Demise of the Dollar, 3rd Edition

CHAPTER 2“WE ARE ALL KEYNESIANS NOW”

My baby gives me the finance blues,

Tax me to the limit of my revenues.

—The Grateful Dead

It was the end of an era. The demise of the dollar began with what is tantamount to an international margin call—and even the most unsophisticated investor knows the words “margin” and “call” are bad when put together in one phrase. Simply put, your guy at the brokerage firm calls to tell you that your assets are in trouble. You've got two choices: either deposit more money into your account, or sell off one of your assets to stay afloat. If you don't have more money to put in…well, you can do the math yourself.

On August 15, 1971, the United States didn't have the gold reserves it said it had. And it was worried that it would have less even sooner.¹

The French president at the time, Charles de Gaulle, wanted gold, not American dollars. De Gaulle recognized the Johnson administration was trying to fight two wars at one time: the Vietnam War in Southeast Asia and “the War on Poverty” at home. Maybe he'd had some insight since the French defeat at Dien Bien Phu in 1954.

Wars are expensive. So are social policies. The United States was running up deficits. In turn, the dollar was getting less valuable. De Gualle recognized it was for political decisions, not because of some intrinsic economic phenomena. Economic history shows us that governments get emboldened to spend more than their currency can handle.

One can almost imagine de Gaulle saying in a ...