by Ron Paul, 09.03.12
We frequently hear the
financial press refer to the U.S. dollar as the “world’s reserve
currency,” implying that our dollar will always retain its value in an
ever shifting world economy. But this is a dangerous and mistaken
assumption.
Since
August 15, 1971, when President Nixon closed the gold window and
refused to pay out any of our remaining 280 million ounces of gold, the
U.S. dollar has operated as a pure fiat currency. This means the dollar
became an article of faith in the continued stability and might of the
U.S. government
In essence, we declared our insolvency in 1971.
Everyone recognized some other monetary system had to be devised in
order to bring stability to the markets.
In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.
In 2003, however, Iran began pricing its oil
exports in Euro for Asian and European buyers. The Iranian government
also opened an oil bourse
in 2008 on the island of Kish in the Persian Gulf for the express
purpose of trading oil in Euro and other currencies. In 2009 Iran
completely ceased any oil transactions in U.S. dollars. These actions
by the second largest OPEC oil producer pose a direct threat to the
continued status of our dollar as the world’s reserve currency, a threat
which partially explains our ongoing hostility toward Tehran.
While the erosion of our petrodollar agreement with
OPEC certainly threatens the dollar’s status in the Middle East, an
even larger threat resides in the Far East. Our greatest benefactors
for the last twenty years-- Asian central banks-- have lost their
appetite for holding U.S. dollars. China, Japan, and Asia in general
have been happy to hold U.S. debt instruments in recent decades, but
they will not prop up our spending habits forever.
Foreign central
banks understand that American leaders do not have the discipline to
maintain a stable currency.
If we act now to replace the fiat system with a
stable dollar backed by precious metals or commodities, the dollar can
regain its status as the safest store of value among all government
currencies. If not, the rest of the world will abandon the dollar as
the global reserve currency.
Both Congress and American consumers will then find
borrowing a dramatically more expensive proposition. Remember, our
entire consumption economy is based on the willingness of foreigners to
hold U.S. debt. We face a reordering of the entire world economy if the
federal government cannot print, borrow, and spend money at a rate that
satisfies its endless appetite for deficit spending.
Source: How Long Will the Dollar Remain the World's Reserve Currency?