August 15, 1971, will certainly remain the most important date of the 20th century in the economic and financial field. This date marks the decision of American President Richard Nixon to abolish the convertibility of the American dollar to gold. We have just celebrated the 50th anniversary of this historic decision in August 2021.
Taken on a Sunday evening, before the opening of the financial markets, this decision inaugurated a new era: that of a currency supported by the sole credibility of the Treasury and therefore of the American government. The good old days of precious metals were over because the gold standard had been established by the Western nations about a century before this about-face.
Overnight, everything that had been measured against gold, that is to say, everything, was measured against the US dollar. The greenback was thus propelled as the new gold. In macroeconomic terms, the U.S. federal deficit grew from 2.1% of national GDP to about 13.5% today.
This unilateral bomb dropped by the Americans, as usual, if I may say so, must be analyzed in the context of a country that was struggling to emerge from the very unpopular war in Vietnam. About 15 of President Richard Nixon's closest advisors put intense pressure on him at his Camp David residence during that fateful weekend.
America takes the rest of the world by surprise to impose its American dollar
Nixon's entire economic policy and program were written off. In the words of the U.S. Treasury Secretary John Connally to reporters immediately after Richard Nixon's speech on August 15, 1971:
“I want to screw the foreigners before they screw us.”
The same John Connally later admitted that he had no certainty about what would happen next.
This unilateral decision by America would put the US dollar at the heart of world finance. It was accompanied by an immediate 10% increase in tariffs. Such a decision stunned the world, especially the allies and partners of the United States. Not only was the dollar no longer convertible to gold, but America was suddenly back to protectionism.
Cynics were already pointing to a fact that was later confirmed by economic historians: this increase in U.S. tariffs was only a way of pressuring the Europeans to accept this de facto devaluation of the dollar. A wave of cascading devaluations of European currencies followed, including that of the Italian lira, which made Richard Nixon say his famous words: “I don't give a shit about the lira”.
The American currency was devalued again in 1973 and, at the same time, almost all the major currencies began to float, not without causing the US dollar to fall by 50% against the yen and the Deutschmark.
The domination of the U.S. dollar over the world has grown steadily over the past fifty years
The US dollar was to remain at the heart of world finance as the true and only cornerstone of the universal financial architecture, despite the abandonment of the gold standard, against all the prophecies that predicted (and still predict) the end of its reign. It enjoyed such an appreciation in the early 1980s that it took the Plaza Accord in September 1985 to halt its rise.
It experienced another surge towards the end of the 1990s. Then, contrary to all predictions, the extraordinarily troubled period of the Lehman Brothers bankruptcy and the subprime and credit crisis of 2007-2009 even allowed it to strengthen. The US dollar is still the star around which all other currencies in the world, including the euro, revolve.
The greenback is much more than the main currency of international trade. The dollar is not only the first currency in the reserves of central banks. Its presence and its use above all allow it to put oil on the wheels of all the economies around the globe: the dollar represents liquidity on its own. Its capacity of attraction is so irresistible that the whole world, its states, its institutions, and its families all want to save in dollars: this forces the Federal Reserve to create more and more of them to satisfy the demand, even the frenzy, of the world.
Everyone wants them: from the most classic of central banks to terrorist groups that paradoxically swear to destroy the “Great Satan” dollar ... In short, America prints dollars - a little for itself, of course - but a lot for the rest of the world. In doing so, it reinforces and often abuses its hyper-dominant position by imposing sanctions that are impossible to circumvent on anyone who dares to defy it. Above all, it has set up the financial thermonuclear bomb against which there is no recourse: extraterritoriality.
More and more countries, like China or Russia, want to overthrow this domination of the King Dollar
The exorbitant privilege that the US dollar gives to America is something that more and more countries are no longer willing to accept. China and Russia have been in the process of de-dollarization for several years. Other countries, such as Iran, are seeking to do the same to be better protected from the economic sanctions that America can take against any country because of the extraterritoriality of the American dollar.
To achieve its great goal of the future, which is to take over America as the first world power, China must put an end to the hegemony of the American dollar. This requires ultra-ambitious long-term projects such as the Belt and Road Initiative, but also its attempt to gain the first-mover advantage in the field of the future: digital currencies.
The digital revolution is probably the biggest threat to the US dollar on the horizon. A major paradigm shift is taking place and the era of national currencies seems to be coming to an end, as they will be progressively supplanted by digital currencies. The latter can be of different natures.
On the one hand, you will have the Central Bank Digital Currencies (CBDCs) that governments will push to try to keep their power, at the forefront of which is the e-CNY which is already far ahead of the competition. In the middle, you will find private digital currencies like Diem (formerly Libra) that Facebook has been trying to create for several months, not without encountering strong opposition from authorities around the world.
In a future world where everything will be digital, the outsider Bitcoin has some serious advantages to offer
Finally, on the other side of the spectrum, you will have a currency like Bitcoin that will be your last resort as an individual to keep control over your life. Bitcoin will have one major advantage: it is a non-political, neutral hard money that answers to no leader.
Bitcoin belongs to the people while abstaining from the natural human penchant for corruption through a programmatic monetary policy known to all. These differences, which are incredible advantages, will become apparent to more and more people in the future, and it will eventually become difficult for the U.S. dollar to continue to dominate the world.
This prospect of Bitcoin as the world's reserve currency still seems remote to many, but who would have thought in the early 2010s that Bitcoin would ever reach a market cap of over $1T? Probably even fewer people. And yet, Bitcoin has achieved this by defying all predictions.
So with Bitcoin, you can expect anything in the future. And especially the best for the many. The American dollar has been warned: a new king is about to take his place in a new world, the digital one.