Why the U.S. Dollar Is Buying Less
IN FEBRUARY the United States dollar took another plunge downward when it was devalued by 10 percent. This was its second devaluation in about fourteen months. Why did it happen?
To understand the basic reasons for the dollar’s recent slide in value, we must look back at the international role it has played since the end of World War II.
The Dollar’s Role After World War II
The United States came out of World War II as the wealthiest nation on earth. Because of its huge gold reserves the dollar became the basis of international fixed exchange rates. In other words, the exact value of other currencies was expressed in terms of their worth in relation to the U.S. gold-backed dollar.
This had, at the time, certain advantages. American factories had not been destroyed during the war as had those in Europe. Europe needed American products. America needed to keep its huge wartime work force employed. A fixed rate of exchange between various currencies, based on the dollar, speeded up rebuilding the war-torn world. Large American corporations could buy and sell internationally, knowing that foreign currencies would stay fairly constant in value over a period of time.
For a few years after the war the U.S. prospered. Wealthy corporations sold abroad to former ally and enemy. As American businesses prospered, they, in turn, brought the U.S. government increased tax revenue.
Then what happened to reverse this process? Why has the dollar declined in value?
The Dollar’s Decline
In a phrase, there has developed what is called a ‘balance of payments’ deficit. That is, Americans are spending more money outside the country than they are bringing into it. As we have seen, American industry has spent huge sums abroad. Also, American tourists carry dollars overseas. The maintenance of American military operations and foreign aid send yet more dollars outside U.S. borders.
But at the same time Europe has been growing stronger industrially and economically. European nations are making more of their own products rather than buying them from the U.S. Further, more and more goods are sold to the U.S. Now the U.S. actually imports more than it exports. The country buys more than it sells.
For twenty years the dollar’s problems have mounted. America’s Time magazine summarizes:
“The root cause of dollar weakness is that ever since the early 1950s the U.S. has been living beyond its means in the world. Consumers, businessmen, tourists and the Government have been spending tens of billions every year to build factories in Europe, buy Japanese cars and cameras, bask in the Riviera sunshine, dispense foreign aid, station troops round the globe and wage the costly war in Viet Nam.”
Understandably, foreigners slowly lost confidence in the dollar’s worth. Nevertheless, foreign central banks always bought excess American dollars in their countries. Why?
To keep the number of circulating dollars reduced. Too many dollars would lower its price. If the dollar’s value fell, the local currency, based on the dollar, would increase in value. Then, any item the foreign country was exporting would cost more on the major U.S. market. Americans would stop buying. Sales would drop off. Business and government would suffer. That could not be allowed to happen.
Thus, dollars continued to accumulate outside the U.S. By February 1973 a pool of up to 80 billion dollars is estimated to have collected.
Money ‘speculators’ holding large sums in American dollars abroad have added to the dollar’s problem. Corporations and even individuals sell their dollars for another strong currency, usually German marks or Japanese yens. When the value of those currencies rises, the speculators sell once more. But in this transaction they buy more dollars than they sold.
When there is a massive sale of dollars by many speculators at one time, a crisis is created. Foreign governments do not have the resources to keep pace with the selling. What can best be done in such a circumstance? Devalue the dollar!
The Dollar Devalued
Devaluation means dropping the value of the U.S. dollar while allowing the value of strong foreign currencies to remain stable. This is what happened for the first time back in December 1971. But further measures were necessary! One devaluation was not enough. Why not?
Because the basic reasons for the devaluation lingered. The U.S. continued to import more than it exported. Further, inside the country, inflation persisted; basic commodities such as food were expensive and rising in price.
Thus a second devaluation was necessary in February 1973. Did that still the fears outside America? No! In fact, right after the second devaluation one of the largest sales of U.S. dollars in history occurred. Further adjustments were obviously necessary. What was done?
The Floating Dollar
The United States agreed with thirteen major non-Communist countries no longer to have a fixed currency exchange rate. Rather, dollar rates would henceforth float, that is, find their own value in each nation as determined by supply and demand.
At least six European nations agreed to a “joint float.” They established a fixed rate of exchange among themselves but floated as a bloc against the U.S. dollar. Speculators are discouraged by the floating dollar system. Previously they knew in advance that certain exchange rates would prevail; but that guarantee is now gone.
All of this is not to say that the dollar no longer occupies a central position in the financial world. It does. One strong reason for its clinging to that spot is candidly noted in the March 19, 1973, issue of Newsweek, a U.S. periodical:
“The U.S. also still possesses the ultimate ‘financial’ reserves of all: the nuclear deterrent and military might that alone insure, as one high German official put it, ‘our freedom, our entire way of life.’”
But for now, the net result of what has occurred since late 1971 is a dollar that buys less at home and abroad. How will these alterations be reflected in average daily buying?
Effects on Those Using the Dollar
For Americans the long-range effects of recent economic moves remain to be discovered. But the immediate result is increased prices for foreign items and services.
One popular German-made automobile rose from $2,059 to over $2,200 in cost after the February devaluation of the dollar. Japanese cars will go up even more in the U.S.
Vacations and travel will be more expensive as the dollar buys less lodging, food and transportation in Europe, Russia and Japan.
However, the hardest blow for many American families is the soaring cost of necessities. Food prices, for instance, already high, can be expected to continue rising due to devaluation. Why? Because emphasis is now on exporting goods; selling, not buying, is being stressed to try to build up the balance of trade in the U.S. favor. As food is sold overseas, less is left for Americans to buy, driving the price of the smaller supply higher.
Oil—another virtual necessity in the modern world—comes more and more from the Middle East and South America. It will cost even more American dollars. Thereafter, heating oil, gasoline and eventually electricity will no doubt be costlier.
Necessities, too, are affected in another way. U.S. industry uses raw material from foreign sources. Bauxite for aluminum comes from Jamaica and Surinam; wool for coats, sweaters and suits is from Australia. Since the U.S. dollar buys less in each of those foreign countries, the finished American product will surely show a corresponding rise in price.
Will the floating dollar solve its problems for good? Many economists welcome the loss of fixed exchange rates. But most also confess that the future is uncertain. The current ‘floating’ rates appear, at best, to be a transitional move. Says Harvard economics professor H. S. Houthakker: “The search for a more stable international monetary system should not be abandoned.” Experts are not certain what changes may be ahead for the dollar and other currencies.
Regardless of what future moves economists may make, there must be further great changes before mankind can ever enjoy real security. The changes required are far more extensive than what men can accomplish. But God has promised to bring them about, not by patching up the present selfish arrangement, but by wiping it out and bringing in a completely new system of things, one in which righteousness will control.—2 Pet. 3:11-13.
That God has the power to do such a thing, there can be no doubt. Furthermore, in the Bible he has specifically stated that it is his purpose to do so, and in this generation. Does your heart yearn for life in such a righteous new order? If so, ask Jehovah’s witnesses for more information. They will be glad to help you to learn about it, free of charge.