Is the Dollar Dying?

It's rectangular. It's green. It doesn't dissolve after a cycle in the washing machine.

The dollar is probably the most recognizable symbol of the United States’ economic strength. After the American economy emerged as the most powerful global economic force at the end of the second World War, the United States found itself the guarantor of the world's most commonly used currency. The "full faith and credit of the U.S. government" backs every note. Merchants the world over will readily forego trade in their own national currency and accept the American dollar. Nations around the world trade their oil in U.S. dollars. Such an advantage in commerce has strengthened the U.S. currency, even through times of economic turbulence. But are those days coming to an end?

The United States has shown that it is willing to go to war to fight threats to the dollar. Not many people know that in 2000, Saddam Hussein, the infamous mustachioed madman of Mesopotamia, touted a new plan to trade his nation's oil exports in Euros instead of dollars. Soon after, the United States launched a war to remove Hussein. Once he was ousted, Iraq returned to trading its oil in dollars. Additionally, Libya's Moammar Ghadafi, who gave up his WMD programs after 9/11 and aided the U.S. with intelligence in its "War on Terror," also found himself on the wrong end of American guns after pressing for the creation of a gold-backed currency in which to trade oil.  Currently, Iran is defying the United States by refusing to trade its oil in dollars. Not surprisingly, there are now calls for the United States to bomb it.

So why is the world abandoning the dollar? Is it a simple reaction to post-9/11 imperialist tendencies that have locked the U.S. into wars of no consequence in Third World nations? Is it because the oil-producing nations of the Middle East seek to escape the monopoly that the dollar has had on the oil market? Or is the economic recession that the United States cannot seem to climb out of doing damage to the "full faith and credit" of the U.S. government? Indeed, the credit worthiness of the United States has been downgraded by international credit agencies twice under the current administration. Perhaps our word isn't good enough to back our currency anymore. Or are there other factors at play?

The Federal Reserve, a private bank that does not answer to Congress (who is the sole possessor of the ability to create money, according to Article 1 Section 8 of the U.S. Constitution), decided in recent years that the way to rejuvenate the economy is to introduce what it calls "quantitative easing." Essentially, the Fed sought to flood the economy with dollars. The idea was that more money floating around would translate into more money in Americans’ pockets, which would boost consumption. Once implemented, its effects were negligible. So the Fed introduced a second round of "easing." Again, the effects fell short of the miracle that Ben Bernanke predicted. Recently, the Federal Reserve decided to give it the old "third time’s a charm" treatment. It is destined to fail.

In reality, adding unbacked currency into an economy (inflating the money supply) lowers the value of existing dollars. In fact, since the inception of the Federal Reserve in 1913, the dollar has lost 95 percent of its real value due to these inflationary tactics. Inflating the money supply creates an enormous disincentive to save money. It also weakens the dollar internationally. This manipulation of the currency, with no regard for long-term effects, makes the international community nervous and inclined to shelter its assets in other places. If the dollar is truly suffering a slow death, we need not look further for the cause than right here at home.

The United States has been down this road before. Central banking (and unbacked paper currency) have found ways to infect the American republic before. In each case, it has been to the detriment of the nation as a whole. In McColloch v. Maryland (1819), the Supreme Court reasoned that even though the Constitution does not expressly delegate the power to create a national bank, Congress could create one in order to carry out its power to “coin money and regulate the power thereof.” The Second Bank of the United States (the predecessor to the modern-day Federal Reserve) was charged by critics, including President Andrew Jackson, with "uninhibited issuing of private bank notes." This led to a period of high inflation, and the Bank failed in 1841, a short 20 years after the court’s decision.  The United States saw enormous growth without a central bank from 1841 until the creation of the Federal Reserve in 1913.

"Quantitative easing" is not a new idea, nor is it a successful one. If the United States wishes to uphold the dollar’s status as the world’s reserve currency, it must put an end to its devaluation. By removing the dollar from a commodity such as gold or silver, the United States opened the door to unrestricted printing of unbacked currency. Powerful investors are aware of the result of such policies, and they are currently shifting to more stable investments such as gold.