Dollar: Past, Present and Future by Navin Doshi


By Navin Doshi

I bought my first mid-size car for about $3,000 in 1961.  A similar car would cost about $30,000 today.  On the surface, it seems that in the last 50 years the value of a dollar has dwindled to a dime. Even more disturbing is the UCLA tuition fees. Today it is over $8000 per year, compared to about $200 I paid in 1960. I do need to know what the future holds for the dollar.  Is it a case of history repeating itself, with the dollar associating itself with God and gold in the future? We need to review the past to gaze into the future, when the dollar with its inscription, “In God we trust” was tied to gold.

The word “dollar” is historically related to the Bohemian tolar (16th century) and much later to the Slovenian tolar (1991), the daalder in the Netherlands, and the daler in Sweden, Denmark, and Norway. Initially the American dollar was pegged to about 1.3 ounces of fine silver and later on, it was pegged to gold at about $20 per ounce of pure gold. President Roosevelt, during the Depression years, devalued the dollar by changing the ratio to $35 per ounce.  

At the end of World War II, treaties were signed in order to establish a common currency to be used among nations.  In his article, It’s Time to End World War II, Hugo Salinas Price, the founder of Mexico’s Electra retail chain, pronounces that the essential agreement is “one that established that gold should be the money to be used to settle all trade deficits between nations, but in lieu of gold, dollars could be used to settle these deficits.  In forcing on the Breton Woods Agreements the acceptance of the dollar as a means of settling international debts, along with gold, the U.S. established the will of a victorious power to continue to plunder the whole world.” General de Gaulle (President of France, 1959 – 1969) has been quoted as saying that this was “an exorbitant and unnecessary privilege” given to America. And so, it was indeed a privilege of the victor in World War II. The perception that America took advantage after WW II has gotten more credence in a recently published book by Dussmann Kulturfaufhaus in Germany. The book has created uproar among Germans because it claims that Germany gave away its sovereignty by signing an agreement that granted undue advantage to the U.S. It also claims that all German gold, even now, is being held in the U.S.

 The favored status of American currency eventually led to leverage in paying for imports and the accumulation of huge trade deficits. The victor, expanding its money supply with little discipline, became the largest debtor country in the history of the world.  In Hugo’s words, “the exporting countries, not being nuclear powers, were afraid to demand gold in payment of their export surpluses, since such a request would very probably irritate the great power.”  When countries like France asked for gold and not dollars, President Nixon removed the dollar linkage with gold, making the dollar a fiat currency.  By running a huge trade deficit which arose out of its expansion of credit and consequent money-printing, the U.S. was able to send abroad masses of dollars to pay for imports. The exporting countries received dollars – not gold – for their export surpluses to the U.S. The dollars began to pile up in foreign central banks as “reserves”.

Commerce is an eminently peaceful activity. The seller forces no one to buy; the buyer forces no one to sell. The means of payment in commerce, since written history began, has been either goods for goods, i.e., barter, or goods for gold or silver- a perfected form of barter. But anything else, any innovation, anything decreed to be a means of payment by anybody whatsoever, cannot be anything but an imposition, a violation of the rules of commerce.

The present ruinous condition of the world’s finances and its lopsided industrial development has not yet corrected itself. If anything, we are in the “eye of the hurricane” for the moment. Over the course of the past few years, the dollar has continually spiraled downward. The dollar, as a Paper Atlas, is subjected to hold the weight of the world on its weakening shoulders.  Currently, the devaluing dollar has to uphold its strength as the world currency if it wants to prevent the potential to end abruptly and violently. Few observers believe that the dollar may gain some strength for a short while. The world has gone short on dollars in a very big way. Few examples include investors sending funds abroad to purchase emerging market assets, the issuance of dollar-denominated bonds, not in their own currencies by sovereign nations, and going out of Europe’s way to borrow greenbacks instead of the Euro.  So the odds are increasing that the dollar may rise in the near future once the momentum reverses, causing short sellers to cover their shorts.

So what does this once-powerful dollar have in store for its future?  Hugo Price believes that “the world’s principal powers should convene and come to an agreement for the establishment of the world’s monetary and financial systems,” where he deems the basis of gold, even silver, to exemplify “a neutral, real and objective medium for commerce and finance.”  Even though the world’s reserve currency seldom changes, the slowing U.S. economy and the devaluation of the dollar may cause an alternative currency to come into play.  U.S. policy makers claim that declining dollar will help American exporters to export more. However, other countries, particularly those with their currencies tied to the dollar, seem to be doing the same, maintaining a very low interest rate. Competing currency devaluation by the central bankers seems to be a fool’s race to the bottom. Recall that the currency is the lifeblood of an economy, and making it weaker is certainly not healthy.

The current purchase of some 200 tons of gold by the Reserve bank of India has caused the dollar to weaken further.  For the first time, a major central bank of a significantly large economy is buying gold, reversing the trend of last several decades when central banks usually sold gold. Before India’s purchase of gold, the jewelry market used 80% of the total gold supply, with all other markets, mostly technology, taking in the remaining 20%. Today the financial segment, that includes hoarding by central banks and investors, has a 50% share of the gold supply.  It seems we are going “Back to the Future” (Recall the movie starring Michael Fox), as it has been in the past before the 1950s when world trade transactions were settled bartering for goods or exchanging with gold and silver. Officially the U.S. central bank holds over 8000 metric tons, the largest among all central banks. However only the Fed and bullion banks know how much is left after leasing and short- selling to keep the dollar strong. In comparison, the Reserve bank of India currently holds much less than a thousand tons, but Indian citizens hold over 20,000 tons.   Almost 100 years ago, John Maynard Keynes chided India for its “ruinous” love of the “barbaric relic”. Perhaps central banks were reading their Keynes over the last two decades, during which anti-gold sentiment pervaded. It seems that Indian experience is winning over those who thought they can control nature in general and the human psyche in particular. Another economist from Austria mostly ignored by Keynesians, Ludwig von Mises, contradicted Keynes’ view and probably learned from Indian experience about the greed of rulers that makes them cheat their subjects by weakening the currencies they control.

Pierre Lassonde, CEO of Franco Nevada, believes that the gold price should rise at a level when the ratio of Dow Jones index to the price of gold goes below 2. Currently the ratio is a little over 9. This ratio has gone twice to about one in 1934, when the Dow and the gold price were about 35, and in 1980 when they were about 800. Aaron Regent, president of the largest producer of gold, Barrick Gold, believes that we passed the peak production of gold some time in 2000. The ore grades have fallen from 12 grams in the 1950s to about 3 grams per ton recently and the trend has never reversed, adding more pressure to the gold price. I have recommended buying gold as an insurance against the ravages of inflation in this newspaper first in 2002 when gold was trading a little over $300. The bullish case for gold could go for another five years based upon cycle studies, and the price could go over $2000.

(Mr. Doshi is a market trader and a writer. His articles are available at


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