Do Not Mourn the Fiat Dollar's Demise as a Reserve Currency

 

The Promise and Betrayal of Bretton Woods

 

The US dollar has been the world’s premier reserve currency since the Bretton Woods Agreement of 1944. Until 1971 it was redeemable by foreign central banks in gold at $35 per ounce. As long as the US did not print more dollars than it could redeem in gold at that price, all was well. But, as Henry Hazlitt predicted, the US did print more dollars and was forced either to abandon gold redeemability or to devalue the dollar to gold at some higher exchange rate. In 1971 President Nixon chose to abandon gold redeemability. This nefarious act opened the floodgates to US spending.

 

The Destructive Siren Song of a Pure Fiat Dollar

 

Despite the fact that it could not be redeemed for gold, the dollar continued to be used as a reserve currency by most of the world. American politicians could not have been happier. The stockpiling of dollars in foreign central banks dampened higher prices in the US and allowed politicians to spend on war and welfare. There seemed no need for spending discipline; in fact the Keynesian economists in government, the financial press, and academia place spending as more important than savings. Spending was supposed to stimulate the economy. Therefore savings was bad; i.e., the so-called paradox of thrift.

 

But the US dollar’s end as the world’s premier reserve currency is nigh. Printing money in unbelievable amounts has led to the dollar’s loss of purchasing power by over 98% to gold ($35/$2,000) Weaponization of the dollar in international trade has accelerated that process. Foreign owned dollar accounts in American banks have been frozen or confiscated, plus the US has cut off some foreign governments, such as Russia and Iran, from the international financial messaging system known as SWIFT. Led by Russia, the BRICS+ nations will abandon the dollar for international trade settlement and reintroduce gold in some form. No nation has a legal or practical monopoly on gold. Furthermore, gold cannot be debased--it has no counterparty. Therefore, we should expect the entire world to embrace gold for international trade settlement in the coming years.

 

Americans should welcome the end of the fiat dollar. The fiat dollar has been a tool for government to rob not only the rest of the world but the American people, too. Monetary debasement destroys capital. We see irrefutable evidence of this in the fact that America spends as much on defense as the next  ten nations combined. Defense spending is non-productive. It may be necessary, of course, but excessive defense spending represents real resources withheld from meeting the needs of the American people. American industry has been starved of the capital it needs. The inevitable rise in consumer prices represents a real transfer of wealth to the early receivers of the newly printed dollars from the rest of society, especially retirees attempting to live on a lifetime of savings. Their savings diminishs in purchasing power every day.

 

Fiat Money Corrupts Society

 

But there is more, much more. Fiat money produced at the click of a computer at the Fed corrupts the people. Rather than becoming self-reliant, the people become dependent upon government to provide them with the basics of modern life—schooling, healthcare, employment, housing, you-name-it. Why prepare oneself for a lifetime of toil when the government has unlimited money to take care of your every need? This is a prescription not only for class warfare and social unrest but for preventing the nation from meeting its productive potential due to the lack of production from millions who are perfectly capable of contributing something to society. I daresay that in addition to government the people themselves rationalize their dependency as merely taking one of the many “entitlements” due to them as being fortunate enough to have been born into a fairly prosperous country. But whence comes this so-called entitlement? Who provides it? Not government, although government may be the legal transfer agent. Entitlements come from the toil of one’s fellow citizens. It can come from nowhere else.

 

The Nations of the World Are Moving On, With or Without the US

 

Led by China and later by Russia, some nations of the world, not wholly within the US orbit, have been building the necessary infrastructure and rules for conflict resolution and increasing trade and investment. Countries representing the vast majority of the world’s population, and also most of the world’s proven commodities, are intent upon industrializing as did the West. The basis for world economic development is sound money, which means gold. Only sound money can provide the irreplaceable information about the true costs and benefits of economic development. Only sound money can reassure investors--whether they are individuals, corporations, or governments—that their investments are secure and that payments will be made in non-depreciating money. This is only fair, and the US and its allies should join this project rather than ignore or fight it.

 

 

Sound Money Is Required for Real Budget Discipline

 

Sound Money Is Required for Real Budget Discipline

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TAGS Big GovernmentThe FedInflationMoney and BanksPolitics

• LEE ESTO EN ESPAÑOL

06/15/2023Patrick Barron

Listen to the Audio Mises Wire version of this article.

News here in the USA has been full of the latest farce known as raising or not raising the debt ceiling. After the usual dog-and-pony show, a budget deal was reached. But was it progress? It was a foregone conclusion that the debt ceiling would be raised, yet again, for the simple mathematical reason that unless the budget is cut, via spending cuts or increases in taxes, it can do nothing else.

With the budget deficit projected to be (hold on to your hat!) $1.5 TRILLION, that is a political impossibility. Notice that I used the adjective “political.” Of course, technically it isn’t impossible to balance the budget or even run a surplus. But under the current monetary regime of fiat money that can be produced in any amount at the click of a computer at the Fed, there is no support either in Congress or among the electorate to do so.

All of us are corrupted collectively, as described by German economist Thorsten Polleit. Since the sky will not fall, yet, by printing more fiat money, no one can be expected to support real budget cuts—not the military, retirees, Medicare and Medicaid recipients . . . the list goes on and on. The Fed will continue to print money to support the rising government debt, in nominal terms only, until the dollar’s purchasing power is destroyed.

The only way to prevent this catastrophe is to return to sound money; i.e., linking the money stock to a commodity, almost certainly gold. By “linking” I mean that what the people call “money,” whether in the form of paper certificates, bank accounts, or some other form such as digital currency, is backed 100 percent by the commodity. The commodity is money. Nothing else. Certificates, bank accounts, or other forms are merely convenient ways to transfer ownership of claims upon the money stock.

Yes, this is the only way. Forget about electing or appointing the “right” people to Congress or the Fed. As long as any person or entity CAN print fiat money, it WILL print fiat money. It is illogical to support a monetary regime in which printing fiat money is permissible and expect that anyone exists who will refrain from doing so. Therefore, turn off your TV. Stop reading the business press. The US federal debt will grow and grow, and nothing can stop it under the current monetary regime.

The Return of Gold as Money

So, is that it? We are doomed? NO! Gold will return! Why? For the simple and rational reason that gold and only gold works. For five thousand years gold was money and money was gold. Gold allows complete strangers to engage in productive exchange. Not only complete strangers but even enemies can engage in productive exchange. You don’t like the Russians? OK, but you don’t have to like them in order to buy their natural gas. Cooperative exchange means, per se, that both parties expect to benefit.

For all I know my local hardware store owner may be an Atlanta Braves fan, about as low as it gets for a Philadelphia Phillies fan like me. Nevertheless, I appreciate the convenience and quality of his store’s products and services, and I’m sure he appreciates my patronage. This is not a frivolous matter. Gold allows everyone to benefit from a worldwide division of labor that requires no vetting of personal or political views or affiliations. In other words, gold leads us to a world of peace and prosperity.

The “East” Will Lead the Way, and Eventually the “West” Will Follow

The era of fiat money and dollar hegemony is coming to an end. Russia, China, India, the Arab nations, South Africa, Brazil, and others—let us call them the “East”—soon will settle their international trade in gold. It will work. Then the Western fiat money nations, led by the United States, will watch as, one by one, former allies start jumping ship. This does not mean that they are willing to be dominated by Russia or China, for example, only that real prosperity is dependent upon honest money; i.e., gold. The dollar will be thrown on the ash heap of history just like the French assignat, the Confederate dollar, the German papiermark, and more recently the Zimbabwean dollar. Of course, real statesmen, especially American, would understand this and start preparing their nations for this immense change in which military power is irrelevant.

Time for Humility

It never hurts to remind ourselves that the world is a very big place and America is just one small part of it. We must learn to be good citizens of the world, honest in our commercial affairs, friendly and respectful toward all, and meddle in the internal affairs of no one. For a nation that has arrogantly assumed that it is special, this will be a very hard pill to swallow. American military power and the dollar as the world’s premier reserve currency created a hubris that is evident in many areas.

Preposterously we claim the power and authority to change the weather and the earth’s temperature, to control the health outcomes for billions of people through international vaccine mandates, the ability and maybe authority to change a person’s biological sex . . . the list goes on and on. It is time for a return to humility, honesty, and above all freedom of the individual to live his life as he, and only he, sees fit.