IVIV (8): Nixonizing U.S. Currency

[Joseph Tracy]

Again, just to pair the Liu article down to  some essential paragraphs

"Ever since 1971, when US president Richard Nixon took the dollar off  
the gold standard (at $35 per ounce) that had been agreed to at the  
Bretton Woods Conference at the end of World War II, the dollar has  
been a global monetary instrument that the United States, and only  
the United States, can produce by fiat. The dollar, now a fiat  
currency, is at a 16-year trade-weighted high despite record US  
current-account deficits and the status of the US as the leading  
debtor nation. The US national debt as of April 4 was $6.021 trillion  
against a gross domestic product (GDP) of $9 trillion.

World trade is now a game in which the US produces dollars and the  
rest of the world produces things that dollars can buy."     read  
more at http://www.henryckliu.com./page2.html


Thus dollar hegemony is objectionable not only because the dollar, as  
a fiat currency, usurps a role it does not deserve, but also because  
its effect on the world community is devoid of moral goodness,  
because it destroys the ability of sovereign governments beside the  
US to use sovereign credit to finance the development their domestic  
economies, and forces them to export to earn dollar reserves to  
maintain the exchange value of their own currencies.

A holder of fiat money is a holder of sovereign credit.  The holder  
of fiat money is not a creditor to the state, as some monetary  
economists mistakenly claim.  Fiat money only entitles its holder a  
replacement of the same money from government, nothing more. The  
dollar, being a Federal Reserve note, entitles the holder to exchange  
the note to another identical note at a Federal Reserve Bank, and  
nothing else. The holder of fiat money is acting as a state agent,  
with the full faith and credit of the state behind the instrument,  
which is good for paying taxes and is legal tender for all debt  
public and private.  Fiat money, like a passport, entitles the holder  
to the protection of the state in enforcing sovereign credit.  It is  
a certificate of state financial power inherent in sovereignty.


The Chartalist theory of money claims that government, by virtual of  
its power to levy taxes payable with government-designated legal  
tender, does not need external financing.  Accordingly, sovereign  
credit enables the government to finance a full-employment economy  
even in a regulated market economy. The logic of Chartalism reasons  
that an excessively low tax rate will result in a low demand for  
currency and that a chronic government fiscal surplus is economically  
counterproductive and unsustainable because it drains credit from the  
economy continuously. The colonial administration in British Africa  
used land taxes to induce the carefree natives to use its currency  
and engage in financial productivity.


The Mundell-Fleming thesis, for which Robert Mundell won the 1999  
Nobel Prize, states that in international finance, a government has  
the choice among (1) stable exchange rates, (2) international capital  
mobility and (3) domestic policy autonomy (full employment, interest  
rate policies, counter-cyclical fiscal spending, etc). With  
unregulated global financial markets, a government can have only two  
of the three options.

Through dollar hegemony, the United States is the only country that  
can defy the Mundell-Fleming thesis.  For more than a decade since  
the end of the Cold War, the US has kept the fiat dollar  
significantly above its real economic value, attracted capital  
account surpluses and exercised unilateral policy autonomy within a  
globalized financial system dictated by dollar hegemony. The reasons  
for this are complex but the single most important reason is that all  
major commodities, most notably oil, are denominated in dollars,  
mostly as an extension of superpower geopolitics. This fact is the  
anchor for dollar hegemony which makes possible US finance hegemony,  
which makes possible US exceptionism and unilateralism.