The economic power of the United States - the case of

the dollar as a reserve currency

Violeta Momčilović‚‚Exorbitant Privilege‚‚ The Rise and Fall of the Dollar

Barry Eichengreen

Suitcases full of dollars are often decor in the movies ... Hollywood is in America, and the dollar is U.S. currency. But today, Somali pirates seek ransom in dollars, South Korea and Thailand accounted most of their trade in dollars ... The prices of oil and gold are calculated in U.S. dollars ... 85% of the

entire world trade is expressed in dollars…

ORIGINS OF DOLLARS

The first payment of the colonists in the New World, with money they brought from their home countries, were rice, tobacco, corn, indigo and wampum - Indian money, lined with perforated shells ... And, of course, English, French, German, Dutch, Swedish money and Spanish Gold and silver ...

Spanish silver coin minted for many years served as an unofficial currency of the American colonies, but its trade was impractical ... It had to be smashed to eight pieces.

In 1690. the colony of Massachusetts was the first colony that issued paper money ...

Continental dollar from 1775.

During the War for independence, to be able to finance the army, the Continental Congress in 1775. approved the unlimited issuance of paper money, known as “continental dollar’’ ... It was the money without coverage and quickly became worthless. Since then, in America there is a saying, ‘is not worthy even the Continentals...’

Immediately after the War for independence in 1785. the first finance minister of the new government, Alexander Hamilton, as a tool of payment, billing and exchanges, suggested the dollar.

Until 1913. the dollar was minted from silver, and after the discovery of gold in Alaska, there was an increase in gold reserves and in 1915. the U.S. introduced a standard, ‘’gold reserves’’. The first paper dollars was created by establishing the Federal Reserve System. Since then, the U.S. central bank released into circulation

paper and coins.

Bretton Woods System

The Bretton Woods Conference established the value of $ 35 per fine ounce of gold and the U.S. dollar as the unit of account of the international exchange.

On August 15. 1971. President Nixon unilaterally abolished the convertibility of the U.S. dollar in gold. The act known as ‘Nixon shock’ leads to the termination of the Bretton Woods system, the U.S. dollar became the reserve currency of all countries.

Coverage of dollars, which is increasingly transmitted, in gold, in 1971. amounted to only 22%.

Bretton Woods system came to the end, and that is the basis for all’’dollar crisis’’ which came as a rule, every 8-10 years.

Assembly of the IMF in 1976. in Manila decides on demonetarisation of gold.

Attempts by the introduction of Special Drawing Rights, SDR, except for statistical and accounting IMF analysis, did not yield the expected results.

SDR as world money does exist and could replace the dollar, but it resisted the developed economies of the world, led by the United States.

U.S. dollar continues to be, the most common foreign currency reserves of most countries

The dollar remains recognized as the ‘’dollar standard’’ and the reserve currency of the world;

Once, 80% of the world's foreign exchange reserves were in U.S. dollars;

The currency composition of foreign exchange reserves are secret and most are based on assumptions, however, it is almost certain that the U.S. dollar still covers between 45 and 60% of all foreign exchange reserves of the world;

The American economy, with the dollar unit of account and the dollar as foreign currency reserves is related to the most developed countries of the world.

By raising interest rates to combat inflation, the U.S. securities through the state treasury attract foreign capital, which basically finance huge balance of payments and the U.S. budget deficit.

A high standard is maintained due to considerable mass of the loan, the liberal policy of the Fed, commercial banks and capital inflows into the U.S., which absorbs huge free capital.

Without the dollar as world money, such costs would have been impossible.

FED is under the direction of Alan Greenspan, implemented the expansive and liberal monetary policy.

Low interest rates, credit expansion, huge spending, nearly missing of savings, low tax rates, increasing the budget deficit, and the deficit in foreign trade.This process was destructive for the U.S economy and systematically led to the crisis.

How is it possible that the United States are on the verge of financial collapse, they weak the world economy, and the dollar, despite the huge emissions, still strengthen?The answer is - skillful speculative stocks of U.S. monetary authorities. Once the demand for loans fell, the Fed raises interest rates and thus capital is rapidly returning to the United States. With the increasing interest - and with the current financial crisis and the stock market - buying U.S. government bonds act as a good investment for investors.

Earthquakes in the world economy and financial sector in the event of a major devaluation of the dollar would be unimaginably enormous ...Foreign exchange reserves and all claims of other countries to the United States would be impaired for the percentage of devaluation, with reducing the purchasing power.This could liberate U.S. from the enormous burden of external debt.Who can stop them, except the internal affairs in the U.S.?

After September 11. in 2001, the Fed has put into circulation more money than in the previous 100 years.

Due to the misuse of dollars in national and global economy, a new financial crisis once again emphasizes the need for reform of the world monetary system.

Appreciation of the euro and its share in foreign exchange reserves, has acted as a real alternative to the U.S. dollar as the possibility that the euro will accelerate the end of the domination of dollars, or at least allow diversification in multiple currencies.However, the turmoil's in the Euro zone, just keep coming back investors to the U.S. dollar, because for now, despite all efforts, there is no reserve currency

How long the crisis will last? Throughout ‘Reaganism’, U.S. switch to politics of immoderate spending above their capabilities, in addition to lowering taxes.

Till 2012 - from the 2007th , U.S. emission was 10.200 billion U.S. dollars, to increase the liquidity of banks, insurance companies, real estate market ...

The emission without coverage does not create capital, only lead to a deeper crisis, and the real sector of the economy does not give signs of recovery.

In 2012, Governor of the U.S. Federal Reserve, Ben Bernanke believed that the crisis will last between one and two years;

Joseph Stiglitz announcing a crisis lasting 10-20 years;

Jeffrey Sachs argues that the crisis could last the whole generation;

However, most analysts, bankers, economists and government believes that the way out of recession is possible by 2015, but it will be very painful for all ...

New Bretton Woods It is based on an

agreement between the United States and the Asia-Pacific Exporting Countries, with a surplus of savings;

These countries mostly attached their currencies rates against dollar;

This regime is based on a structural current account deficit on the one hand, and the current account surpluses of countries of the Asian bloc on the other hand, and for now, it is stable.

U.S. Federal Reserve System products offer of money which goes through the banking system to consumers, who then consume imported goods, mostly produced in Asia;

Asia takes the money generated by its exports of goods and purchases of U.S. bonds, in other words, it returns the money to the U.S. ... and the cycle is repeated over and over again ...

With the received funds, the U.S. finance their deficits and Asian exporters maintain the stability of its currency, preventing their appreciation, and so their goods remain cost competitive.

A new Bretton Woods system has none of monetary discipline, where the borrower is faced with the consequences of their financial irresponsibility.

It will operate until the Asian markets have buyers for their goods, and while they create a surplus of money.

What next? The situation in the U.S. in August 2012, was on the brink of financial collapse;

If the borrowing limit is not raised, the U.S. would not be able to pay its obligations, salaries, pensions, social benefits, loans ...

To what extent this limit can continue to raise?

Currently in the U.S. there are the two opposing sides. Republicans, especially the conservative wing -Tea party, who oppose raising taxes, and on the other side, the Democrats, who do not agree with the reduction of social welfare, health care, reducing the budget funds for education, retirement ...

The next U.S. president will have to use all the constitutional and personal authority in order to bridge this gap.

It is certain that nothing dramatic will happen before the election, because both of the measures distract voters.

After the elections, tax increases are almost certain, as well a reduction of budget expenditures. Allocations the funds for the investments in the United States, the struggle with rising unemployment and stimulation of its own export program ...

United States have a serious financial problems, and that is the fact. The world is too much relied on the U.S. economy, the budget and the currency is also the

fact.

That the U.S. can go bankrupt without massive consequences for the whole world is a utopia.

And no matter how the financial situation seems alarming for the still the most powerful country in the

world, it's amazing that anyone believes that the dollar and the U.S. easily and simply will go down in history ... Maybe they will one day, but it will be

very expensive for the all world…