The Dollar and the Gold Standard

The coming currency crisis has been upon world leaders minds, although we rarely hear about it in the popular press.  The Chinese have expressed concern on a number of occasions.  Nicolas Sarkozy, and George Soros have both called for ending the current US Dollar regime with a something different.  Mr. Soros has argued for a regime based upon "Special Drawing Rights" of a basket of currencies as determined by the IMF.  Soros is usually off his rocker when it comes to politics, but what he has proposed is actually similar to a currency regime that prreviously existed.  Don't forget, he made a billion dollars betting against the British Pound when they were fored to devalue in the 1990s.   

Just to give you a brief history of currency markets.  Currencies were originally based upon gold.  The USD was held to gold at $35 per ounce.  If one desired they could actually exchange their US dollars for gold.  However, since the United States was virtually the only country in  the world that would actually perform that exchange, just about all the countries in the world held their reserves in dollars so that they did not actually have to keep and store the gold themselves (See http://bit.ly/d8kTTb).
By 1968, the attempt to defend the dollar at a fixed peg of $35/ounce, the policy of the Eisenhower, Kennedy and Johnson administrations, had become increasingly untenable. Gold outflows from the U.S. accelerated, and despite gaining assurances from Germany and other nations to hold gold, the unbalanced fiscal spending of the Johnson administration had transformed the dollar shortage of the 1940s and 1950s into a dollar glut by the 1960s. In 1967, the IMF agreed in Rio de Janeiro to replace the tranche division set up in 1946. Special Drawing Rights were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF. Nations were required to accept holding Special Drawing Rights (SDRs) equal to three times their allotment, and interest would be charged, or credited, to each nation based on their SDR holding. The original interest rate was 1.5%.
 
This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime.
The IMF special drawing rights, would mimic the previous US Dollar regime based upon gold.  Except, instead of the owner having rights to gold it would have rights to a basket of currencies. Other's have argued to go back to the gold standard.  Mises argues: (See http://bit.ly/dA70ER).

But the most fanatical attacks against gold are made by those intent upon credit expansion. With them, credit expansion is the panacea for all economic ills. It could lower or even entirely abolish interest rates, raise wages and prices for the benefit of all except the parasitic capitalists and the exploiting employers, free the state from the necessity of balancing its budget — in short, make all decent people prosperous and happy. Only the gold standard, that devilish contrivance of the wicked and stupid "orthodox" economists, prevents mankind from attaining everlasting prosperity.
 
The struggle against gold, which is one of the main concerns of all contemporary governments, must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction that is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.

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