Over the last couple of months our good friends in U.S. economic central planning Ben Bernanke, Timothy Geithner and even our fearless leader Barack Obama have been trying to blame Europe for the economic issues in the United States. Barry O. has even gone out and wagged his finger at Europe to say that it needs to get it's economic house in order.
This idea is so insane that you must be without a clue to believe it. There is a fundamental problem with this concept, and that is the way these economies are based. To understand the problem with this theory you have to understand the relationship of the dollar to the Euro, and the older European currencies that the Euro is based on. To do this we have to go all the way back to before World War II.
Before WW2, most European currencies were based on a Gold Standard. The major economies like England, Germany, France, etc.. had many tons of gold and silver in their reserve vaults. Their printed money, much like our dollar back then was just a paper certificate that represented the debt in gold or silver to the bearer in that metal.
Just look at the dollar bill above. "Silver Certificate" "This certifies that there is on deposit in the treasury of The United States of America One Dollar IN SILVER PAYABLE TO THE BEARER ON DEMAND" This is a common sense solution to running a stable economy.
Then WW2 happened and threw a major wrench into this concept. In 1944 44 allied nations met in Bretton Woods, New Hampshire to decide how the post war recovery was going to take place. For more information on the Bretton Woods System Click Here. Basically it decided on a fixed exchange rate between the U.S. dollar and the currencies of the other nations.
Once rebuilding started in Europe, the United States loaned dollars to the nations in western Europe. They in exchange for loans in dollars had to give their gold and silver reserves to the Americans as collateral. In the 50s and 60s the United States being the only major industrialized nation to not be devastated by the war had a booming economy. The U.S. was supplying the world because everyone else's industry was not yet back online.
By the 70s countries like West Germany had fully recovered from the war an were ready to pay back all their loans to the Americans and get their gold and silver back. Their were so many dollars in circulation at that time, (mostly the loaned out dollars in Europe) that eliminating the European gold and silver from the America's reserve would devalue the dollar. What needed to be done is take the dollars back, return the gold and silver, and destroy all the extra dollar currency that was printed. This would have maintained the value of the dollar but the influence of the United States as a world economic power would go back to where it was before the war.
Our President Nixon came up with a "better" plan. He closed the "gold window" which is now referred to as the Nixon shock. It basically by executive order made the United States dollar into a fiat currency. (See my previous article) All the gold and silver stayed in Ft. Knox and the Europeans were basically told they are SOL.
In previous times in history this kind of violation of a treaty this large would have resulted in the outbreak of a large war. The Europeans came to the realization that without any gold or silver in their reserves to pay for a war effort, they had no choice to to accept the new fiat dollar as something of value.
So now this fiat dollar, controlled entirely by the U.S. Federal Reserve has become the reserve asset of the world. Something that has value only because of its acceptance is the major entity backing most of the worlds currency, even the Euro after its creation. This is the 800lb. gorilla in the room that nobody wants to talk about.
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