Published on Global Research.ca, by Robert Bridge, June 30, 2009.
As global leaders struggle to rescue their nations from economic breakdown, the legitimacy of the dollar as the world’s reserve currency is under attack. Perhaps the problem lies with the Fed.
A large part of the “super” in the American superpower is based on the modern creed of liberal democracy, which serves as the motor of free-market capitalism. And the lubricant that keeps this colossal machine humming at full speed 24/7 is the US dollar. So before we risk any conjectures on the future prospects of America’s versatile banknote, which presently serves as the ‘world’s reserve currency,’ perhaps we should know more about who controls it.
In the Fed We Trust:
It usually comes as a shock to people – especially diehard Americans who place infinite trust in their sacred Constitution – when they discover that the US dollar is not a product of the American government. That’s right, fellow consumers, that crumpled wad of dollars in your pocket is the product of the U.S. Federal Reserve, and despite the very official title, is about as “federal” as Federal Express. The reality is that the U.S. Federal Reserve is a profit-making venture just like Wal-Mart, General Motors or McDonald’s.
Yet the US Constitution clearly states (Article 1, Section 8) that one of the many functions of government is to “coin money, regulate the value thereof.” Indeed, this task was deemed so important that the Founding Fathers mentioned it ahead of the obligation to “raise and support armies.” The Constitution says absolutely nothing about outside parties being responsible for printing money or regulating interest rates.
To quote Abraham Lincoln, the 16th president of the United States, “The privilege of creating and issuing money is… the supreme prerogative of government.”
Today, a handful of blue-blooded American politicians (a very rare breed these days, it seems) are beginning to echo ol’ Abe on the very same issue.
Ron Paul, the congressman from Texas who made an unsuccessful bid for the 2008 Republican Party presidential nomination, represents a growing number of Americans who want to see the Fed severely tamed, or put out of business altogether …
… End of the World’s Reserve Currency?
Since the start of the ongoing economic crisis, which caused a tremendous loss of confidence in the US dollar, there have been calls to rebuild the world’s financial architecture.
“We must rethink the financial system from scratch, as at Bretton Woods,” said French President Nicolas Sarkozy in September.
In July 1944, with World War II drawing to a close, 730 representatives from over 40 nations assembled at the Mount Washington Hotel in Bretton Woods, New Hampshire, US. Here, the delegates agreed on financial legislation – including the creation of the International Monetary Fund and World Bank – that would dictate economic policy in the West for the next half a century.
At the center of the agreement was the decision to make the US dollar the ‘world’s reserve currency,’ which was based on the gold standard. This system collapsed on August 15, 1971 when US President Richard Nixon “closed the gold window.” In other words, the dollar is no longer backed up by gold reserves, and to this day the US currency enjoys “dollar hegemony.” But for how long is another question.
In October, Prime Minister Vladimir Putin rattled financial markets when he hinted to his Chinese counterpart, Wen Jiabao, that the two countries “stop using US dollars in Russian-Chinese settlements.”
RT reported that Putin has also called for a complete overhaul of the world’s financial system to “end monopoly in world finance.”
China owns around $700 billion dollars of US debt in the form of Treasury Bonds, so it is understandable that the Chinese authorities are seriously considering what the heck to do with their investment at this point.
A US delegation that met with central bankers in China early this month provided some insight.
“It’s clear that China would like to diversify from its dollar investments,” said Republican Mark Kirk said at the Center for Strategic and International Studies, a Washington think tank.
Kirk said the Chinese leaders were critical in private of the US Federal Reserve’s policy of “quantitative easing” – which is in essence a flooding of the financial markets with cash. China views this as a reckless policy of printing cash out of thin air.
US officials estimate a deficit of $1.841 trillion for the 2009 budget.
Whatever US officials finally decide to do with the Federal Reserve, they may wish to reflect upon the British economist John Maynard Keynes’ suggestion for a world reserve currency.
Keynes suggested a ‘world currency unit,’ the bancor , which would regulate the international medium of exchange between nations. The famous supply-side economist envisioned the bancor being fixed upon the value of 30 commodities, with gold among them.
Now there’s an idea worth banking on. (full text).