Exorbitant Dollar Privilege

 

 
 

The 1944 Bretton Woods 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 currency would foster world trade. Participating countries hoped to stop trade wars created by currency devaluations and tariffs that had slow 1930's world economic recoveries.  France called this "America's exorbitant privilege"[2] as it 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".[2] Economists as always disagreed on 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 her economy and moved most Axis gold to the US  2) Gold was valued at $35 per ounce and other currencies were a little undervalued in terms of gold allowing countries could sell resources and the few goods they produced to the world's largest market at low prices 3) US manufactures didn't mind because England, France, Germany and Japan has had lost much of their industrial base and made little for export. With little world competition US exporters had Oligopoly power. This power allowed US 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 US manufactured goods. 5) Eventually the Marshal Plan added even more dollars into the system which also flowed back to the US. And only the US could print dollars. This was acceptable as long as the US could convert of dollars to gold at  $35 per ounce. This dollar exchange standard worked for two decade as interest earning easy to use convertible dollars were use for international commerce.
 
 
 
The value of the convertible dollars became problematic during the 1960's because of US deficit problems caused by 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) the Vietnam War borrowing cost of $500 billion. and countries were unhappy using the dollar. Why?

The US gold reserve of $30 billion were already backing existing dollars and the US government refused to slow US economic activity to protect the dollar  by raising taxes. International pressure on the dollar caused by inflation caused massive gold outflows forcing the Nixon Shock which severed the dollar link to gold and eventually creating a floating value for gold and the US fiat dollar. 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 Labour government. In 1979, the Conservatives under Margaret Thatcher won the election.  Many feel U.S debt to caused the US dollar to have the same fate.

To cushion the shock on US 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%. In 1973 the value of the weaker dollar was set at $42 and then allowed to float with other currencies. 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

 

  Advantages of overvalued dollar for US were cheap energy, cheap imports including foreign travel, low interest rates on all US debt including mortgages and cheaper foreign expansion by US companies. Disadvantage is high valued dollar hurts competitiveness of US exporting companies, companies that compete with imports and anyone working for these companies. Source See Economic Normality 1945-2015   page 2   and World Changed and Good Jobs Disappeared 
 
  What’s good for the global economy (and for many Americans) is bad for U.S. manufacturers and their workers as their products would suffer a permanent price disadvantage. For them, the global dollar is not a privilege. It’s a stubborn curse. Since 1976, the United States has not had one annual trade surplus. The New Normal of ever  increasing manufacturing wages was over and another New Normality had begun. It’s trade deficits were not the result of poor U.S. competitiveness. In reality, our deficits were required to supply the world with a currency for international trade and investment. The many advantages of being the world's currency would continue and  politicians began looking for solutions to problems caused workers by Free Trade. Source
 
 
 

Exorbitant Privileges Continues because the dollar has not faced any significant competition from  the  Japanese Yen, English Pound , Eurozone Euro, and Chinese Renminbi because of their weak economies and government in relation to US. The Special Drawing Rights (SDR) system of the International Monetary Fund has not gained traction. For know no alternatives exist. Some feel the Some  experts believe the current system favors the United States and is unsustainable and an alternative will emerge to correct imbalance existing since the 1971 Nixon shock. Source

 
  Readings

Advantages and disadvantages of exchange rate systems

Exorbitant Privilege: The Rise and Fall of the Dollar 85 min video by author Professor Barry Eichengreen

 

 

In 1971, Nixon suspended convertibility of the dollar to gold, effectively ending the Bretton Woods system. But even after this,