed differentially.
The principal weapon of this country is not in its capacity to wage war, but its ability to export its economic and productive losses. The United States never considered the real magnitude of the changes on the economies of other countries, such as China and India. The US has a huge demand for goods and services, perhaps necessary to continue the pursuit of the American dream. The U.S. has embarked on a constant devaluation of the dollar as its last resort to maintain a demand of goods and services, but without real financial support.
Alan Greenspan first introduced this theory. He had a large influence in the US economy from 1988 to 2006, and kept interest rates low in order to prevent inflationary effects. This faulty demand sustained a low interest rate, and produced, on the contrary, high inflation and therefore the housing bubble that exploded last year in the US.
This unsustainable demand for goods and services based on low interest credit created a favorable environment during the last decade. Because of this, Economists argued, “the greatest liquidity in history was recorded.” A more true economic history developed in a different manner: all dollars and Government bonds were bought by China and other emerging economies, which in turn leveraged their development based on these. They established a chain of credit sustained by the willingness of minor debtors, not by the large debtor: the United States. How convenient it is to be able to spread one’s own economic failures across the world along with an entire toxic burden.
Since credit is a real entity in the economy, its irrecoverable nature is damaging. It not only hurts the insolvent debtor, but also the purchaser and investor. The excuse is the structural capacity of the U.S., which is also valid—in spite of the crisis; the US economy grew 1.3% in 2008. The capacity of industry, technology, consumption, quality, competitiveness and creativity within that nation cannot be denied.
The introduction of the euro as the official currency of the European Union in 1999 has also influenced the dollar’s value. It promised a huge migration to the nascent currency, which was economically appealing because it offered twice the interest paid by the dollar (2 percent). That migration hurt the volume of American money supply and created inflation. It was controlled by an upsurge in its rampant fiscal deficit. Furthermore, the United States, in keeping with its preemptive war policy, launched wars in Afghanistan and Iraq. These decisions were made were at expense of the rest of the world.
But I believe that one must react when confronted by the vast economic problems generated by currency. The safe and wise decision is to return to the gold standard. The revaluation or devaluation to the dollar is dependent on the price fluctuation in the international market. This important metal historically performs positively; like oil, its exploitation is finite.
China has accumulated 600 tons of gold, which is the largest reserve in the world, ensuring its economic future.
The latest discovery in our country is the La Colosa mine with an estimated 12.9 million ounces. When added to the present rate of extraction, it would ensure a revaluation of between 0.3 and 0.5 percent annually against the dollar. This would be of great benefit to the development of our country and provide a greater capacity for financial, industrial, and technological self-determination, without being subject to the inconsistency of the dollar.
Gold and the dollar vary in opposite directions. Our country has only 6.84 million tons of gold in international reserves, which is nothing when compared to Argentina or Venezuela, which have 54.8 and 357 tons, respectively. The dollar spreads the economic losses of the US internationally and this, undoubtedly, is its main source of power.
Benjamin Franklin traveled to London in 1751 to seek permission to issue paper bills instead of pounds sterling, a request that was denied. The so-called ‘Continental’ note whose indiscriminate printing financed the War of Independence was issued against the will of the English Parliament.
George Washington, through a decree of April 4, 1792, adopted the Mexican ‘Daller’ as the new currency. English phonetics soon morphed the term into ‘Dollar.’ The nascent dollar was backed up by silver until March 1, 1900, at which time President William McKinley declared its support and price in gold. As industrial development, commercial markets, and the accumulation of wealth advanced more rapidly in the United States than in other countries, international confidence grew in the dollar. An exchange rate of an ounce of gold for each 35 dollars was eventually established.
The duration and aftermath of the Second World War had negatively affected all major economies, with the notable exception of the U.S. Arms sales, war supplies, food, and money loans buttressed the U.S. economy. But before that, some postwar conditions were created in 1941 in the Atlantic Charter signed by President Franklin D. Roosevelt and the British Prime Minister Winston Churchill to strengthen the economies of allied powers after the war.
From its new dominant position, the U.S. worked to establish the dollar as the world’s defacto currency to standardize global supply and demand. Following the Bretton Woods Agreement in 1944 between 44 countries, the accord that gave rise to the World Bank (WB) and the International Monetary Fund (IMF), New York displaced London as the international financial capital.
On August 15, 1971, President Richard Nixon presented the world with a revolutionary monetary change by taking the U.S. off the gold standard. Based on an alleged shortage of gold necessary to support the dollar’s established exchange rate, gold would no longer denominate U.S. currency. Other member countries of the WB and the IMF followed the U.S. in repealing the gold standard for their currencies, often with great institutional difficulties. Countries with less exchange rate power found this process to be especially burdensome. This conversion immediately gave rise to a terrible rate of inflation, the main concern of the world’s central banks.
With the emergence of inflation, the dollar, acting as the world’s transactional currency, automatically lost its neutral quality and established winners and losers in the capital markets. Because the United States can devalue the dollar at its convenience, a value backed up only by the productive capacity, consumption, technology, and by the U.S. economy’s creation of wealth, countries with varying dollar reserves stand to benefit or be harmed differentially.
The principal weapon of this country is not in its capacity to wage war, but its ability to export its economic and productive losses. The United States never considered the real magnitude of the changes on the economies of other countries, such as China and India. The US has a huge demand for goods and services, perhaps necessary to continue the pursuit of the American dream. The U.S. has embarked on a constant devaluation of the dollar as its last resort to maintain a demand of goods and services, but without real financial support.
Alan Greenspan first introduced this theory. He had a large influence in the US economy from 1988 to 2006, and kept interest rates low in order to prevent inflationary effects. This faulty demand sustained a low interest rate, and produced, on the contrary, high inflation and therefore the housing bubble that exploded last year in the US.
This unsustainable demand for goods and services based on low interest credit created a favorable environment during the last decade. Because of this, Economists argued, “the greatest liquidity in history was recorded.” A more true economic history developed in a different manner: all dollars and Government bonds were bought by China and other emerging economies, which in turn leveraged their development based on these. They established a chain of credit sustained by the willingness of minor debtors, not by the large debtor: the United States. How convenient it is to be able to spread one’s own economic failures across the world along with an entire toxic burden.
Since credit is a real entity in the economy, its irrecoverable nature is damaging. It not only hurts the insolvent debtor, but also the purchaser and investor. The excuse is the structural capacity of the U.S., which is also valid—in spite of the crisis; the US economy grew 1.3% in 2008. The capacity of industry, technology, consumption, quality, competitiveness and creativity within that nation cannot be denied.
The introduction of the euro as the official currency of the European Union in 1999 has also influenced the dollar’s value. It promised a huge migration to the nascent currency, which was economically appealing because it offered twice the interest paid by the dollar (2 percent). That migration hurt the volume of American money supply and created inflation. It was controlled by an upsurge in its rampant fiscal deficit. Furthermore, the United States, in keeping with its preemptive war policy, launched wars in Afghanistan and Iraq. These decisions were made were at expense of the rest of the world.
But I believe that one must react when confronted by the vast economic problems generated by currency. The safe and wise decision is to return to the gold standard. The revaluation or devaluation to the dollar is dependent on the price fluctuation in the international market. This important metal historically performs positively; like oil, its exploitation is finite.
China has accumulated 600 tons of gold, which is the largest reserve in the world, ensuring its economic future.
The latest discovery in our country is the La Colosa mine with an estimated 12.9 million ounces. When added to the present rate of extraction, it would ensure a revaluation of between 0.3 and 0.5 percent annually against the dollar. This would be of great benefit to the development of our country and provide a greater capacity for financial, industrial, and technological self-determination, without being subject to the inconsistency of the dollar.
Gold and the dollar vary in opposite directions. Our country has only 6.84 million tons of gold in international reserves, which is nothing when compared to Argentina or Venezuela, which have 54.8 and 357 tons, respectively. The dollar spreads the economic losses of the US internationally and this, undoubtedly, is its main source of power.
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