In a recent article I postulated that the dollar could lose all its purchasing power with a rapidity that will come as an unpleasant bombshell, even to those who already see inflation as society’s greatest problem in the future. The key to understanding why this may be so lies in human reactions to the monetary consequences of the next credit crisis. The undermining of the dollar as a currency affects all other fiat currencies, because it is the reserve currency and all financial markets use it as the pricing medium for commodities and for much of international trade.
A comprehensible analysis of currency exchange dynamics must therefore concentrate on the dollar, only bringing in the broader picture when appropriate. In this article’s context, currency exchange dynamics refers primarily to events that lead to a change in the dollar’s purchasing power.
The dollar has suffered monetary inflation ever since the Federal Reserve Board was created, both in terms of the expansion of base money and of bank credit. The effect in terms of loss of purchasing power has so far come in two shifts. The first was in 1934, when the dollar was devalued against gold by 40%, and the second following the collapse of the London gold pool in the late 1960s, since when the dollar has lost a further 97.4%.
The precedent has therefore been set for a continuing trend, that will eventually conclude with the destruction of the current monetary system. We know this because monetary regimes come and go, leaving gold and silver as the only solid forms of money throughout human history. Therefore, the end of the dollar, along with the whole fiat currency system, just like the end of empires, is one of the monetary certainties. But only a small minority of analysts are conscious this is so and appear to assume the current monetary state will continue indefinitely.
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