As an American, I was not surprised by Edward Luce’s rather bleak prediction of America’s future in his critical analysis of a possible constitutional crisis (Magazine, FT Weekend, October 17). We face a more disturbing scenario. A calamitous future would be a concurrent financial collapse of the debt-ridden, unbacked, global fiat monetary system. Such a scenario is difficult to comprehend, but it is decidedly probable for those who have studied the history of fiat currencies. It has been over 70 years since the Bretton Woods agreement, when the international monetary system was developed and pegged to the US dollar, as the world’s reserve currency, which in turn was based on redeeming dollars for gold.
It has been almost 50 years since US gold-backing was dropped and all currencies became fiat (government sanctioned currency of no intrinsic value based on political, military and other considerations). In other words, under the original Bretton Woods deal, all currencies were effectively backed by gold. All that changed when President Richard Nixon closed the gold window, ending the convertibility of dollars to gold in August 1971.
Mr Luce’s article explains, “like so much else in any constitutional democracy, the system ultimately survives because of behavioural codes rather than law. Rules are a confidence trick. If enough people refuse to follow them they cannot be enforced”; and quotes Aziz Huq: “The great secret about the US constitution is that it relies on public acceptance. Without legitimacy, nothing can last for long.”
Seemingly, fiat currencies fit this description perfectly. The real test for America will be how it deals with a massive inflating currency of diminishing value with far less purchasing power.
Chris Kniel
Orinda, CA, US
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October 20, 2020 at 11:02AM
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Letter: Dollar collapse would seal America’s calamitous fate - Financial Times
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