Hope of Israel Ministries (Ecclesia of YEHOVAH):
The Dollar Crisis and Why
This article -- written in 2004 -- is more cogent and relevant today in light of the global events exploding around us. The buying power of the American dollar is shrinking. The impact is global. What does the future hold -- and how will it affect you?
Courtesy "The Real Truth"
The U.S. dollar is depreciating in value. Many economists believe that the recent decline of the dollar is only the beginning of an inevitable and serious correction. Some say it will be an “orderly” decline, benefiting the U.S. economy by causing exported products to be less expensive for foreign purchase. Others see a potential rout and collapse as a very real possibility.
What does this decline mean for you? -- for the United States? -- and for the rest of the world?
To understand what is at stake, we need to examine the history of the American dollar, and the international monetary system, which is underpinned by the U.S. dollar and was constructed in the middle of the last century. We’ll study the reasons the dollar is receding as the world’s currency, and why most Americans appear to be unconcerned. We will also look at the potential fallout if the American dollar continues its slide.
History of the Dollar
The term “dollar” had its roots in the Joachimsthaler, first coined in 1519 from the silver mines in Joachimsthal, Bohemia.
Following America’s independence from Great Britain in the late 18th century, the infant country set out to establish enduring, foundational institutions, which would catapult the United States to world power a few short decades later. A medium of monetary exchange was necessary, and in 1792, the “dollar” was created as the fundamental monetary unit in the United States. Its value was set at 24.75 grains of fine gold, with the coinage of silver dollars set to the value of the Spanish milled dollar.
The dollar provided a stable medium of exchange throughout the 19th century -- with the amount of equivalent gold per dollar being occasionally adjusted by very small quantities. This stable condition remained until the 1920s, when exchange rates began to fluctuate wildly, and the international gold standard broke down.
In the U.S., the dollar continued to be redeemable in gold until the Gold Reserve Act of January 30, 1934, prohibited the coinage of gold. Thus began the abandonment of gold as the standard of value for the dollar in the domestic economy.
While domestic redemption of gold for dollars was prohibited during the Roosevelt administration, gold continued as the commodity used to store wealth and balance international accounts. For example, if the value of imports consumed by a nation exceeded the value of goods produced and exported, the country with surplus paper notes could demand its equivalent value in gold as payment to balance accounts. This system forced nations to be fiscally responsible if they wished to retain their gold reserves.
During World War II, in reaction to the wide economic fluctuations and shrinkage in trade of the depressed decade of the 1930s, influential economists, such as John Maynard Keynes in Great Britain and Harry Dexter in the United States, conceived an alternative system. The architecture of this modified system was codified in the draft “Articles of Agreement of the International Monetary Fund”, known today as the IMF. These articles, adopted at the historic conference held at Bretton Woods, New Hampshire in July, 1944, shaped the international monetary system for the next quarter century.
This system attempted to provide stability in international trade by attaching “pegged” but adjustable values to each unit of currency. As a basis, an ounce of gold was pegged at 35 American dollars. The U. S. government guaranteed this value, agreeing to exchange gold for dollars on demand. Other nations would define their currencies in terms of dollars, thus making the American dollar the world’s first true international currency.
The power and wealth of the United States at the end of World War II enabled the American nation to set the rules for the rest of the world. The U.S. at that time possessed an overwhelming military, had a productive capacity that was supreme, and owned roughly three-quarters of the world’s gold reserves.
The Bretton Woods system performed well until the mid-1960s, when world trade began to grow at a pace that outstripped the system’s ability to effectively balance payments. Because of this disparity, nations were forced to restrict trade and payments to reduce their deficits.
The dollar had continued to be the linchpin of the system, as the U.S. stood ready to buy and sell gold at the set $35 per ounce. As foreign holders of dollars began to accumulate more currency than the U.S. could convert to gold, the system began to collapse.
In 1968, major banks determined that they could no longer engage in gold transactions with private individuals and firms. Although central banks continued to trade gold and currency at the established exchange, the price of gold exchanged between private parties would now be determined by the market.
On August 15, 1971, because of its ongoing deficit, the United States announced that it would no longer buy and sell gold with foreign central banks. Without the gold guarantee of the dollar, the international currency of choice would begin to float in value. The dollar’s value would be determined by world confidence in the U.S. Government’s ability to honor the fiat note, by the U.S. treasury’s production of paper dollars, and by central bank currency exchange manipulation.
Finally, in January of 1976, the IMF incorporated a number of changes to the Articles of Agreements, officially altering the international monetary system. The changes provided freedom to each nation to adopt its own preferred exchange rate arrangement with IMF oversight through the central banks. Additionally, the role of gold was downgraded, with the IMF itself selling one-third of its gold holdings. Thus, the ordered system based on a finite supply of gold degenerated to a floating system of accounts based on paper notes or guarantees.
The former system had encouraged savings and national frugality, while also protecting the integrity of the dollar. The latter system encouraged speculation and spending. As radical as this shift was, it was only symptomatic of a more serious and fundamental change in philosophy. At the same time, the war of ideas and policy raged between two distinct economic ideologies -- nationalistic protectionist policy and international free trade.
Free Trade and the Gold Standard
Most today assume that the international system of free trade was instrumental, at least in part, in catapulting the United States to superpower status. The historical roots of the modern free trade ideology are rarely discussed.
Free trade in modern times has existed as an ideology since at least the 18th century, when an Englishman named Adam Smith proposed an economic system that would maximize the wealth of the British Empire. Smith’s treatise, represented in The Wealth of Nations, contained within it the logical, nationalistic use of the empire’s resources that could contribute to the greatest possible accumulation of wealth and extension of power. However, Smith and other economists of that time never envisioned the disregard for national borders and sovereignty that is espoused today. He wrote of appropriately levied tariffs -- occasionally of huge proportions -- to be used whenever required, perpetuating and extending British power and influence.
Also usually ignored is recorded history showing that Great Britain did not implement free trade policies outside of its own empire until the early 20th century -- during a time of impending decline.
Similarly, the United States became a world power while enforcing protectionist measures, using enormous tariffs (some as much as 400 percent!) until the latter half of the 20th century to protect its industrial base, labor rates, and economic incentives. The system of tariffs insured that foreign governments, using exploited labor and government subsidies, could not “dump” their commodities on American soil and unfairly impact American industry and labor.
Import tariffs were charged to price foreign goods above the domestically produced commodity or manufactured product. The money paid by the foreign government then found its way into the U.S. treasury, thus serving the purpose of financing government with foreign resources. This funding also contributed to an extremely low tax burden on U.S. citizens.
It was under this system that the American nation flourished. These facts are corroborated by documented percentages that trumpet the relative geographical control, industrial production, and wealth of the United States at her zenith of power. Is it a coincidence that, as the gold standard was abandoned and tariffs were reduced and then eliminated, and as production factories were moved offshore, the nation also experienced a decline in relative wealth, economic influence, and effective use of its military power?
In contrast to Henry Ford’s “fair day’s wage for a fair day’s work,” today’s entrepreneurs largely disregard such an idea, and see no error in the belief that production should occur where the goods can be produced for the least cost and at maximum profit. What they fail to realize is that, at some point in the not so distant future, the very goods that he is producing will be beyond the reach of the average American worker, and the domestic system will collapse.
This debasement of the dollar would have sounded a national alarm to traditional America. Today, the dollars’ decline generates only modest concern from all but a very few. The powerful America of yesteryear is viewed as a hurdle to eliminate, instead of the beacon and protector of true freedom that it once was. The decline of the dollar in relative value and the transfer of American assets to other nations are viewed with indifference, or worse -- as a just redistribution of wealth. The dollar is being redefined.
The divorce of the dollar from a commodity base such as gold was a critical factor in the decline of America. While the fiat currency system has contributed to the international exchange of goods and services, it has also served to reduce the importance of America on the world stage.
A System in Bankruptcy
Some economists are very uneasy about mushrooming debt in the United States, with a growing number concerned that a fiscal “day of reckoning” is imminent. Even as the American economy is touted as the envy of the world, a blind eye is turned toward the overall balance sheet of America, and its indebted citizenry—who have been throwing a huge hedonistic party, having grown accustomed to consuming more than they produce. All the while, they tell each other that everything is fine. The poverty of the 1930s has receded from national memory, and affluence in America is regarded as an entitlement and basic right.
Americans have sold their means of production to help finance this short-lived fiesta! Foreign governments can now force the United States to be declared insolvent at a time of their choosing! Let’s look at some recent developments:
In the past ten years, the U.S. current account (a measure of imported verses exported goods) has gone from an $80 billion surplus to an incredible and unsustainable $550 billion deficit! In effect, the world has been flooded with dollars used to pay for the unrestrained consumption of United States citizens. With these billions of surplus dollars, foreign nations have purchased massive amounts of U.S. securities -- in effect, financing the continuing slide into financial disaster!
Have these nations acted in such a way because they are predisposed to being generous benefactors forever sponsoring unfettered American consumption? Only the most naive would believe this. These nations have supported the dollar in the currency markets, as well as supported the continuing burgeoning debt of the U.S. government for the same reason any creditor would lend money to a bankrupt opponent -- to achieve control of the debtor and profit from his demise!
If this is not bad enough, dollar-rich nations such as Japan, China and Germany have used trade to undermine the productive capacity and technological advancement of the once greatest nation on earth. They have used billions of dollars to purchase assets in the United States, as well as build state of the art productive facilities in their own nations. These foreign facilities employ workers at a fraction of the salary once paid to the American worker. Such frivolity as practiced by the United States has, in effect, financed its own fall from power.
Consider this. We will soon reach a time when foreign nations can demand basic commodities such as food and energy as payment for American dollars they hold in reserve.
Stunning, but true!
Here is just one ominous development on the world scene: China’s grain harvest has fallen in four of the last five years. Currently, they are not producing enough food to feed their population, and have been drawing down their reserve. At present rates of production and consumption, China’s reserves will be entirely depleted sometime at the end of 2004.
The American consumer could soon find himself competing with foreign nations for his own wheat! YEHOVAH God warned of this in Deuteronomy 28:33, when He said, “A strange nation will eat up your crops and all the fruit of your labor, and you shall be utterly crushed and broken continually, till you are driven mad by the sight of it all” (Moffatt translation).
What would prevent the Chinese government from using its huge trade surplus with America to demand American wheat? To meet future demand for an ever-growing Chinese population, a long line of grain-loaded vessels would stretch across the Pacific, with two or three ships embarking daily. This would come at a time when world grain stocks are at their lowest levels in 30 years and U.S. farmers are under stress from drought -- and the growing demand for water in the cities.
This dismal situation is analogous to a household that lives well beyond its means of production. Creditors may continue to lend this profligate house ever increasing amounts of money until the situation is irreversible. At that time, the creditor will assume control of that household’s assets, even evicting the family from its dwelling. The debtor, prosperous by all outward appearances, has suddenly become a pauper! The creditor has become his “head”, by assuming rule over him! YEHOVAH God warned His people of these curses centuries ago in Deuteronomy 28:43-44. They are now becoming a harsh reality for Israel’s modern-day descendants.
The federal government is also running an unprecedented domestic deficit that many economists view as unsustainable. Total federal debt exceeded an incomprehensible $7 trillion in February 2004, with the annual deficit a record $374.25 billion. When the government does not take in enough revenue to finance its expenditures, it can balance accounts by: (1) Increasing taxes (2) printing more money (in effect, causing inflation) (3) borrowing from domestic and foreign sources.
But, the United States cannot finance this debt domestically. It is dependent upon massive foreign intervention to prevent outright insolvency and collapse. Japan has been willing to purchase billions of dollars of securities to date, but only the most unrealistic optimist would contend that they will continue this for much longer. In short, the United States is not becoming dependent upon other nations -- it already is!
Taxes, Not Tariffs
Americans today accept a huge tax burden as part of living in the modern world. Much of the average American’s income is taken from him and used to fund the many functions of government, infrastructure, military, and the transfer of wealth to favored groups of people. The long debate over taxation of US citizens that occurred in the 19th century has faded from the memory of most Americans.
The income tax as a regular and important source of revenue, for example, was a hotly contested issue until the 16th amendment was adopted in 1913. The US Supreme Court decision, “Pollack vs. The Farmers’ Loan and Trust Company”, in the 1890’s declared attempts to pass a tax to be in violation of the Constitutional provision requiring direct taxes to be apportioned among the states according to population.
Did you know that the intent of the income tax in the early 20th century was to tax only the very wealthy? Married couples with less than $4000 in annual earnings were excluded, at a time when the average annual income in America was only $500. As recently as 1948, only two percent of the average wage went to federal tax!
Today, taxes of all shapes have made the effective tax rate of the average American’s wages somewhere near half of his gross income. Families with both father and mother working are now bringing home less discretionary pay on a percentage basis than a hard working father once provided alone!
As the tax burden to Americans has increased, the portion of the U.S. Government financed by foreign nations has almost ceased. With the implementation of borderless free trade, gone are the tariffs once applied to foreign goods that financed a sizeable portion of the United States Government prior to the latter half of the 20th century.
YEHOVAH God warned in type that the nature of human governments was to expand and burden the common man. This can be found in the history of ancient Israel, when YEHOVAH allowed Israel to choose their own king, thus removing themselves from direct rule by YEHOVAH God (I Samuel 8:11-18).
While government debt has increased in almost immeasurable fashion, the American consumer has also done his fair share of overspending. The ratio of household liabilities hit an all time high of 22.6 percent in the first quarter of 2003. In the past 25 years, the number of families filing for bankruptcy increased 400 percent -- with foreclosures up 350 percent!
Real estate assets have skyrocketed in price, driven by two-income households (having more money to spend, thus driving up the price), easy credit, real estate fees, and the lowest interest rates in decades. This has served to further increase the average American’s debt burden. Many use their homes as security to borrow money to pay for consumer items ranging from SUV’s to groceries! Economists look for this real estate asset bubble to burst at the first significant move upward in interest rates.
This mindset in government and private enterprise is a recent phenomenon in the U.S. Previous generations understood well that economic independence was a prerequisite to the protection of constitutionally defined freedom. The selfish and irrational disregard for the future could only occur in a generation of Americans that have had their culture destroyed, their achievements maligned, and their pride broken.
Casting Their Gold in the Streets
The above picture does not bode well for the future of the dollar. The trade deficit by itself will likely continue the dollar’s decline. Many economists acknowledge a rout would have already taken place were it not for Japan’s recent support. In 2003, Japan spent a record 20 trillion yen to buy $321 billion to support the American currency. Japan then used the acquired dollars to invest in securities of the U.S. government -- thus funding further irresponsible spending.
How long will foreign governments be willing to provide such funding? The cold reality is this: At some time in the future, the threat of Asian governments running down their colossal dollar holdings will crystallize, and the dollar’s decline will be anything but orderly!
Presently, Japan’s government appears to be turning away from the massive intervention used to support the dollar against the yen. In March of 2004, the former Japanese Minister of Finance (MOF) was quoted as saying, “It looks to me that their strategy has changed.” The dollar subsequently lost over five percent of its value relative to the yen.
Combine this with a treasury department that might attempt to print the government out of debt, and a Federal Reserve Bank forced to raise its lending rate to prevent a complete collapse in value. Add the overarching condition of government forced to offer securities at higher rates of interest to attract funding, and you have a recipe for national disaster of unprecedented proportion!
Although we do not pretend to know when the dollar will retreat on a massive scale, we do know that its collapse is certain. The blessings that YEHOVAH God promised to Abraham’s descendants (Gen. 12:2; 22:17-18; 35:11) are being withdrawn.
YEHOVAH proclaims that the symbols of wealth -- gold and silver -- are His (Hag. 2:8)! He mightily warns that He will remove the gold and silver suddenly from His wicked and sinning people (Ezek. 7:19)!
The dollar’s ultimate collapse is as sure as the word of YEHOVAH God -- unless a nation now far removed from the true God deeply repents -- utterly changes its ways.
The World in Crisis
What effect will the destruction of the U.S. dollar have on the rest of the world? Will the European and Asian economic blocs be able to protect their currencies when the dollar collapses? Bible prophecy indicates that, although foreign markets and currencies will likely experience turmoil and instability while the dollar implodes, the powerful regions of the world will ride through the financial tumult and emerge prepared for economic war -- and eventually real war.
Today, the European Union’s Euro is providing Europe and the world an alternative to the U.S. dollar as a unit of international currency. While the Euro’s acceptance grows, Asian nations are restructuring their regional financial system to become more independent of the U.S. dollar. Additionally, Muslim nations, including the oil-producing nations of OPEC, plan to replace the U.S. dollar with the gold Dinar by 2006 for all international crude oil transactions.
Bible prophecy warns that, as the modern-day nations that have descended from ancient Israel decline and collapse, YEHOVAH God will soon use other nations to correct the sinful and degenerate American and British peoples.
While most of the world desires the destruction of America, Britain and other Israelite nations, they are generally ignorant of the darkness that is prophesied to descend upon the entire earth. At that time, the Gentile nations will turn to war against each other, and their blood will be “poured out as dust, and their flesh as the dung” (Zeph. 1:17).
Good Economic News Soon to Come
Ultimately, man’s economic system will fail. Greed, corruption, lack of vision, and unrestrained consumption are all contributing to its demise.
However, YEHOVAH God will soon return to set up a GOVERNMENT and WORLD ECONOMY that will capitalize on the particular productive strengths of nations and peoples in different regions of the world. He will force mankind to remove the spirit of competition from this revolutionary economy, and replace it with a spirit of outgoing concern for the well being of others -- on an individual as well as national scale.
Never again will workers suffer the exploitation they have endured for 6,000 years. Never again will those who have all the gold make the rules for those who do not. Labor unrest, so long exploited by those who rule, will be gone. Truly, a fair day’s wage will be paid for a fair day’s work.
Gone will be the inflation that destroys honestly accumulated wealth. Gone will be debt instruments that allow people and nations to continue to consume the productive efforts of others, without also producing tangible wealth themselves. All nations will prosper as debt-free human citizens ruled by the kingdom of YEHOVAH God.
This is the wonderful picture of the world to come. May that day come soon!
-- Edited by John D. Keyser.
Hope of Israel Ministries -- Preparing the Way for the Return of YEHOVAH God and His Messiah!
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