The Dollar is becoming scarce because the whole world wants and lacks it. This problem — recurring since the 1960s — of scarcity in the American currency constitutes an incredible headache for countries indebted to the appreciating dollar because servicing the debts have become more expensive.

With the dollar reaching historic levels against a multitude of currencies like the Japanese Yen, the Pound Sterling and others from emerging countries, it is useful to look back at history to understand its effect on interest rates, public debt, loans to private individuals, which transacts using the dollar.

In this respect, the abrogation of the Bretton Woods system that was set up in 1944 was an eventual outcome as non-Americans were not agreeable to financing the lifestyle of American citizens. The abandonment thus paved the way for an aberrant asymmetry of how the financial system of the past worked. It costs barely a few cents for the US administration to print a US$100 note while all other countries had to “earn” their keep through means like exports and work.

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In retrospect, Charles De Gaulle’s foresight hastened the end of the Bretton Woods system in 1965 and exchanged all the dollars in France’s reserve for gold at the official US$35 per ounce rate. This “coup” indeed sounded the death knell for the Bretton Woods system because the French President feared that he would no longer be able to exchange the greenbacks for gold in the future. The move was proven the right one as the US reserves in this precious metal amounted to approximately US$13.3 billion while foreign central banks held US$14 billion!

In a turn of events, the US administration under President Nixon announced on 14 August 1971, the end of the 25-year-old international agreement and suspended gold convertibility at the agreed rate. This important aspect of the Bretton Woods system, which was unanimously adopted at the end of the Second World War, was swept away by the US and turned the world’s monetary system on its head. This revolutionary shift had severe consequences that were impossible to foresee such as the imposition of the floating exchange rates.

History makes it possible, once again, to understand the decision to abandon the system which certainly had universal impacts. The move was motivated by a consideration of its domestic market where it is suffering from high inflation, a nascent imbalance in its trade and a price and wage freeze. Unable to honour their commitment to pay gold at US$35 per ounce, the US therefore killed the system. Being freed from the constrained, it could grow unlimitedly through spending and going to debt because the Damocies’ sword of automatic convertibility was gone.

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The appetite for American consumption fully expressed itself in all its splendour and was even the moving force behind the world’s production and prosperity. From then on, trade and balance of payments deficits in the US no longer counted and its financial assets became the ultimate safe haven and sole provider of global liquidity. The fluctuation of the American currency on the foreign exchange markets was no longer conditioned by their internal economic and fundamental situation, but determined by the other countries’ confidence in the US.

This “Nixon shock” as it was described in 1971, made it possible for the US to become omnipotent thanks to this formidable lever that is the dollar. The surge of the American dollar in recent months has posed an existential problem for a host of countries whose public debt is denominated in it. The US and its currency are more popular than ever as a place of refuge in this current dynamic world but there is of course a price to be paid.

For more information about Michel Santi, visit his website: michelsanti.fr/en

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