Re: Iraq and The Dollar

by Steven F. Hayward

Derb is right that the spectre of the collapse of the dollar was the unremarked aspect of Johnson deciding to pull the plug on Vietnam in early 1968. I wrote about this extensively in chapter 5 of The Age of Reagan. Here’s the first paragraph of the section:

At the same moment the tumult over the Tet offensive was unfolding, “the most serious economic crisis since the Great Depression shook the Western world,” in the words of economic historian Robert M. Collins. In a nutshell, there was a loss of confidence and a near-panic over the U.S. dollar. In the old days, if bank depositors feared for their deposits and lost confidence in their bank, there would be a run on the bank. If the bank had enough reserves or could borrow dollars from another bank, the panic could be quickly dispelled. But what happens when the financial system is backed up by a central bank promising to redeem depositors with gold? If a crisis of confidence occurs, then you have not a run on a bank, but a run on a whole country’s currency and gold reserves. This is what happened in 1968. The episode brought to an abrupt end the lofty promise of “growth liberalism” or the “New Economics,” and set the stage for rising inflation and economic instability that took 20 years to remedy.

The full cite for the Collins article is: Robert M. Collins, “The Economic Crisis of 1968 and the Waning of the ‘American Century,’” American Historical Review, April 1996, p 396.

Among the things that happened during that crisis were Johnson closing the “gold window” temporarily over one weekend and dispatching Treasury officials to London to plead for help, and he also tried top put limits on US investment overseas, and discourage travel abroad by US citizens by imposing a $500 “exit tax” on overseas airplane tickets.

Having said all this, however, one should not be hasty in drawing an equivalent with the present troubles of the dollar. A case can be made that the fall of the dollar is almost done with for a number of macro reasons. One shrewd analyst I read says that Greenspan and the US is palying chicken with the Europeans to get them to adopt pro-grpwth policies, which they need to do if they are to continue to have access to Asian markets. A falling dollar is not in their interest. In this kind of game of chicken, I bet on us–the US–to win.

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