The 3 Biggest Problems Of The “Dollar Standard”

by Richard Duncan, Daily Reckoning

Then the Gods of the Market tumbled, and their smooth-tongued wizards Withdrew, And the hearts of the Meanest were humbled and began to believe It was true That All is not Gold that Glitters, and Two and Two make Four And the Gods of the Copybook Headings limped up to explain it once more.-Rudyard Kipling, 1919

 

When the Bretton Woods international monetary system broke down in 1973, the world’s financial officials were unable to agree on a new set of rules to regulate international trade and monetary relations. Instead, a new system began to emerge without formal agreement or sanction. It also remained nameless.

The current international monetary system which evolved out of the collapse of Bretton Woods will be referred to as the dollar standard – so named because U.S. dollars have become the world’s core reserve currency in place of gold, which had comprised the world’s reserve assets under the Bretton Woods system as well as under the classical gold standard of the 19th century.

The primary characteristic of the dollar standard is that it allowed the Unites States to finance extraordinarily large current account deficits by selling debt instruments to its trading partners instead of paying for its imports with gold, as would have been required under the Bretton Woods system or the gold standard.

In this manner, the dollar standard has ushered in the age of globalization by allowing the rest of the world to sell their products to the United States on credit. This arrangement has had the benefit of allowing much more rapid economic growth, particularly in large parts of the developing world, than could have occurred otherwise.

It also has put downward pressure on consumer prices and therefore interest rates in the United States, as cheap manufactured goods made with very low-cost labor were imported into the United States in rapidly increasing amounts.

However, it is now becoming increasingly apparent that the dollar standard has also resulted in a number of undesirable, and potentially disastrous, consequences.