Long-Term Economic Question 4
Updated 10/4/18 Please link to ,use as a textbook/supplement and
4. Exorbitant Dollar Privilege
Bretton Woods international monetary system added the U.S. dollars to Gold as the only world
trade currencies. The US had most of the world's gold and the added
dollars to world
currency would foster world trade. Participating countries hoped to stop
trade wars created by currency devaluations to increase exports and tariffs
to decrease imports. These government economic policies had slowed
1930's world economic recoveries. France believed this "America's exorbitant privilege"
resulted in an "asymmetric financial system" where foreigners "see
themselves supporting American living standards and subsidizing American
multinationals" with cheap credit. Economist
Barry Eichengreen said: "It costs only a few cents for the Bureau of
Engraving and Printing to produce a $100 bill, but other countries had to
pony up $100 of actual goods in order to obtain one".
Economists as always disagreed on the amount of this advantage by measuring the US
increased return on assets from a negative -1% to positive 7%.
|The US dollar was acceptable as a
substitute for gold because 1) US
war sales of foodstuffs and arms to the Axis grew the U.S. economy and moved most Axis gold to the U.S.
2) Gold was valued at $35 per ounce
and other currencies were a little undervalued in terms of gold. This
countries to sell natural resources and the few goods they produced to the
large U.S. market at low prices 3)
U.S. manufactures didn't mind because England, France, Germany and Japan
had lost much of their industrial base and produced little for export.
With little world competition U.S. exporters had
This power allowed U.S. exports to be priced at a relatively high price
resulting in high profits for US companies and high salaries for their
workers. 4) US loaned dollars to
exporting nations which were returned for high quality U.S. manufactured
goods and private and public financial assets.
5) Eventually the Marshal Plan
added even more dollars into the world currency system which also flowed back to the US.
And only the U.S. could print dollars.
This was acceptable as long as the US could convert
dollars to gold at $35 per ounce. This dollar exchange standard
worked for two decade.
The value of the convertible dollars became problematic during the 1960's because of these US deficit problems. 1) President Johnson's war on poverty: Head Start, Job Corps, Food stamps, Medicaid, Funded Education, Job training , Direct Food Assistance and Direct Medical Assistance for about four million poor people. 2) Vietnam War borrowing cost of $500 billion and 3) Countries were unhappy using the U.S. dollar. Why?
The US gold reserve of $30 billion were already backing much more in existing dollars. and the U.S. government refused to slow US economic activity to protect the dollar by raising taxes. International pressure on the dollar created by inflation caused massive gold outflows. This resulted in the Nixon Shock which severed the dollar link to gold and eventually creating a floating value for gold and a US fiat dollar system. A new negotiated gold value for the was needed.
Britain continued to prop up the pound against a market that clearly wished it to be lower. The currency simply did not warrant the value that Britain wished it to have, yet successive Chancellors* refused to allow it to float freely, fearing a sterling collapse. In 1976, the Chancellor of the Exchequer called in the IMF to help arrest persistent runs on sterling. On the advice of the IMF, the Chancellor imposed austerity measures, which reduced inflation and improved economic performance. The IMF’s loan was never fully drawn. The pound recovered – but only temporarily. Against a background of rising unemployment, the famous “Winter of Discontent” in 1978 sounded the death knell for the Labor government. In 1979, the Conservatives under Margaret Thatcher won the election. Many feel U.S. debt would cause the US dollar to have the same fate.
To cushion the shock on U.S. exporters, a 10% surtax on all imports was instituted. Japan soon increased the Yen's value against the dollar by 7% meaning the US dollar price of Japanese goods had increased by 17%. Others would be forced to follow. Eventually individual countries negotiated an increase of the dollar value of their currencies by 3% to 8% depending on their US negotiation power. The dollar price of gold was also increased by 9%. So US imports became more expensive by 12% to 17% and import prices decreased by the same amount. In 1973 the value of the weaker dollar was set at $42 and then allowed to float with other currencies. This meant Bretton Woods finally collapsed. Nixon was happy because printing dollars to pay for stuff was now allowed. No gold needed. Nixon also abolished the International Monetary Fund’s international capital constraints that had allowed Arab oil producers to recycle their petrodollars into New York banks. The global ‘Petrodollar’ was born and would grow as countries with their own currency still needed dollars to buy oil. This massive invasion of petro dollars into the US Banking System would end up in a world economy that really didn't need them. Deep-Do-Do would result. See Long Decline-the Great British pound, Plaza Accord, Smithsonian Agreement
overvalued dollar for U.S. were cheap energy, cheap imports including
foreign travel, low interest rates on all US debt including mortgages
and cheaper foreign expansion by US companies.
high valued dollar hurts
competitiveness of U.S. exporting companies, companies that compete with
imports and anyone working for these companies.
Economic Normality 1945-2015
page 2 and
World Changed and Good Jobs Disappeared
In 1971, Nixon suspended convertibility of the dollar to gold,
effectively ending the Bretton Woods system.
But even after this, Dollar Privilege Continued.