Thursday, December 17, 2015

Death of Money: Revisiting the Past

Summary

Important financial events took place between 1977 to 1981 such as the nearly cessation of the USD as world reserve currency in 1978, 50% loss of USD's purchasing power, 50% US inflation, IMF's issuance of 12.1 B SDRs, and the 500% appreciation of gold from 1977 to 1980. The US Treasury responded immediately by issuing government bonds denominated in Swiss francs. 

The threat to USD status as world reserve currency was the natural outcome of President Nixon's abandonment of its connection to gold in August 1971. Without the firm decision of President Ronald Reagan and Fed Chairman Paul Volcker, there was no way that the USD could be saved. Both Reagan and Volcker introduced monetary and economic reforms, which include 19% rate hike, and cutting taxes and regulations. As a result, the USD rallied 50% and gold price dropped 60% in March 1985, and inflation dropped from 13.5% in 1986 to 1.9% in 1980, and the age of King USD had begun in 1986. 



Excerpts

"Few Americans in our time recall that the dollar nearly ceased to function as the world’s reserve currency in 1978. That year the Federal Reserve dollar index declined to a distressingly low level, and the U.S. Treasury was forced to issue government bonds denominated in Swiss francs. Foreign creditors no longer trusted the U.S. dollar as a store of value. The dollar was losing purchasing power, dropping by half from 1977 to 1981; U.S. inflation was over 50 percent during those five years. Starting in 1979, the International Monetary Fund (IMF) had little choice but to mobilize its resources to issue world money (special drawing rights, or SDRs). It flooded the market with 12.1 billion SDRs to provide liquidity as global confidence in the dollar declined. We would do well to recall those dark days. The price of gold rose 500 percent from 1977 to 1980" (p.8). 
"While the dollar panic reached a crescendo in the late 1970s, lost confidence was felt as early as August 1971, immediately after President Nixon’s abandonment of the gold-backed dollar" (ibid.).  
"The subsequent efforts of Fed chairman Paul Volcker and the newly elected Ronald Reagan would save the dollar. Volcker raised interest rates to 19 percent in 1981 to snuff out inflation and make the dollar an attractive choice for foreign capital. Beginning in 1981, Reagan cut taxes and regulation, which restored business confidence and made the United States a magnet for foreign investment. By March 1985, the dollar index had rallied 50 percent from its October 1978 low, and gold prices had dropped 60 percent from their 1980 high. The U.S. inflation rate fell from 13.5 percent in 1980 to 1.9 percent in 1986. . . . By the mid-1980s, the fire was out, and the age of King Dollar had begun" (p. 9).  
Guide Questions

1. What important financial events took place between 1977 to 1981?

2. What was the immediate response of the US treasury to prevent such threat?

3. What caused the USD crisis between 1977 to 1981?

4. How was the USD saved? 

5. What were the results of the decision of Reagan and Volcker?


Source: Rickards, J. (2014). The Death of Money: The Coming Collapse of the International Monetary System. New York: Penguin Group.