The decline of the dollar

by Jeff Mackler


The dollar has continued to decline against the euro and most other major world currencies. On Dec. 23, one euro sold for US$1.35, a drop of 7 percent since the Nov. 2 election and a drop of almost 35 percent over the past two years. 


A few years ago, by way of example, if an American wanted to buy one euro, the now common currency for 12 European nations representing 300 million people, they paid about one dollar. In fact, the value of the euro was set to equal the dollar's value when it was introduced in January 2002. Today, the same euro costs $1.35. To look at it another way, the dollar that used to buy one euro only buys 74 percent of one euro today.


Most experts expect the dollar's decline to continue. They predict or hope for a slow, even-measured decline—a scenario designed to avoid a wrenching

change in the world economic order. Others worry about a sudden collapse, with disastrous results indicative of the fundamental weakness in the U.S. economy.


The Bush administration has expressed little concern about the dollar's decline. While the president stated that he favors a "strong dollar," he was content to let "markets make the decision about its value." The same "What Me Worry?" Bush fired his first treasury secretary, Paul O'Neil, when the latter warned against Bush's massive budget deficits.


Before we proceed to explore the meaning of the dollar's decline, a bit of history may be helpful. For most of the 19th century the U.S. functioned on a

bi-metallic system of money—that is, gold and silver.


But the standard of value essentially was gold, as very little silver was traded.

Gold, like all other commodities, is the product of human labor power. Its great value as a medium of exchange has nothing to do with any of its intrinsic

qualities, beauty, conductivity, etc., and everything to do with the fact that its scarcity means that a large quantity of labor power is required to bring it

from its natural state, usually buried deep in the earth's crust in tiny flakes embedded in the mineral quartz, to gold bars.


By the same token, silver is less valuable because the same expenditure of labor power, given silver's greater abundance as well as other factors involved in its production, produces correspondingly greater amounts of silver. Thus, gold in its final or processed form, is essentially stored labor power.


A true gold standard was formalized in the U.S. in 1900 with the passage of the Gold Standard Act. In those days one could almost literally walk into a bank

and demand gold for dollars. That put the dollar on a firm basis indeed. This came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership, except for the purposes of jewelry.


The Bretton Woods Conference of 1944 created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35 per troy ounce. Formally called the United Nations Monetary and Financial Conference, this meeting of the world's great powers at Bretton Woods, New Hampshire, established the International Monetary Fund and the International Bank for Reconstruction and Development. While the conference agreements were signed in July 1944, they were implemented after the

end of World War II, in 1946.


Most important, the conference ended with an agreement to establish the U.S. dollar as the world's standard of value and therefore the world's currency. There was no requirement that the dollar be backed by gold or any other commodity.


Bretton Woods was a reflection of the postwar emergence of the U.S. as the world's greatest power.  At the level of economic might, there were no

competitors. Europe's economic infrastructure, major plants, industrial base, and all the rest stood in ruins. The British and French empires began to

unravel. Both had been compelled to borrow incredible sums from the U.S. and were major debtor nations. The USSR stood in ruins, although victorious against Hitler's armies. One-fifth of its population, or almost 27 million people, perished in the war. The axis powers, Germany and Italy, were similarly



The United States, on the other hand, was virtually untouched by war. Its factories were booming. It was the world's leading creditor. It debts to the world were zero. As a consequence, the Bretton Woods participants had little choice but to accede to a reality that could not be denied.


The U.S. dollar emerged victorious, backed by the industrial might and productive capacity of the United States, whose banks were brimming with gold and whose factories produced commodities for a world market with

virtually no competitors. The value of the dollar was indeed based on faith, but a faith backed by the reality of the world's most productive and unchallenged economy.


Nixon frees the dollar from gold


The Bretton Woods system ended on Aug. 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35 per troy ounce. At that point, for the first time in history, formal links between the major world currencies and real commodities were severed. The gold standard has not been used in any major economy since that time.


President Nixon's decision was far from frivolous. By 1971 a rebuilt and modernized Europe and Japan had emerged on the world scene with a growing capacity to challenge U.S. domination of world markets. Massive

spending to finance the Vietnam War, achieved by deficit spending at then unprecedented levels, not to mention the printing of paper money for which there were no commodities in circulation, undermined the dollar.


In 1971 the volume of currency in circulation in the U.S. was increased by 11 percent. In consequence, leading European banks began to redeem billions of

depreciating U.S. dollars for gold.


Nixon's decision ended this hemorrhaging. This move to free the dollar from gold, as well as his simultaneous imposition of a wage freeze and associated measures to buttress a faltering American capitalism, amounted to an admission that there had been a fundamental change in the world relationship of capitalist forces.


The U.S. had been compelled to compete at new levels in order to remain in the profit-seeking game.


Underlying this dilemma, similar but magnified many times over today, was a crisis of overproduction. The once again competitive world system began to produce a mass of commodities—as in the field of auto production—that saturated world markets. The new technologies introduced into the productive process, coupled with massive competition, reduced profit rates for all the players.


Today, no one has the slightest idea of the real worth of the U.S. dollar, which has been freed from any measure of real value for decades. As measured by its present exchange rate for gold the price is approximately $470 per troy ounce, a far cry from the pre-1971 world-established price of $35. The real

value of the dollar, however, can only measured by the confidence in it afforded by the major players in the world capitalist system. This confidence is rapidly



Today, the combined economic power of Europe and Japan exceed the United States in regard to many, if not most of the world's major economic indices, including the number of dominant banking institutions, the

number of powerful multi-national corporations, etc.


In short, the U.S. is no longer the world's economic top dog. In many areas, like steel and auto production, telecommunications, aircraft manufacture, and banking—to name a few—European capitalist firms and institutions equal or exceed their U.S. counterparts.


Europe, Japan—and increasingly, China—have emerged to challenge the U.S. in every arena of the world economy. From zero competition in 1945 to the beginnings of a real threat in 1971, to merciless competition that has reduced U.S. and world profit rates to dangerous levels, the world's leading

creditor is now the world's leading debtor.


The United States owes over $6 trillion to the world's banking institutions. U.S. government "borrowing" from the social security fund would increase the debt

another $2.1 trillion.


To buffer failing or flagging U.S. corporations and to stave off additional bankruptcies, the ruling rich have used their government's power to the max. Every mechanism available has been turned to rescuing a system that has no alternative but to lie, cheat, steal, impoverish the world, and make war to survive.


Examples include:


• Deficit spending: The U.S. registers year after year the largest budget deficits in world history. Roughly a half-trillion dollars is spend annually above and beyond the U.S. treasury's income. The deficit is paid for by loans to banks at exorbitant interest rates, many of which are inextricably tied to the corporate ruling class.


• Military spending: The government grants multi-billion-dollar contracts to leading U.S. corporations in the military-industrial complex. There are few, if any, competitors in this field. These near monopolies charge super-inflated prices for military hardware—from aircraft carriers to fighter jets. The law of value is virtually suspended, with prices being determined by corporate whim, with official government complicity.


The resulting superprofits are designed to offset the losses by the same corporations, whose profit rates in the competitive sphere are under constant attack. A good war or two, or three, once in a while, further helps to maintain the "demand" for new and updated weapons of mass destruction.


• Looting social services: The Clinton administration cut more social services than the combined presidencies of the three previous Republican administrations. These cuts had nothing to do with partisan politics and everything to do with corporate welfare—that is, funding the ruling elite's incapacity to profit as against its foreign competitors.


The cuts are continued by the Bush administration, whose attention has turned to deepened privatization efforts, from public education to social security. The

latter has already been looted to the tune of trillions of dollars.


• Tax cuts for the rich: President Clinton cut taxes for the ruling elite by $1.3 trillion. Bush added another $1.9 trillion. These gifts, again, were required to keep the slowly sinking U.S. corporate ship afloat.


• Tax evasion: Here again, the laws have been altered to essentially allow corporate America to escape taxation. Methods such as off-shoring corporate

headquarters and taking advantage of not-so-subtle changes in the tax codes allow many of the largest and most powerful to pay nothing.


These are but a few of the proofs that the post-World War II days of U.S. economic hegemony are over. The U.S. dollar is no longer the dominant world currency.


It is no longer backed by the power of an unchallenged economy. In fact, it is backed by the weakness of a system that increasingly fails to meet the

international standards of competition.


The world is in the midst of a mad race for profit and domination. To stay in the game, even huge corporations must strengthen their market positions by mergers and more mergers, takeovers, and buyouts. The consolidation of capital has proceeded at breakneck speed, as has the saturation of world markets.


On the other side of the Atlantic and the Pacific, the same consolidations are underway—in Europe, aided by the combined competitive power embodied in the European Union, and in Asia, by Japan and the emerging power of a Chinese capitalism that has reached the zenith in levels of super-exploitation.


Trade deficit balloons


The U.S. trade deficit is expected to break all records in 2004, the value of U.S. imports exceeding its exports by a startling $600 billion annually. The

Bush administration hopes to use the declining value of the dollar to turn this equation around. A cheap dollar makes the price of U.S. exports less costly

while the price of foreign products sold in the U.S. are more expensive.


U.S. corporations are pleased with the result since they benefit from not having to compete as much with often better quality and often cheaper foreign

products. But the cheap dollar and associated lower cost of U.S. products abroad has not significantly increased the magnitude of U.S. exports. Europeans and others have not jumped on the expected bandwagon to

swoop up reduced-price U.S.-manufactured products.


To date, the U.S. has financed the trade deficits by borrowing from abroad, mostly from Asia, whose nations hold huge stocks of dollars and are anxious to help maintain their value. But in the face of the ballooning federal budget deficit and trade deficit, foreign investors, including China and Japan, are

losing their appetite to buy into the flood of U.S. government bonds that have been floated to finance America's debts.


China, whose currency is pegged to the dollar, has sent signals that it is prepared to dump some of its huge stores of accumulated and depreciating U.S. dollars, a move that could trigger a more precipitous decline. Meanwhile, the U.S. expected to use cheap dollars to pay off some of its rising foreign

indebtedness—another signal to foreign competitors that all was not well in the land of the world's currency of record.


One year ago, in January 2004, when the picture was rosier, foreign investment in the U.S. was twice the amount of the U.S. trade deficit. But this figure has shrunk every month since. In October, inflows of foreign capital were lower than the monthly trade deficit. The message was clear; why invest in a U.S. economy that increasingly cannot pay its bills?


An early sign that the bulwark of world economy was under extreme stress came three years ago with the massive plunge of the U.S. stock market, with major indices like the NASDAQ losing 80 percent of value. In a few months, as foreign investors realized that many U.S. corporate profit rates had been falsified to inflate stock prices and therefore attract unwary speculators, foreign investment was dramatically withdrawn. The myth was shattered that greater profits could be made in the booming U.S. economy than in Europe, Japan, or elsewhere.


Some $6 trillion was lost as U.S. stock prices went south, more closely approximating the real value of U.S. corporations. The simultaneous bankruptcy of several major U.S. companies—Enron, WorldCom, etc.—added fuel to the fire. Pension funds evaporated, leaving millions bereft of the security they had planned on for a lifetime.


The world's bankers and corporate elite, as well as the U.S. capitalist class itself, fear a continued decline of the dollar, especially a sharp decline that

can only be taken as a fundamental weakness in the U.S. and world economic systems. Indeed, such a weakness is a reality, stemming from massive deficit

spending in virtually every nation.


As in the U.S., Europe's capitalist governments, at the service of their own ruling classes, have been compelled to impose similar draconian cuts in social

services and in working-class living standards to fund failing corporations in order to stay in the competitive race for survival.


The world capitalist order today is based more than at any time in history on a massive and growing debt or credit bubble. As this bubble inevitably expands,

especially in the case of the United States, the central player in the world economy, the potential for disaster increases. Former Federal Reserve Chair Paul Volcker puts the odds at 75 percent that a disaster will not be averted.


Foreign banks today hold $11 trillion in U.S. dollars. Should Bush's cheap dollar policy continue to be used to pay off America's debts, the dollar's safe-haven status may be abandoned, as nervous creditors reject holding a disintegrating or rapidly depreciating currency—not to mention being paid off with a paper money of dubious value.


"If the dollar falls by another 30% as some predict," says the authoritative London Economist," it would amount to the biggest default in history: not a

conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets." While The Economist is on the mark

regarding the consequence of a continued dollar decline, it is off the mark regarding the alternatives open to American capitalism.


The Economist commentary concludes: "Americans who favour a weak dollar should be careful what they wish for. Cutting the budget deficit looks cheap at the price." But as we have demonstrated, maintaining massive budget deficits is a requirement for the continued functioning of the U.S. capitalist system.

Spending money the country doesn't have is much preferable to letting the whole system go to hell in a hand basket—that is, refusing to protect America's corporations that would not otherwise survive.


The Economist arrived at an apt description of the U.S. crisis. They correctly assert that the Bretton Woods agreement essentially gave the U.S. the right to

write checks that no one cashed—to mount a level of debt that previously would have been impossible. But unlike 1944, when the strength of the U.S. economy was the guarantor that debts would be paid, today's check writing (that is, deficit spending in all its forms) is not backed by the uninterrupted profits that previously accrued to an unchallenged U.S. capitalism.


The U.S. ruling rich are faced with an insurmountable dilemma. Whichever way they turn, disaster is in the making. Tragically, the main victims will be U.S.

workers along with the poor and oppressed and their counterparts across the globe. But as the crisis deepens capitalism's irrational and destructive logic

will become clearer to millions and more, laying the basis for a revolutionary challenge to the system as a whole.


Capitalism will be confronted and replaced with a new social order, in which private property in the basic means of production—and production for profit

itself—will be replaced by a rationally planned, collectively owned, and democratically controlled economy based on the full satisfaction of human needs.


The alternative to capitalist barbarism, war, and catastrophe is socialism. There is no other.

*This article first appeared in the January 2005 issue of Socialist Action newspaper.

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