Back in 1971, the world was suffering from a vast overabundance of dollars. American foreign investment and foreign aid coupled with inflationary US government policies had flooded the world with greenbacks.
At the same time, the world – especially the United States – had too little gold. That was a problem because, unlike today, exchange rates didn’t float freely on markets. The United States was committed to redeeming dollars for gold at $35 an ounce. (Other nations’ currencies were pegged to the dollar at fixed rates.)
Foreigners were desperately trying to redeem dollars for gold or convert them to other currencies. With the US increasingly unable to meet its commitment, speculators anticipated devaluation.
In August of that year, President Richard Nixon addressed the dollar crisis by suspending the dollar’s convertibility into gold.
Despite a subsequent negotiated devaluation, speculators continued to attack the dollar. By 1973, the gold standard and fixed exchange rates were history.
It was during the 1971 devaluation negotiations that Nixon’s Treasury Secretary John Connally made a deliciously cynical comment that is oft-quoted even today. Connally told foreign counterparts that the dollar is “our currency but it’s your problem.”
In an odd way, the dollar was also my problem. In 1971, I was the 24-year-old minesweeping and supply officer on the USS Pivot. In light of the dollar crisis, the Nixon administration decided to give Pivot and several other US Navy minesweepers to Spain as payment for base rights there in lieu of dollars.
In preparation, the Pivot’s captain tasked me with teaching our crew Spanish – a language that I didn’t know and that the crew turned out to be uninterested in learning. I made a desperate call to the Pentagon and found someone there who helped me put together a long list of minesweeper terms with Spanish translations. The crews overcame the language barrier – sort of – by pointing at their mimeographed copies of the list.
These days a strong dollar is, in many ways, everybody’s problem. It’s especially problematic for foreign countries.
International Monetary Fund research last year concluded that for emerging-market economies, “a 10% U.S. dollar appreciation, linked to global financial market forces, decreases economic output by 1.9% after one year, and this drag lingers for two and a half years.” Worst hit are developing countries that have borrowed in dollars: Their local-currency principal and interest obligations balloon.
If one of the reasons for a stronger dollar is higher interest rates, then it’s also a potential problem for the Federal Reserve Board and Fed Chair Jerome Powell. President-elect Donald Trump wants low rates and a weak dollar – and more control over the Federal Reserve. But if – as many economists and investors predict – his policies prove inflationary, the Fed will be keeping rates high, which will tend to keep the dollar strong. Powell would find himself in Trump’s crosshairs again.
A stronger dollar would be no fun for US exporting industries, very much including agriculture. It’s hard enough to compete with Brazil and other ag-exporting countries without the dollar further dulling American competitiveness.
Yet stronger is where the dollar seems headed. The US Dollar Index has been in strong territory – above 100 – since April 2022 and has been rising since late September. The betting on Wall Street is that it will rise further in a Trump administration despite the president’s preferences.
By choosing hedge-fund manager Scott Bessent as treasury secretary, Trump has somewhat reassured markets: Upward pressure on long-term interest rates and the dollar has eased a bit in recent days. The prospect of gigantic tariffs has been one of the triggers for Wall Street’s inflation fears. Bessent has spoken of tariffs less gigantically, saying they can be a negotiating tool and calling for coordinating them with US allies.
Bessent also, however, has promised to maintain the dollar’s status as the world’s reserve currency. That’s a good thing for any treasury secretary to do; reserve-currency status affords the US many benefits. Keep in mind, though, that it is one of the reasons the dollar is so often strong. With so much of the world’s trade and investments denominated in dollars, there’s almost always demand for the almighty buck.
Connally was half-right; the dollar is indeed our currency. But it’s not just their problem. It’s almost everybody’s.
Former longtime Wall Street Journal Asia correspondent and editor Urban Lehner is editor emeritus of DTN/The Progressive Farmer.
This article, originally published on December 2 by the latter news organization and now republished by Asia Times with permission, is © Copyright 2024 DTN/The Progressive Farmer. All rights reserved. Follow Urban Lehner on X @urbanize
The US Fourth Reich wants everyone to bow before it; in the long run, it will dearly pay the price for this arrogance.
BRICS certainly aren’t bowing down to the dollar. The dollar bloc will be confined to mostly the West and its satellite states on the fringes of the world island. Triffin’s dilemma is something American policy-makers are paid to ignore. You cannot “have it all” in economics. The price of a strong dollar is de-industrialization but low inflation. The price of a lower dollar is higher inflation but industrialization. Dismantle the US empire and become a normal country again. Having a strong dollar and consistent trade deficits is not normal nor sustainable.
That’s right all those petty despots in the 3rd world are just lining up to buy houses in Peking and Moskau using monopoly money
NY and London market themselves as magnets for the world’s stolen booty via British controlled tax havens in the Caribbean. Not Moscow or Beijing
you are 100% right