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

The Promise and Betrayal of Bretton Woods

US Dollar” by emilleilmansyah is marked with CC BY-SA 2.0.

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.

© Patrick Barron 2023 Website