The Dollar is becoming scarce, because the whole world wants and lacks it. This problem – recurring since the 1960s – of scarcity of the American currency constitutes an incredible headache for the countries indebted in this currency when the latter is brought to appreciate because their debts and their interests become more expensive according to the same proportion. We relive this type of squaring the circle for a few months because the dollar is now reaching historical levels of rise against a multitude of currencies and not the least like the Japanese Yen, the Pound Sterling and of course vis-à-vis against almost all currencies of emerging countries. History is, however, able to help our understanding of these mechanisms which embrace interest rates, public debt, loans to private individuals, all through the transmission belt of the dollar.
In this respect, the abrogation of the system set up in 1944 at Bretton Woods had the consequence (intentional or not on the part of the US authorities of the time?) that it was, in reality, non-Americans who financed the lifestyle of American citizens! The abandonment of Bretton Woods thus opened the way to an aberrant asymmetry of universal finance expressed in a simple but cruel principle: it costs barely a few cents for the US administration to print a $100 note when all other countries – without exception – must deserve this same $100, earn it either by their work, or by their exports, etc…, (Barry Eichengreen formula).
From a chronological point of view, it was Charles De Gaulle’s foresight that was to hasten the end of Bretton Woods when he decided, in 1965, to exchange all the dollars in reserve in France for gold at the official $35 an ounce rate. This coup indeed sounded the death knell for Bretton Woods because the French President feared (rightly) that he would no longer be able to exchange his greenbacks for gold in the near future. And for good reason, because US reserves in this precious metal amounted to approximately 13.3 billion while foreign central banks held…14 billion dollars in reserves!
The American volte-face, however, was spectacular and unilateral since – at the end of a historic stay at Camp David in the greatest secrecy around his main collaborators – Nixon announced on August 15, 1971 the rupture of these 25-year-old international agreements which mainly consisted in an automatic conversion of one ounce of gold against the fixed price of $35. This pillar of Bretton Woods, unanimously adopted at the time at the end of the Second World War, was swept away by the United States, which thus gave the world monetary system a revolutionary orientation with consequences that were just as heavy as they were impossible to foresee: namely the imposition of floating exchange rates.
History makes it possible, once again, to understand this decision which was certainly universal in scope, but which was in fact motivated by domestic American considerations because the country was suffering from high inflation, a nascent imbalance in its trade and a price and wage freeze. Unable to honor their commitments to pay $35 for every ounce of gold presented to them, the United States therefore killed this regime and was thus able to continue to spend, to go into debt, in short to grow, in an unlimited way because the Damocles’ sword of automatic convertibility was gone. The appetite for American consumption was therefore able to express itself in all its splendor and was even the locomotive of world production and prosperity. From then on, both trade and balance of payments deficits in the United States no longer counted, in a context where US financial assets became the ultimate safe heaven as well as the ultimate and major providers of global liquidity. The fluctuations of the American currency on the foreign exchange markets were therefore no longer conditioned by their internal economic and fundamental situation, but by the bulimia of all the other nations towards US assets and the returns they offered.
This “Nixon shock”, as it was described in 1971, therefore made it possible to establish American omnipotence thanks to this formidable lever that is their dollar, the surge of which in recent months has posed almost existential problems for a number of countries whose public debt is denominated in it. Never mind: the USA and its currency are today and more than ever a destination of refuge, even if this confidence still and always granted to this country so dynamic and enterprising is often dearly paid for.