$: the lord almighty, our master
15th August 1971: surely the most important date of the 20th century for economics and finance, the day that marked the decision of US President Nixon to unpeg the dollar from gold. Taken on a Sunday evening, before the opening of the markets, it introduced a new era: that of a currency underpinned solely by the credibility of the Treasury and therefore of the American government. The good old days of precious metals were over, with the gold standard having been established by Western nations about a century before this volte-face. From one day to the next, what had been measured against gold – that being everything! – was now measured against the US dollar. The Greenback was thus heralded as the new gold. In macroeconomic terms, the US federal deficit went from 2.1% of GDP to about 13.5% today.
Let’s stay on the “macro” element because this bomb that was dropped unilaterally (as per usual) by the Americans should be analysed within the context of a country that had been trying desperately to get out of the very unpopular Vietnam War. Fifteen or so of President Nixon’s closest advisors put intense pressure on him at his Camp David residence over that fateful weekend. His whole economic policy and programme were therefore written off because they had to – in the very words of the Secretary of the Treasury at the time, John Connally, speaking to journalists immediately after his president’s intervention – “screw the foreigners before they screw us”…before acknowledging that “no one knows what’s going to happen now”.
Combined with an immediate increase of 10% on tariffs, this decision dumbfounded the world – and mainly the allies and partners of the United States. Not only was the dollar no longer exchangeable with gold, but the USA had rekindled protectionism, even if the cynics of the time were making a claim that has indeed been confirmed by economic historians: this increase in US tariffs was in reality nothing but a means of putting pressure on Europe to make them accept this de facto devaluation of the dollar. A cascading wave of devaluations thus ensued for European currencies, including the Italian lira that made Nixon utter his infamous line “I don’t give a shit about the lira”. America’s currency was then again devalued in 1973 and, in parallel, nearly all important currencies were resigned to fluctuating, not without bringing about at one point a fall of 50% for the US dollar against the yen and the deutschemark.
It was, however, to stay at the heart of global finance – this dollar –, a real and unique cornerstone of the world’s financial architecture, despite the abandoning of the gold standard and going against all the prophecies that foretold (and still foretell today) the end of its reign. And, in fact, it saw such a rise in value at the start of the 1980s that it required the international Plaza Accord in September 1985 to stymie its take-off. It saw another jump at the end of the 1990s. Then, contrary to all predictions, the extremely troubled period of the Lehman bankruptcy and the subprime and credit crises of the years 2007-2009 actually reinforced its status. It is the star that all other world currencies (including the euro) orbit.
In fact, the dollar isn’t only the main currency of international trade. Nor is it only the number one currency of central bank reserves. Its presence and usage allow it to grease the cogs of all economies throughout the world: it is liquidity, in and of itself. Its power of attraction is so strong that the whole world, its governments, institutions, and families, all want to make their savings in dollars, which literally forces the US Federal Reserve to make more and more of it in order to satisfy global demand, or the global frenzy one could say. Everyone wants to get their hands on it: from the most traditional of central banks to terrorist factions who swear paradoxically to want to destroy the “Great Satan”. In short, America prints dollars – some for itself of course – but mainly for the rest of the world. In doing so, it sits comfortably and often abuses its hyper-dominant position by imposing sanctions on those who dare to defy it that are impossible to circumvent. But above all, it has built a thermonuclear financial bomb against which there is no recourse: extraterritoriality.
A threat is however visible over the horizon, or perhaps even closer: the digital revolution, that will – inevitably – (also) destabilise the dollar. The era of national currencies seems to be coming to an end, as they will be gradually supplanted by private currencies that will not be built on the credibility of the respective nation, but that will be generated by and built from databases and information.