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SPEAKING FREELY
The dollar: Time for
a change
by David Champeau
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click
here
if you are interested in
contributing.
The US dollar has
experienced many changes since its inception.
During the first session of the new Congress, on
April 2, 1792, the Act Establishing the US Mint
was passed, which defined the dollar. Section 9 of
the Act stated: "Dollars or Units - each to be of
the value of a Spanish milled dollar as the same
is now current, and to contain three hundred and
seventy-one grains and four-sixteenth parts of a
grain of pure, or four hundred and sixteen grains
of standard silver." This act also defined the
eagle, half eagle, quarter eagle, half dollar,
quarter dollar, dime, half dime and cent. The
ratio between the value of gold and silver was
defined as 15:1, which undervalued gold because
other countries, such as France, had established a
ratio of 15.5:1.
This is where our story
begins: the dollar equals a certain amount of
silver. During the early years of the 19th
century, Congress enacted various laws with regard
to legal tender. Most of these laws pertained to
accepting foreign gold and silver coins as legal
tender.
In June, 1834, 42 years after the
dollar was defined, the Congress changed the ratio
of gold to silver by reducing the amount of gold
in the Eagles, setting a new ratio of 15.98:1,
thus undervaluing gold. The reason for this was
that speculators were withdrawing gold from
circulation due to its undervaluation against
silver. President Andrew Jackson wanted large
denomination gold coins to take the place of bank
notes and bills issued by the United States Bank,
the second attempt at a central bank in America,
which he had just shut down. Even with this act of
Congress, the silver dollar still remained the
unit of account.
In 1849, Congress changed
the laws again and this time introduced the gold
dollar. "There shall be from time to time struck
and coined at the mint of the United States and
branches thereof - conformably in all respects to
law, and conformably in all respects to the
standard for gold coins now established by law -
coins of gold of the following denominations and
value; viz, double eagles, each to be of the value
of twenty dollars or units, and gold dollars, each
to be of the value of one dollar or unit." Thus,
the US then had two "dollars" in circulation, one
of gold, and one of silver.
On February
21, 1853, another act of Congress reduced the
weight of the fractional silver coins and also,
for the first time, limited the legal tender
quality of all silver coins. "The silver coins
issued in conformity with the above section shall
be legal tender in the payments of debts for all
sums not exceeding five dollars." At the time of
the passage of this act, the bullion in the silver
dollar was more valuable as a commodity than the
bullion in the gold dollar, consequently the
silver dollars were withdrawn from circulation and
sold as bullion in the European markets at a
profit. To remedy this, Congress reduced the
weight of the fractional silver coins, and limited
their legal tender debt-paying power, but left the
coinage of the silver dollar free and unlimited.
The next big change in the dollar occurred
on February 12, 1873, with the Coinage Act of 1873.
This act demonetized silver and, for the first
time, made the gold dollar the unit of account. An
amendment to this act, passed in 1874, created a
"trade" dollar. The 1874 law specified that the
new silver coins (dollar, half dollar, quarter
dollar and dime) were to have limited legal tender
in this country not exceeding five dollars, merely
to provide the fiction that silver coins were
circulating. In addition, depositors of bullion
had to pay a fee of 0.5% to have their silver made
into "trade dollars"; this was to discourage
dumping the coins in this country.
The
government made strenuous efforts to see to it
that these new coins were readily accepted in the
Far East, especially China. Japan and India were
secondary targets and strong attempts were made in
those two countries also. Diplomatic and consular
officials were given "marching orders" to do
everything in their power to put the "trade
dollar" into active Far Eastern use. Thus for the
second time in US history, we have two "dollars",
one of gold for domestic circulation and the other
of silver for external circulation.
Thus
far the major changes in the dollar have occurred
in 1792, 1834, 1849 and 1873. The intervals of
these changes follow a pattern of roughly 20-40
years apart, roughly the duration of one-two
generations. Another 20 years later, in 1890, we
saw the attempt to remonetize silver with the
Sherman Silver Purchase Act. This attempt failed
after less than three years, when the act was
repealed in 1893.
The next major change
came in 1913 with the creating of the Federal
Reserve System. Forty years after the
demonetization of silver, the next step was the
demonetization of gold, and the replacement of all
notes circulating in the US (such as National Bank
Notes, Silver Certificates, US Notes and Gold
Certificates) with Federal Reserve Notes.
One part of the Federal Reserve Act
pertaining to gold reads as such: "SEC. I6.
Federal reserve notes, to be issued at the
discretion of the Federal Reserve Board for the
purpose of making advances to Federal reserve
banks through the Federal reserve agents as
hereinafter set forth and for no other purpose,
are hereby authorized. The said notes shall be
obligations of the United States and shall be
receivable by all national and member banks and
Federal reserve banks and for all taxes, customs,
and other public dues. They shall be redeemed in
gold on demand at the Treasury Department of the
United States, in the city of Washington ... or in
gold or lawful money at any Federal reserve bank."
In other words, Federal Reserve Notes are
redeemable for gold.
Fast-forward 20 years
to 1933. The stock market crash leads to the Great
Depression. Newly elected president Franklin
Roosevelt declares a four-day bank holiday, issues
the Gold Confiscation Act and devalues the dollar
by 41% from $20.67 an ounce to $35 an ounce, thus
ending 96 years of the dollar's value being fixed
relative to gold. We now have another instance of
a "two-tiered" dollar: one dollar, not redeemable
for gold, for domestic use and another dollar,
still redeemable for gold, for foreign use.
Fast-forward 20 years again to the
mid-1950s. The world is rebuilding from World War
II, the US is the dominant country, and Bretton
Woods, the International Monetary Fund and World
Bank are all working as part of the international
financial system. Gradually the amount of US
dollars outside the United States increased
enormously, both as a result of the Marshall Plan
and because the US, which had become the main
consuming market of the world after peace was
reestablished in Europe, paid for imports in
dollars (sound familiar?). As a result, enormous
sums of US dollars came to be held by foreign
banks outside the United States. Some foreign
countries, including the Soviet Union, also had
deposits in US dollars in American banks, granted
by certificates.
During the Cold War
period, especially after the invasion of Hungary
in 1956, the Soviet Union feared that its deposits
in North American banks would be frozen as
retaliation. A British bank offered the Soviets
the possibility of receiving its US dollar
reserves as deposits outside the US. The British
bank would then deposit that money in the US
banks. So there would be no chance of confiscation
because it belonged to the British bank, and not
to the Soviets. This operation was considered the
first to create the so-called Eurodollars. Another
new type of dollar.
Fast-forward 20 years
to the early 1970s. The US has mounting trade
deficits and is bleeding gold. On August 15, 1971,
president Richard Nixon closed the "Gold Window",
removing the last formal link between gold and the
dollar. The result was inevitable. In February
1973, the world's currencies "floated". By the end
of 1974, gold had soared from $35 to $195 an
ounce. It was also in 1973 that the world saw
another new version of the dollar come to market,
the "petrodollar," defined as dollars accepted by
oil-producing countries and forcing the world on a
dollars-for-oil standard.
From 1873, we
have seen changes in the dollar in 1913, 1933,
1956 and 1971-1974, each change coming roughly 20
years apart. Silver and gold have been relegated
to the sidelines. Credit-based, floating
currencies make global exchange possible. We have
three "versions" of the dollar in the world: US
domestic dollars, eurodollars and petrodollars. We
could also say that the "Asian" or "Japan" dollar
was created during this time. The Japanese held
$12 billion in long-term US securities in 1978,
and now hold $700 billion.
The next change
if the cycle were to hold should have occurred in
the 1990s. With China's rise accelerating in the
1990s, China began to accumulate massive US dollar
reserves. China held no long-term US securities in
1989, $18 billion in 1994 and now holds over $200
billion, second only to Japan, according to the US
Treasury.
What's next?
With the
euro-zone countries holding over $200 billion in
US securities and Asia with $1 trillion or more,
the stage is now set for another change in the
dollar. If the 20/40-year cycle follows its past
pattern, the next change will occur sometime
around 2011-2016 and it will be a big one since it
will be on the 40-year cycle. We have already seen
three instances where the US has had a
"two-tiered" dollar, where, in two of those
instances, the domestic dollar was not the same as
the dollar outside the US.
The 2011-2016
time frame makes sense not just from the cycle
standpoint but also from a demographic standpoint.
By 2015, the baby boom generation will be well
into the belly of the retirement bell curve. We
know that the US government has something of the
order of $50 trillion in unfunded obligations in
order to make good on the promises made to the
baby boomers. This $50 trillion dwarfs what
foreigners are currently holding. If we spread
this over 20 years, the US will need roughly $2.5
trillion a year, the equivalent of this year's
federal budget. Something has to give.
Of
course the US is not alone in this predicament.
The Europeans and Japanese have the same problem
and the Chinese will have a similar problem a
little further down the road, (although the
European social welfare system is much larger and
more entrenched than the Asian one). Thus the US
will not be able to do whatever it is that it will
have to do in isolation. Globalization, combined
with the aging populations of the industrialized
world, will lead us into uncharted waters. All of
the industrialized world will have to experience
some type of drastic change.
How all of
this resolves itself I do not know. I do know that
it is criminal to do what we are doing to
successive generations by burdening them with this
massive debt (which of course, cannot be paid).
Thomas Jefferson, in a letter to James Madison,
stated: "Then I say, the earth belongs to each of
these generations during its course, fully, and in
its own right. The second generation receives it
clear of the debts of the first, the third of the
second, and so on. For if the first could charge
it with a debt, then the earth would belong to the
dead and not to the living generation. Then, no
generation can contract debts greater than may be
paid during the course of its own existence."
These words of wisdom have been forgotten
by many. The debts and unfunded promises are piled
sky high. This time a simple two-tiered dollar may
not solve the problem.
Change is in the
air. A big change.
David
Champeau runs a blog.
(Copyright 2005 David Champeau.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click
here
if you are interested in
contributing. |
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