Last Stop for the U.S. Dollar?

The current speculative attack, perhaps the worst in modern history, seems to “celebrate” in its own way the 40th anniversary of the end of the Bretton Woods system.

On Aug. 15, 1971, President Richard Nixon decided to break the dollar from the value of gold. The 1944 International Monetary Fund was established to re-stabilize the post-war economy and tied Western countries’ dollar reserves to gold. In theory, countries with dollar reserves could at any time request their conversion into gold.

In the ’60s, the U.S. dollar could no longer maintain the old rate of exchange with gold following a series of economic and monetary crises, of inflationary surges, and in particular of growing debts determined by the costs of the war in Vietnam. The U.S. administration had two options: devalue the dollar and start to produce again from scratch, or blow up the Bretton Woods system. It chose the second alternative.

“We must protect the dollar from the attacks of international money speculators,” said Nixon in his famous speech. He also announced the freezing of wages and prices and the introduction of duties on imports. The transition held a flexible monetary exchange rate system hostage to currency markets.

Aug. 15, 1971 was a watershed in the history of post-war economic policy. It also marked the beginning of deregulation. Many of today’s troubles were born there. The agreement reached by 44 states was destroyed with just one sign. And so the shared dream of building a more stable world and economic development was broken. A dream followed until then, despite the tensions of the Cold War. Since then, the United States has faced budget deficits and increased spending by printing more dollars. Dollars that have flooded the world. Bought first by Europe, then by oil producers and more recently by China.

In 1971, the U.S. public debt / GDP was 36.2 percent. Today it has exceeded 100 percent. For 40 years, America has been living beyond its means. The holes were covered with new debts that the Fed has always been keen to cash. It was a bad example for many other countries, including Italy. If the cat steals the cheese, imagine what mice can do! To manage a growing debt and a financial situation that becomes more and more ill, the U.S. has changed many other regulations. They also shot down the entire system of rules created by President Roosevelt to overcome the Great Depression and left a free hand to the wildest of finances.

You can’t say that Europe has behaved in a different, more correct way. So now the challenge to reorganize and harmonize the economic relations in a global and profoundly changed world is an imperative for all. Especially for the U.S. if they still want to have a strategic role. Finally, Europe seems to want to give itself a unified political and economic governance. Meanwhile, the BRIC countries and the African continent are knocking on the door of history.

To prevent the crisis from leading to a war between currencies, one of the pins of the new international agreement should be money. The role of the dollar as reserve and exchange currency has come to an end. A few days ago, the Chinese news agency Xinhua confirmed that “we need to study other options beside the dollar as reserve currency. The time of easy loans and debt is over for the United States.” The governor of the Central Bank of China, Zhou Xiachuan, warned that current economic policies of Washington weaken the confidence in treasury bonds, whose instability undermines the international financial system.

Remember that China has repeatedly re-evaluated the role of Special Drawing Rights, which now hold together the dollar, euro, yen and sterling. The message of the BRIC countries is clear: It is time to work to create a “stable basket” of currencies, also with reference to gold as an essential element to manage together and constructively the new season of development and global economic cooperation.

Moreover, in the 1971 speech Nixon himself spoke of the “urgently needed new international monetary system.” Perhaps more than anyone he was aware of the “gravity” of his decision.

But so far only a few seem to understand it. Indeed, many have underestimated it.