Great Depression Online Archive Issue:

The Post Dollar Reserve Standard Era

Great Depression Online
Long Beach, CA
October 28, 2008

Inside This Issue You Will Discover…

*** The Latest Acronym
*** The Lessons of History
*** The Post Dollar Reserve Standard Era
*** And More

The Latest Acronym

The latest acronym to fix the financial system was put to use yesterday.  Specifically, the Federal Reserve began buying commercial paper through its Commercial Paper Funding Facility (CPFF).

“The Federal Reserve started buying so-called commercial paper on Monday to jumpstart a critical but faltering lending market used by banks and big businesses,” reported David Goldman for CNNMoney.com.

“The program, known as the Commercial Paper Funding Facility (CPFF), will continue through the end of April 2009.

“The central bank will charge a floating interest rate that will begin at 1.88% for unsecured debt and 3.88% for asset-backed commercial paper.”  

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~~~~~~~~~~~~~~~~~~~~~~~~~

What to make of this latest plan, we don’t know.  But drawing from the lessons of history, we could be in for more than just a credit crisis.  In fact, the fishy scent of the CPFF – and the other new government schemes, like the MMIFF, TAF, and the TARP – may be signaling not only a credit crisis, but a currency crisis to boot.

The Lessons of History

‘“I haven't forgotten history,’ says Gert Heinz, a tax adviser in Munich,” and reported by Katrin Bennhold for the International Herald Tribune.  “‘If you depend on paper money you can lose everything.  We’ve learned that the hard way after two world wars.’

“So when Chancellor Angela Merkel went on television recently to tell Germans that their bank accounts were safe, Heinz, who at 68 still remembers the rows of canned food that his mother hoarded in the attic, decided he would rather be safe than sorry.

“He converted another chunk of his savings into gold and stocked up on a six-month supply of rice, sugar, flour and a special brand of milk powder that lasts for half a century.”

For those who aren’t familiar with history – or who haven’t lived through a truly dreadful economic crisis – the actions of Heinz seem extreme and excessive.  Yet, they’re precisely the prudent thing to do.

“Indeed, his [Heinz] reaction reflects the history of a Continent that has weathered wars, revolutions and financial crises over the centuries, burnishing national convictions that are very different from those in the United States.

“He still remembers the stories his grandfather told of a suitcase full of bank notes buying no more than a loaf of bread during hyperinflation in 1923 Germany.  He also remembers the currency changes of 1948 that again wiped out savings.”

Here in the United States, it’s very possible that we could muddle through this economic crisis – like we always have – then return to business as usual…and higher living standards.  Or we could be in for some burnishing history of our own.

With the Federal Reserve flooding the financial system with unprecedented amounts of “liquidity” – more than $600 billion in the month of September alone – the current reflation effort could quickly and violently morph into hyperinflation.  And calls for a global financial overhaul – including currency changes – are coming to pass.

The Post Dollar Reserve Standard Era

In fact, after much urging from Europe, particularly French President Nicolas Sarkozy, a Group of 20 industrialized and developing nations will be hosted by President George W. Bush on November 15th.  Touted as Bretton Woods II, Asian and European leaders expect the summit to initiate an overhaul of World War II-era banking rules.

If you don’t remember, the Bretton Woods system is what evolved into the dollar reserve standard – the system that’s given the United States such a notable financial advantage over other countries.  As stated in the Direct Expressions White Paper “Why Gold is True and Honest Money”...

“…following World War II the United States had the greatest market share of the world economy and world power.  And, because of this, they were able to establish the post war monetary system of the western world on their terms.  The Bretton Woods system of 1944, created a pseudo gold standard where the dollar was backed by gold, at $35 per ounce, and member countries pegged their currencies to the dollar.

“Nonetheless, the United States progressively increased its money supply in the years following the Bretton Woods system.  And while member countries were allowed to redeem the dollars they acquired through trade for gold bullion by the United States, it was unwelcomed by the dominant world power.  Rather, the United States persuaded these member countries to inflate their money supplies to maintain their respectively pegged values.

“By the late 1960’s, with the seeds of the Great Society and Vietnam War spending sown, expanding world money supplies bloomed wild price inflation.  And then France, to the aversion of the United States, no longer played their part in the charade; rather they began redeeming their dollar reserves for gold.  In 1971, President Richard M. Nixon had seen enough of his country’s gold disappear.  Seizing the unique and exceptional opportunity he had, Nixon defaulted on the Bretton Woods system, and stiffed the world unconditionally.  Dollars were no longer redeemable for gold; the world’s currencies became wholly the fiat – paper money – of governments.”

Under this system the United States could expand its money supply at will and their trading partners had little recourse, other than to accept faith based dollars as trade for their exports.  At the same time, the dollar remained the measuring stick for commodities and all the currencies of the world.

What would happen to the dollar in a Bretton Woods II world?  In other words, what would the dollars in your bank account be worth in a post dollar reserve standard era?

We conjecture a guess that they wouldn’t command the respect in the global marketplace that they have for the past 60-years.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Who could have imagined Wall Street as we knew it ceasing to exist?  Who could have predicted that giants like Washington Mutual and AIG would disappear from the face of the Earth or need massive government bailouts just to keep their doors open?  In today’s investing world, unprecedented volatility is creating short term opportunities for making massive returns of up to 120.59% in only 26 days.  Learn more here:  Out of Crisis, Opportunity.

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