How Secure is the U.S. Dollar as the World’s Reserve Currency?

The United States dollar is no longer backed by gold, and besides, we’re not even sure how much gold we still have.

There was a time when anyone could walk into any bank in the U.S., hand the teller a $10 bill and get back a $10 gold Eagle. If you gave the teller $20 in currency and asked for gold, you’d get a $20 gold Double Eagle. Well, those days are long gone — F.D.R. ended that. But as you can see, when dollars are readily exchangable for gold, the dollar has an intrinsic value. If your $20 bill can be exchanged for a $20 gold Double Eagle coin weighing (approximately) one troy ounce, you don’t need to be a math genius to know that the price of gold was $20 an ounce, back in 1849. What this meant was that the dollar was worth a lot more than “the paper it was printed on.” It was worth a measure of gold. The law required the Federal Reserve to hold gold equal to 40 percent of the value of the currency it issued. Our dollars could not be printed faster than the nation could accumulate additional gold.

In 1944, delegates from 44 countries met at Bretton Woods, New Hampshere, to establish a new international finance system. The U.S. had over 8,000 metric tons of gold bullion, an amount greater than the next three largest reserves combined. So the nations agreed that the U.S. dollar would serve as the “Reserve Currency.” The U.S. currency was backed by gold, and the rest of the nations backed by currencies with U.S. dollars. In other words, Canada did not need any gold to back its currency. It would hold U.S. dollars in its treasury and that would support its value.

Of course, we understand that this matter is far more complex than as it is being discussed here. Many books have been written on this subject, and we are placing this complex concept in a short article, so bear with us if we’re glossed over something, or failed to note a nuisance. This article is not being written to provide a definitive history, but rather to provide some surface-level insight into that’s happening.

The “extraordinary “privilege” of having our dollar serve as the international reserve currency is enormous. Just about everything we buy is manufactured elsewhere in the world. Look at the items around your house or your office. Turn them over, and they will say, “Made in China,” or something like that. So all the world excports their goods to us, and what do we export? We export only dollars. And all these countries have wanted these dollars because they were necessary to provide a reserve, effectively a proxy for gold, for their currencies. And what would these countries do with all the many hundreds of millions and the billions of dollars they reecived? Well, for years, they bought our bonds, not the sweat of our collective labor, but only our promise to pay the bondholder for 30 years at a stated rate of interest. Countries “settled” their international balances in dollars. This system resulted in an incredible abundance of products in our stores and then in our homes and shops.

Even though after F.D.R.’s Executive Order, the citizenry could no longer exchange their dollars for gold, foreign governments could still present their dollars to our Treasury and demand their value in gold. Then, in 1971 Nixon “temporarily” ended the dollar-gold convertibility that had existed for foreign countries. We were officially off “The Gold Standard.” But while there were no longer any conversion or exchange rights, the world understood that we still sat on the largest holding of gold, and our gold and our productive economy continued to serve to allow other countries to keep the dollar as their reserve currency.

Then, this nation totally lost its senses and began printing money like there was no tomorrow. Look at the U.S. Debt Clock. It shows that we now have debt in excess of $36 Trillion. We can never pay this back, and everyone knows it. Or, to put it another way, we can always pay it back — but in worthless currency. But, we still have 8,000 metric tons of gold, and that provides value. Well, maybe we don’t. Our dollars are no longer tethered to gold, so there is no obligation (or expectation) to be paid in gold. We can keep our gold and pay back our bondholders in essentially worthless dollars.

Most of the U.S.’s gold is held at the United States Bullion Depository, commonly known as Fort Knox. But who really knows what’s inside those massive vaults. The last so-called “audit” was in 1974 when officials opened only one of the fifteen valuts to a mix of journalists and politicians for two hours, and allowed them to walk though and touch the gold bars. They called this an audit, but no one tallied the contents, or checked any serial numbers, or assayed the gold. And no one got to see what, if anything, was within the other fourteen vaults. Well, that was 50 years ago, and the only reason they setup that event was because there was widespread skepticism (back then) concerning how much U.S. gold remained. So maybe it’s there, and maybe it’s not. You’d think that if it were there, they would bring in some well vetted auditors to actually perform a true audit. What if it’s not there? What if it’s all (or mostly) been sold off? What kind of effect would that have on the value of the U.S. dollar? We just don’t know. It could run the gammit from totally devastating to who cares?

But meanwhile the world’s other countries, which have long traded between each other utilizing U.S. dollars, are wondering why they should continue to play this game?, why they should continue to send us their manufactured items in return for overprinted dollars?

Several of the world’s largest countries have started setting up an alternative system, so that they can bypass the dollar. If China sends manufactured products to Brazil, and Brazil sends agricultural products to China, why should they need to convert all values into U.S. dollars and handle the financial aspects of the transaction in dollars?

So Brazil, Russia, India, China, and South Africa (“BRICS”) decided to set up an alternative system for international trade, one that bypasses the U.S. dollar. It’s a complex system, based in part on gold and in part on the individual member nation’ s commodities, but once it’s up-and-running, there will be no need to involve the U.S. or its dollar in any bi-lateral or multi-lateral transactions between and among these nations.

[Read about President-Elect Trump’s response to the BRICS in the “update” at the end of this post.]

Now, much of the impetus to build this new system is based on what the member nations see as an abuse of the present Reserve system by the U.S. We have confiscated foreign assets held in the U.S. as tools of foreign policy. No matter what you see as the propriety of such confiscations, it is readily apparent that many nations no longer see the U.S. as a safe jurisdiction for financial transactions.

The BRICS framework is oming together. We don’t know if there will be a BRICS currency that will be used by many nations (such as the Euro), but most people who follow this story do not believe a new currency is coming. Instead, they think that the new system will be used to settle international trade deals, with the U.S. cut out of the transaction. Further, they see BRICS as exercising monetary discipline, unlike the U.S., providing much needed stability to international pricing.

At this time, there are five new members: Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE). About three dozen other countries have expressed interest in joining, or are known to be activly considering whether to join.

This new huge international monetary and financial convention will have signifant implications for the U.S. and its western economic partners. The world “it is achanging,” and not in our favor; but in a very real sense, we did this to ourselves by reckless money printing, reckless expenditures, international asset confiscation, and generally, taking the “extraordinary privilege” for granted, assuming that forever the world will send us its products in return for our increasingly worthless dollars.

One such change we have already seen has been the increase in the price of gold, as the BRICS countries’ central banks continue to accumulate large hordes of gold. As mentioned, it is expected that each member country will stabilize its currency with a mix of gold and local commodities.

But just how do they get to buy all this gold? Where do they find it? From whom do they buy it? Mysteries galore, and this feeds into the theories that Fort Knox has been emptied over the years, and that very little of the stated 8,000+ metric tons remains in our possession. As stated earlier, we don’t have the foggiest idea of whether it remains or whether it’s been sold off, but you’d think that if it were there, they’d somehow show this fact to the world and put the rumor to bed.

Just one further concept here to share: The U.S. knows that there is a relationship between the value of the dollar and the price of gold. If gold should soar, that would indicate that the dollar is worth less. So to back up the dollar, perhaps they have repeatedly sold gold to artifically hold down its price and thereby prop-up the dollar. Remember that we haven’t seen anything since 1974, and that was only one of fifteen vaults. Nowadays, they can suppress the price of gold by selling ETFs short, but before these proxies for gold existed, they very well might have sold off the physical reserve. So to close the loop, we sell our gold very cheaply to prop-up the dollar, but the net result is that we make the gold very cheap for the foreign governments, with whom we compete, to purchase all the gold they want at huge discounts, subsidized by the U.S. taxpayer.

Just wait for the day when China says to the U.S. that it wants to see proof of gold holdings, and we respond with insults but no proof of gold. That day is coming.

UPDATE:
President-Elect Trump has now posted on Truth Social:

• “The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy. They can go find another “sucker!” There is no chance that the BRICS will replace the U.S. Dollar in International Trade, and any Country that tries should wave goodbye to America.”

There is no doubt that 100% tariffs will chase away many of the countries that are attracted to join BRICS. This Trump strategy will work, without doubt, on those countries that trade very extensively with the U.S., such as both Canada and Mexico, because our economy can thrive without doing any trade with them, but not vice-versa. In other words, they need us a whole lot more than we need them. Russia could care less, because we really don’t have much trade with Russia. What comes from Russia? Vodka and maybe cavier. Russia has a minor economy, and if any and all imports and exports from and to Russia were to stop, no one here would notice it. But China is another matter. Which country needs the other more? Just about everything we buy comes from China, so just imagine all the shelves at Walmart empty, or the prices very significantly higher. On the other hand, it was long the case that China needed our dollars, though they don’t really want dollars anymore, as they view dollars as a currency continually declining in value. They used to buy our bonds from the funds we handed them for their goods. Now they use their dollars to buy (our?) gold. So, can they sell their goods elsewhere? To some extent, yes, but we are their largest market, and losing us would seriously impact their already weak economy. Still other countries, such as India and South Africa, will have to make a serious decision whether to move forward with BRICS, and thus face 100% tariffs here, or to abandon BRICS and continue trading with the U.S.A. Trade wars are always interesting, but in most cases we have serious trade imbalances, and the imbalance always is in the favor of the other country and not of the U.S.A. This means that they sell a lot more here than we sell there. (Example: there are a lot more German cars in the U.S.A. than there are Ford and GM cars in Germany.) So who would suffer from a 100% tariff? Of course, it will not be us. We don’t need Swedish furniture or Korean washing machines — we have plenty of options when it comes to the exports of many countries. Certainly, there are many countries from which we buy nothing. What, for instance, do we buy that comes from any nation in South America or Africa? For these countries, the threat of a tariff is meaningless as these countries matter very little in global trade (and they likely receive enough American foreign aid that the threat of losing their foreign aid payments will be sufficient to keep them in line.) The main issue will be China, but fortunately for us, China’s economy is seriously weak these days, so even they may decide that they must play ball with us, so long as we own the ball.