Toward the end of World War II, the world economic systems were nearly as battered as the countries in which the fighting took place.
National leaders recognized the need to establish a trading currency to facilitate the trade that was going to take place after the war to rebuild battered continents. In July 1944, world economic strategists assembled at Bretton Woods, N.H., to work out a system for a trading currency. This was called the Bretton Woods Agreement.
This agreement was struck to set up the International Monetary Fund to act as bankers to the countries in the agreement and deemed the U.S. dollar to be the trading currency for the whole world. The dollar was pegged to an ounce of gold, which at the time was statutorily set at $32 an ounce. The purpose of the IMF was to bridge any temporary imbalances of payments between the parties. This system worked pretty darned well and took us all the way to Aug. 15, 1971.
On that date, President Richard Nixon took the U.S. off the "gold standard" and the dollar was to float against all other currencies as it does today. Nixon's reasoning for the move was the U.S. didn't have enough gold reserves to pay for the Vietnam War and the country needed to reduce national obligations by devaluing the dollar.
You see, if you devalue your currency and all of your debt is delineated in dollars, you effectively pay the face amounts of your issued bonds with dollars of less worth. If you sold a 25-year bond, your currency to pay back the principal at the last payment is worth less due to inflation.
We have had some inflation since 1971 as is shown by the fact that $32 bought an ounce of gold in 1971 and that same ounce of yellow metal may be purchased for about $1,600 today. Measured this way, the dollar is worth about 2 percent of what it was in 1971.
The dollar is still the "reserve" currency for the world. Because of that, it lowers our costs of doing business by enabling U.S. employers to borrow more cheaply and to not have to pay for any currency transaction costs like you and I do when buying foreign currency when we travel abroad. I always feel like I've been ripped off after I see how much foreign cash I can buy at a trading window as opposed to the amounts quoted in financial sections of newspapers. The difference is in the transaction costs.
Suppose you are a big U.S. trading partner with a large amount of U.S. bonds like China. The Chinese last year proposed a new international trading currency made up of a "trading basket" of currencies designed to make the reserve currency more stable. The advantage is that if you are paying Chinese laborers in Yuan (the Chinese currency) which is stable and collecting future payments in dollars which are inflating, you are losing money. They went to an international meeting last year and the U.S. shot the idea down cold. I'm deducing from subsequent actions of the Chinese that they were displeased.
China started talking to the BRICS (Brazil, Russia, India, China, and South Africa) which are the fastest growing economies in the world - economies we as a nation would dearly love to do business with. Each of them is economically quite healthy.
Last week, according to Associated Press, the BRICS signed an agreement to trade with each other in their own currencies "thereby reducing dependence on the U.S. dollar and euro." Goodbye all the advantages we enjoyed being the reserve currency of the world.
If we are not the reserve currency, then we are economically in the same boat as the PIIGUS ( Portugal, Ireland, Italy, Greece, United States, Spain ). We can no longer manipulate our dollar like we could prior to last week.
Keep the people diverted with issues like gay marriage and gun control as the country goes into economic freefall. To talk about budgets and the economy is just too scary.