Economic Issues In Retrospect and Prospect

TOWARDS A NEW FINANCIAL SYSTEM: END OF THE DOLLAR ERA AND RISE OF A MULTI-CURRENCY SYSTEM

PART II. CHAP 8.

I- Introduction: The Role and Importance of Reserve Currency 

There’s been a lot of discussion and assesment lately about the US Dollar losing its position as the world’s major reserve currency. A reserve currency is simply one that is both global and is accepted for trade worldwide. The dollar, the euro and the yen are the most accepted curren-cies with the dollar making up 64 percent of all foreign exchange reserves. Before looking at today’s discussions and assesments about the US dollar’s status as the global reserve currency, we will give some brief background information on historical development. 

The dollar has been a major reserve for over a century, but it became the dominant one after World War II. The United States was by far the most powerful nation after the war and held far more gold than anyone else as well. The US offered to exchange gold for dollars held by foreign countries and thus the gold standard became accepted worldwide.

In the late 1940s, the world was able to recover from the war thanks to a strong, stable dollar and the US prospered as well. But there was trouble, while other countries’ currency reserves were backed by gold, the US could print dollars backed by US Treasury Bonds. Between Presi-dent Johnson’s Vietnam War, his Great Society programs, and the rampant inflation they caused, the US was forced to print more dollars than could be backed by gold.

This caused a run on gold so extensive that in 1971, President Nixon felt obligated to stop backing dollar reserves with it. The dollar became a fiat currency, one backed by an arbitrary decree from the US and the floating exchange rates we have today were born. As a result, the price of gold tripled, the dollar started its decline to being worth one-sixth of what it was prior to decoupling, and inflation was running at 15 percent by the end of the decade.

Taking the dollar off of the gold standard along with the Arab Oil Embargo sent it plung-ing and the US needed something to replace it. US Secretary of State Henry Kissinger came 

up with a brilliant idea that became known as the Petrodollar. Saudi Arabia had become the world’s leading oil producer and exporter and the US was their biggest customer. The Saudis are 50 miles from Iran and 25 miles from Israel at the nearest points, and they don’t get along with either one. So, when Kissinger approached them about pricing all Saudi oil in US Dollars in exchange for protection from their hated neighbors, a deal was made. This agreement gave the US what the rest of the world called an “exorbitant privilege.”1 Every nation had to keep dollars in reserve to pay for oil. And the Saudi’s got the 13 other OPEC Nations to go along as well. This allowed the US to print as many dollars as she wants. Unfortunately, the result is that the US is over $20 trillion in debt and has over $100 trillion in unfunded liabilities. Ac-cording to Bertell (2018), Russia and China want to see an end to the Petrodollar system. The Russians are now the world’s largest oil producer and the Chinese are now the world’s largest oil importer and they have made an arrangement to price oil in Chinese Yuan eliminating the dollar altogether.2 

Countries hold the US dollar in reserves not in form of actual dollars, but the US Treasury Bonds. The Chinese are the world’s biggest Treasury Bond holders, but they’ve been net sell-ers for the last three years. And they’ve been buying gold with the proceeds. The Russians have also been buying gold in massive amounts. They take the Yuan the Chinese pay them for oil and then turn around and buy it on the Shanghai Exchange. What the Russians and Chinese both want is to create an alternate reserve currency to the US Dollar.

So, the Russians and Chinese are accumulating gold in immense quantities because they want to create a reserve backed by gold and not controlled by any country. Their answer is to use the International Monetary Fund’s Special Drawing Right (SDR). SDR’s, which started in 1969 and are already used for international transactions, would be backed by gold in the Sino-So-viet plan and used as a reserve currency. The question then becomes; “does a country want to hold SDR’s backed by gold, or dollars backed by a United States over $120 trillion in debt?”

If this were to happen, the dollar would collapse, global investors would rush to other curren-cies, gold or commodities. Interest rates would skyrocket, import prices and inflation would take off and we would probably see a depression. In fact, this is not only hypotetical assump-tion or wishfull thinking. This has been widely discussed among many peolpe such as academ-ics, politicans, financial market analysts and experts.