We continue our discussion on the US Dollar’s future as the reserve currency. On this episode we mention world’s previous reserve currencies, how they started and ended. We then once again talk about the decision to stop the US Dollar being backed by the gold.
Good Morning, I’m Austerity Jones and I am back with C Thomas Printer for part two of his discussion: gold to be a reserve currency again. C Thomas, you left us on a ominous note last week mentioning the US military, where are you going with that?
C Thomas: Good morning Austerity. You have likely heard the phrase “the sun never sets on the British Empire.” I suppose that now applies to the US military and their world policing patrols ensuring the safe passage of nautical cargo. The US dollar became the reserve currency in 1920 but it was only during WWII that the rest of the world saw that the US could defend that via military, industrial, or nuclear capacity.
The trail of reserve currencies used for global trade begins with the Greek Drachma in ancient times but the first modern currencies to be widely accepted were the Venetian ducat and the Florentine florin, both gold coin sources of exchange used in European-Arabic trade. Since then you can watch the rise and fall of nations as the privilege passed from Portugal to Spain to the Netherlands to France to the UK and finally to the US. Often they were based on gold or if not silver until the US went off the gold standard and left us with a fully fiat system of money. These periods usually last about 90 years on average and the US has had the privilege for just over 100 years and counting.
The key to being a reserve currency is to be productive. The Portuguese used their navigation technology to harness the power of sea trade with their silver real being the dominant currency until Spain conquered them. Spain had a nice run until their silver real began to be debased by using less valuable metals and diluting its value. This didn’t last for long as the Dutch would gain independence from Spain and their pure silver guilder became the world’s leading currency as the Dutch East Indian Company developed world wide trade with the guilder being used to transact as much as 50% of European business. Whereas Portugal and Spain relied primarily on trade and the acquisition of raw materials as in Spanish silver from the Americas, the Dutch would build a foundation of banking with the Bank of Amsterdam that would set the standard for the future central banks as an overseer of exchange.
However, the costly Anglo-Dutch wars and currency debasement again would open the door for the wealthy French flourishing under the reign of Louis the XIV. Their Franc was originally silver, but was replaced by paper currency: the Assignat, to allow greater spending during the American Revolution. But this excess money printing led to the French Revolution and the cutting of the heads of the royals. A new currency emerged again: a gold coin with uniform weight. This money was successful even though the French would soon not be.
The French time at the top ended at Waterloo with Napoleon’s defeat and it was the British that would assume the mantle of world superpower. It was the industrial revolution, ensuing productivity, and naval prowess that allowed Britain to flourish in the 1800s. They took the learnings of the Bank of Amsterdam to properly set up a system of banking that would ensure fair transactions and used the French model of uniform coinage to create the pound sterling. The pound originally referred to a pound of silver, but the Bank of England moved to gold coins and then to bank notes that were 100% redeemable in gold. It allowed for easier transacting and transport of money and allowed trade to flourish world-wide. However, to fund World War I, the gold standard was suspended, the currency was debased and the country, deeply in debt after the war, lost the privilege to the US. The US has enjoyed reserve currency status by being the best example of these previous systems. We have natural resource advantages being home to oil and gas allowing us energy independence unlike modern day China. We developed a massive industrial complex allowing for production capacity that dwarfed the world after World War II when we helped rebuild the world. Our banking system built on our own gold standard, positive foreign exchange surplus, and strong private credit markets allowed us to build on what the Bank of Amsterdam and the Bank of England had shown to be an advantage. By defeating the Japanese and helping to defeat the Germans simultaneously the US had proven itself a worthy superpower. We had unique advantages as we were a melting pot of immigrants, we had two large oceans protecting our borders making invasion unlikely, and we had a system of government that wasn’t yet repressive.
Now, if there was anything to learn from the rise and fall of these countries it was that being wealthy was a prerequisite to having the world’s reserve currency, but maintaining that privilege would require not debasing the currency. That is when the people lose purchasing power which is all that really matters. The French overprinted their Assignats that caused a social revolution (remember Marie Antionette losing her mind along with the rest of her head). The Dutch and the English avoided revolutions but their overprinting ultimately caused the inflation that doomed their currencies. Going off the gold standard was the prerequisite to currency debasement either the adding of metals to the Spanish Real or the pound sterling losing its convertibility to gold.
And, just like our predecessors of reserve currencies, there came a period where the US started overspending. It overspent on the domestic programs of JFK and LBJ in the 60s while financing a war in Vietnam. America also began running a balance of trade deficits causing other countries to prefer to settle in gold, most loudly Charles De Gaulle of France (yes of the Paris Airport fame). In a February 12, 1965 Time magazine article, De Gaulle’s “Golden Plan” was said to be a return to the gold standard as he called for other nations to cash in their dollars for gold. He said that America should not have “this signal privilege, this signal advantage.” He was referring to the US being able to pay its foreign debts in dollars instead of gold, expand their influence militarily and economically using the dollar but by all accounts should be worth less and less. He called for redeeming gold to reign in US strength world wide. In that same article, Yale’s Robert Triffin (remember the Triffin’s dilemma?) said that if gold was to be repriced it would likely go up in value 2-3 times in value helping gold producers like South Africa and Russia and hurting US allies that held US dollars as reserves like Germany, Japan, and Canada. De Gaulle even went so far as to suggest a new gold backed reserve currency called the cru- collective reserve unit (Now where have we heard that before? ). But even De Gaulle knew that no one could stand up to the US militarily except for the USSR which was not an ally of anyone in the west. So De Gaulle was economically successful, as other countries like Spain joined him in asking for gold, but a worldwide reserve currency shift was not an advantage the United States was going to relinquish.
As the gold drained out of America as foreign countries demanded gold for their dollars, the US was soon forced to make a change, however. This led to President Nixon having a 3 day meeting in Camp David in August of 1971.
Austerity: Excuse me C Thomas, Camp David? What’s this?
C Thomas: This is the location of a presidential retreat, basically a getaway property in Maryland that is highly secure.
Austerity: Okay, and who was in this meeting?
C Thomas: Present at that meeting was John Connally who was previously the governor of Texas. You might remember him from riding in the limousine when JFK was shot and killed. John was seriously wounded in the shooting but recovered and despite being a Democrat, was chosen by Nixon to be the Treasury Secretary. Since Connally was a politician he relied heavily on his Treasury under secretary who had an intimate knowledge of the workings of the financial markets. That fella’s name was Paul Volcker, yes the guy that ran the Fed a decade later and stamped out inflation. Also in attendance was George Schultz from the Office of Management and Budget, who had been on Eisenhower’s Council of Economic Advisers, dean of business at the University of Chicago, the future secretary of Treasury, replacing Connally, and ultimately secretary of state under Ronald Reagan. This was a meeting of true heavyweights and the decision to go off the gold standard was not a decision taken lightly.
That Sunday night Nixon went on television and interrupted Bonanza and told the world that the gold window was closed. No longer was the US dollar backed by gold. This would usually be the nail in the coffin for a reserve currency so Nixon sent out Paul Volcker to make the peace with America’s trading partners insisting that the US had no choice.
One heavyweight that was missing in that meeting was Henry Kissinger, one of Nixon’s most trusted advisers. He was at the time negotiating with the North Vietnamese in Paris. Later, Kissinger and Nixon would find a way to shift America from one standard of the past, gold, to the new standard of the future, oil. The birth of the Petrodollar was their plan to lengthen and secure America’s reign at the top.
Sincerely Yours,
C Thomas Printer
This week’s financial tip
Continue your savings after last week’s withdrawal. Did you check the price of silver and gold this week? With Black Friday this week and Christmas coming up I want you to bargain shop. There are deals everywhere and the effort that you spend in finding a better deal can result in real money saved for you and your family whether it is for food like turkeys or hams or gifts that you will give. Put in the work and reap the savings, don’t be a lazy shopper if you must be a shopper at all.
On this date in history
98 years ago to be exact, Macy’s Thanksgiving Day Parade was held for the first time in New York City, and the tradition of watching huge balloons on Thanksgiving morning was born.
Also born on this date
Anders Celsius, who despite being unaccepted in the US, has seen his centigrade scale of temperature become the world’s standard and ensuring that his contributions to society will be remembered forever. We should all be so fortunate.