The Dollar Is Our Currency, but It’s Your Problem – The American Hyperpower Is Back.
This quote from John Connally is more relevant than ever in 2022.
The American dollar is becoming scarce because the whole world wants and needs it. This problem - recurring since the 1960s - of the scarcity of the US currency is an incredible headache for countries indebted to this currency as soon as it appreciates, as their debts and interest expenses increase in the same proportion.
We have been reliving this type of squaring of the circle for a few months now, as the US dollar is now reaching historic highs against a multitude of currencies, not the least of which are the Japanese Yen, the British Pound, and, of course, against almost all the currencies of the emerging countries. History is however able to help us understand these mechanisms which embrace, in the same suffocating embrace, interest rates, public debt, and private credits, all through the transmission belt of the dollar.
In this respect, the abrogation of the system set up in 1944 at Bretton Woods had the consequence (intentional or not on the part of the American authorities of the time?) that it is, in reality, non-Americans who finance the lifestyle of American citizens!
The abandonment of Bretton Woods thus opened the way to an aberrant asymmetry of universal finance expressed in a simple but cruel principle: it costs the American administration only a few cents to print a 100-dollar bill when all the other countries - without exception - have to earn that same 100 dollars, either by their work or by their exports, etc. (Barry Eichengreen's formula)
General Charles De Gaulle's foresight
From the point of view of chronology, it was the farsightedness of Charles De Gaulle that was to accelerate the end of Bretton Woods when, in 1965, he decided to exchange all the dollars in reserve in France for gold at the official rate of $35 per ounce. This move effectively sounded the death knell of Bretton Woods, as the French President feared (and rightly so) that he would not be able to exchange his greenbacks for gold shortly.
And for good reason, because the American reserves in this precious metal amounted to about 13.3 billion while the foreign central banks held ... 14 billion dollars in reserves!
The American about-face was spectacular and unilateral, however, since - at the end of a historic stay at Camp David in the greatest secrecy around his principal collaborators - Nixon announced on August 15, 1971, the rupture of these 25-year-old international agreements which consisted of automatic conversion of an ounce of gold against the fixed price of 35 dollars.
This pillar of Bretton Woods, unanimously adopted at the end of the Second World War, was swept away by the United States, which thus gave the world monetary system a revolutionary direction with consequences that were as heavy as they were impossible to foresee: namely, the imposition of floating exchange rates.
The sword of Damocles of automatic convertibility
History allows us, once again, to understand this decision, which was certainly universal in scope but was motivated by internal American considerations, as the country was suffering from high inflation, an emerging imbalance in its balance of trade, and a freeze in prices and wages.
Unable to honor its commitment to pay $35 for every ounce of gold presented to it, the United States killed the regime and thus was able to continue spending, indebting itself, and growing, in an unlimited manner, because the sword of Damocles of automatic convertibility had disappeared.
The American appetite for consumption could then express itself in all its splendor and was even the locomotive of world production and prosperity. From then on, US trade and balance of payments deficits no longer mattered, in a context where US financial assets became the ultimate safe haven as well as the major providers of global liquidity.
The fluctuations of the US currency on the foreign exchange markets were no longer conditioned by its domestic economic situation, but by the bulimia of all other nations towards US assets and the returns they offered.
This “Nixon shock”, as it was called in 1971, allowed the Americans to establish their omnipotence thanks to the formidable leverage of their dollar, whose surge in recent months has caused quasi-existent problems for many countries whose public debt is denominated in it.
But the United States and its currency are now, more than ever, a safe haven, even if this confidence in this dynamic and enterprising country is often dearly paid for.
Some reading
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