www.ft.com
The US dollar, which turned 150 this week, is finally starting to act
its age. After a stormy childhood, it spent much of its 20th century
prime as the unquestioned linchpin of global finance, particularly
during the Bretton Woods era, when it was tied to gold. Today, the
greenback is the primary reserve currency, largely due to tradition and
lack of alternatives. With traders unwilling to bet on the troubled euro
and unable to bet against the renminbi, gold's nominal record in dollar
terms this week shows unease about the dollar's long-term strength.
In 1861, people getting paid in the untried new paper currency
initially were wary, sending its value sharply lower versus specie. The
phrase "not worth a Continental" – a reference to paper dollars issued
to finance the Revolutionary War eight decades earlier – showed their
skepticism about fiat currency. They feared the dollar, created to
finance the Union's war against 11 rebel states who had issued their own
dollar three months earlier, would suffer the same fate.
In fact, the dollar almost vanished several times. Yet the flowering
of the US economy in subsequent decades, and the need for liquidity
during panics, revived its fortunes. The longer it hung around, the more
it became accepted as "legal tender". Federal Reserve notes, a 20th
century development, eventually replaced original greenbacks backed by
the Treasury, but the name stuck.
That was 40 years ago – the same year that the dollar's link to gold
was severed. Hard-money types say that began the dollar's decrepitude,
but perhaps they are wrong. US economic decline might easily have been
quicker if the Federal Reserve under Paul Volcker had not restored faith
in the dollar in the 1980s. Even backed only by faith, memories of the
greenback's prime bought the US a few more decades of the good life. Now
old and frail, the dollar is worryingly vulnerable to a nasty fall.
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