Follow the Money

Once upon a time, our currency was backed with gold. You could take a $20 gold piece to the bank and trade it for paper money valued $20, or vice versa. Then in 1933, our president sent out an order that Americans were to turn in all their gold and be paid for it in paper money. An ounce of gold would no longer be $20, but would move with the market. However, other governments could still trade in their dollars for gold, and did. America became very prosperous, and imported many foreign items, and paid for them in dollars. The foreign governments took advantage of the ability to trade these dollars for American gold, until the 1970s when our government began to fear that American gold reserves would be depleted and told them they could not trade dollars for gold. Which was a good thing because America imports much more than they export.

So why did other countries continue to use dollars when the value of them fluctuated against the value of gold? In short, other countries had to have dollars because all oil on the planet is bought and sold in U.S. dollars. Only a fraction of U.S. dollars in print are physically in the U.S. right now. Many billions of dollars are abroad, participating in foreign trade.

But the U.S. financial position is weakening. The oil trade will ultimately move away from using dollars exclusively. And when those dollars come home to roost, guess what that will do to prices in the U.S.? Have you ever seen pictures of post WWI Germany with the people carrying wheelbarrows of cash to go buy bread? Or wallpapering their bathroom with money because it was cheaper than wallpaper?