Historical Origins of the Present Global Economic Crisis

The Roots of the Present Economic Crisis

The global economic crisis that started in 2008 has its origins in the events of the 1970s. That was the time when the United States reneged on its commitment to work under the Bretton Woods Agreement, which stipulated that countries must peg their currencies to gold and must follow the gold standard. On August 15, 1971, the United States under President Nixon announced that it was no longer following the gold standard and that the Dollar has been taken off the gold standard. Though there are various reasons for this action ranging from European countries withdrawing and period of inflation threatening the United States, the actual reasons were political rather than economic.

Sticking to the unilateral announcement, it is important to note that while all the countries were under the Bretton Woods Agreement of 1945 that bound them to maintaining gold reserves that were the equivalent of the currency, there was stability and balance in the international monetary system. Once the United States withdrew from the gold standard, there was no way the international currency system could be kept under check and the result was that all currencies in the world began to exhibit volatility and turbulence.

The Ending of the Gold Standard and the Dominance of the US

The ending of the gold standard meant that the United States Dollar was no longer tethered to gold and this resulted in inflation in the United States and elsewhere. The United States Federal Reserve began to print money whenever they were faced with a currency crisis and this led to the debasement of the Dollar. Further, the US exerted pressure on the other countries to hold Dollars and use Dollars for international trade. This meant that the Oil exporting countries had to use Dollars as the currency for transactions and had to maintain significant dollar reserves that were recycled back into the United States economy. This further exacerbated the macroeconomic situation and the world economy was beset with turbulence and chaos ever since the 1970s. In the 1990s, with China being ascendant, the United States encouraged wider trade deficits with China that meant that while the US imported more from China then it exported, the proceeds from the trade to China were recycled back to the US in the form of Treasury bond purchases and acquisition of assets by the Chinese. The point here is that the events set in motion in the 1970s have repercussions to this day because once a currency is not pegged to gold or any other commodity, the result is inflation in the domestic economy and turbulence in the global economy.

Solution to the Present Crisis

The solution to the present crisis is through a managed transition to a commodity backed currency regime wherein countries of the world instead of letting their currencies float freely would peg them to gold or a basket of commodities. This would ensure that the global economy would not have excessive savings in one part of the world and excessive consumption in other parts of the world. Further, the global economy would not have to be rebalanced from time to time because of imbalances in Dollars. Moreover, the Dollar as the reserve currency has an exorbitant privilege wherein the United States can dictate terms to the rest of the world and this leads to tendencies of hubris and arrogance.

Concluding Thoughts

The key theme here is that unless currencies are tethered to a commodity and the global exchange rate system is balanced with the holdings of gold in each country, there is likely to be chaos and turbulence leading to currency wars that we are witnessing now. In conclusion, if the global economy has to be revived and rescued from the present nightmare, the solution is for another Bretton Woods kinds of agreement where all countries agree to peg their currency to a commodity or a precious metal like Gold.

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