“Money does not grow on trees” is an old expression of wisdom that seems to have been disregarded by 21st century American policymakers. People all over the world and throughout time base their decisions primarily through lived experience. The US dollar became the world’s reserve currency in the aftermath of World War II, which is now almost eighty years ago. There is virtually no one in power at the American government or in leading institutions who has a living memory from before that period.
In fact, the elite status of US currency has been taken for granted and is being eroded by policies that create inflation as well as sanctions that exclude other nations from participating in the global economy that America dominates through its money. There is the danger that the constant erosion could precipitate an avalanche that could cause the dollar to lose its status.
This would shock the United States economy with massive price increases on consumer goods while crippling the local, state, and federal governments because deficit spending will no longer be possible if no one buys the debt. In this scenario, states like California and New York might find themselves turning to the federal government for some type of bailout while smaller states with more balanced budgets might find themselves wondering why they should be paying the bill for someone else’s reckless spending that they had no part of, which in turn could create a crisis of unity among the United States of America.
Bretton Woods
The World War II film “Flags of Our Fathers” tells the story of how the survivors from the famous flag raising at Iwo Jima photo were returned to the United States to promote the purchasing of war bonds while dealing with their own PTSD and guilt of their friends who died in battle. In one scene, Bud Herber, their handler from the Treasury Department, explains that they need to sell war bonds because the country is almost bankrupt and the Arabs selling oil will only accept payment in gold.
Prior to WWII, the reserve currency of the world was British Pound Sterling, but its status was greatly weakened by both WWI and WWII because the nation needed to spend massive amounts of money to fund its war efforts. Meanwhile the Americans became their largest creditors and wealth flowed across the Atlantic to North America to pay back their debts.
In 1944, with the outcome of the war certain to be an Allied victory, representatives from the forty-four nations working together to defeat the Axis met in Bretton Woods, New Hampshire to plan the global monetary policy for the post-war order. In the end it was decided that all the nations would peg their currency to the US dollar and that would be pegged to gold at the fixed price of thirty-five dollars per fine ounce.
In less than thirty years, that system started to fall apart as the US government’s spending drastically increased because of the “guns and butter” policies initiated during the Johnson Administration and the depletion of gold reserves because foreign countries were redeeming their dollars for gold. On August 15, 1971 President Nixon suspended the convertibility for dollars to gold which effectively ended the gold standard. With the treasury’s printing press no longer restrained, the 1970s saw a spike of high inflation that lasted into the 1980s. An ounce of gold that cost $35 in 1971 now costs approximately $2500 today.
Despite the abandonment of the gold standard, the US dollar has been able to maintain its prominence in the past fifty years because of US economic and military power combined with the petrodollar. The petrodollar sets the US dollar as the currency to be used internationally when purchasing “black gold,” also known as oil.
Trade Deficits
Globalized trade requires the movement of goods between countries. Overall, this is a net benefit to the world as some countries are better at producing specific things and their resources are better spent on those endeavors while exporting their surpluses and using those proceeds to import what they don’t have or cannot efficiently create. The last time the United States had a trade surplus, meaning Americans exported more than they imported, was 1975.
Now, in order to import goods, Americans must have an item to trade because no one is giving their stuff away for free. What the United States exports are their dollars and they get away with it because they are the world’s reserve currency. But massive inflation combined with the overuse of sanctions has caused some nations—some of them quite big and powerful—to search for alternatives to the dollar.
The BRICS alliance was created specifically for this purpose, even though its members have yet to agree on an alternative currency in the years since its founding. Part of what is propping up the US dollar’s dominance is the fact that there is not an alternative ready to replace it. However, there has been speculation that gold—whose price is up 25% this year—could be that alternative, and the price increase is a reflection of the demand from other countries buying it to fill their central banks.
Massive Government Overspending
Modern Monetary Theory (MMT)—the idea that money does grow on trees because we can just print it when we need to and use taxes and other policies to control price inflation—was an idea from the 2010s that gained popularity before the runaway price inflation that started in 2021. During that decade, the US national debt almost doubled from $14.8 trillion to $27 trillion. This massive increase in borrowing was made possible by the Federal Reserve. They created the money from thin air and purchased the debt from the government through a policy called Quantitative Easing (QE). Currently, in 2024, the debt is now over $35 trillion and increasing exponentially every year.
And it’s not just the federal government that spends more than it has. Every state in the union has a debt. But the big difference between them is how much that debt is. As of 2021, California is more than $500 billion in the red, while ten other states each had a debt of less than $10 billion. Should California receive a federal bailout because of its mismanagement, then, in theory, the taxpayers in states with lower debts would be paying the price.
Growing Divides
During the US Civil War, the nation was largely divided between the populous and industrial North and the slaveholding, rural, and agrarian South. In the decades since, we have witnessed America become a more united nation as advances in communication and transportation eased the ability to travel through this large nation. But, in the 21st century, we are starting to see a new split in the union between red and blue states.
Blue states are controlled by the Democrat party and have larger governments with more spending. In recent years, we have seen a migration of citizens from those states to others in the nation. These people tend to lean Republican, and their loss has increased the Democrat power in blue states, while also increasing Republican power in the red states they move to as the voter base shifts. Purple states are becoming fewer and fewer and it’s at the point where presidential candidates only travel to a handful of states for campaigning because the others are secured before the elections thanks to increasing partisanship.
Businesses are also leaving blue states for red ones. California was once the economic leader in the country, but now many companies like Tesla and Chevron are moving to Texas where the government climate is more friendly. Many financial companies from New York have moved to Florida as well because the local tax burdens are much lower, allowing them to keep more of their money.
The Coming Crisis
New York Governor Kathy Hochul told Republican voters in her state to move to Florida if they are unhappy with the way the Democrat party governs the state under her leadership and many have taken her up on her offer. It’s very likely that she would have lost her 2022 reelection bid had so many Republicans not left the state since she assumed power. And, while this strengthens her and her party’s voter base, it weakens the state treasury’s tax base.
As economic power shifts, the deficits of blue states like California, New York, and Illinois will only increase further. And, if the dollar stops being accepted by producers in other nations for payment, then the trade deficit will become a shortage of goods manufactured abroad. The decrease in supply will lead to rising prices.
The ability to create money out of thin air will lose its magic as that money becomes near worthless as a form of payment. Everyone in America will feel the pain and, when people are struggling, they are less able and willing to help others, especially when they blame the out-of-control spending of some for the predicament that everyone is in. The danger to the United States of America is very real but it is also fixable, although it won’t be easy and it will require leaders that are not afraid to make difficult decisions instead of kicking them down the road.
