Since the end of WWII, the United States has essentially enjoyed a free ride on the backs of the rest of the world. Americans have been cashing a virtual blank check signed by nearly every other country for over 70 years and what she has done with that check has been, at the very least, alarming, disturbing and wasteful. As early as 1965, French President, Charles DeGaulle, complained about the inherent disadvantage France and other states were having as a result of this.
To understand how this happened, it is necessary to review some basic concepts of economy and world commerce. According to Google, economy is "the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services." They also define world commerce this way, "an interchange of goods or commodities, especially on a large scale between different countries (foreign commerce)." These concepts are most easily demonstrated through the robustness of a nation's currency. The more stable a currency is on the world's stage, the more robust is its economy. In this example, since WWII the USA has had one of the most stable currencies on the planet and, with but a few notable years, its economy has grown steadily as a result.
An example of a country with an unstable economy,Mexico, shows just what happens to such nations. Except for the first few decades following the war, its currency has been under almost nonstop attack. By the time I moved to Mexico in 1980 its peso to dollar ratio had dropped from 12 to 1, which it had enjoyed up to 1976, to 22 to 1, when it was forced to devalue by September of that year. But by the time I returned to the US in 1984 that ratio had dropped even more dramatically to 176 to 1. During my four years in the country, the peso was devalued on a daily basis. Inflation became so acute that the government decreed a nationwide wage increase for all workers on three separate occasions and in 1983 passed a law forbidding anyone from buying more than US$50 in any given month. Mexico hit rock bottom in December, 1992, with a ratio of 3,000 to 1. In 1993, the government of Mexico decided to drop the three zeros and create a new peso with a new rate of 3 to 1.
The other important factor to consider is the promise a country makes to keep its currency robust at all times. Throughout modern history, many countries have backed their currency with gold. That means that any holder of its currency in the world could return that money and request gold in exchange. This support is not made lightly and its net result is to force the country to be very careful about its annual budget lest it spends more than it could repay in gold reserves.
In the early 20th Century, the enormous costs of WWI proved to be the downfall of the gold standard across Europe and elsewhere. By 1927 some of them had stabilized their economies enough to return to it, but alas their euphoria was to be short lived. The Great Depression which started in 1929 brought down all gold standards worldwide and with the coming of WWII ten years later, those same countries found their postwar economies so devastated that a return seemed all but impossible.
Enter Bretton Woods
According to Thoughtco.com, (1d) "Because the United States at the time accounted for over half of the world's manufacturing capacity and held most of the world's gold, the leaders decided to tie world currencies to the dollar, which, in turn, they agreed should be convertible into gold at $35 per ounce."-
"Under the Bretton Woods system [so named for the town in New Hampshire, USA, which hosted the event] central banks of countries other than the United States were given the task of maintaining fixed exchange rates between their currencies and the dollar. They did this by intervening in foreign exchange markets. If a country's currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, driving down the value of its currency. Conversely, if the value of a country's money was too low, the country would buy its own currency, thereby driving up the price."
But not all countries signed the agreement. Most notably, the USSR and its satellite nations refused to sign because the system was primarily based on capitalistic principles that ran contrary to Soviet values. The result of this insubordination was the decision by the other parties to deny any foreign exchanges outside of their own country. In 1978 I saw firsthand some of the effects of that policy 34 years later when I visited Warsaw in December.
In my book, The Great American Culture Shock, I highlight what happened. As the fateful day drew closer, I decided to see if I could find an exception to the draconian measure of worthlessness outside of the country. One day while at work I moseyed over to one of the exchange rate booths at the airport. I told the clerk that I would like to buy some Polish money, Zloty. He stared at me for a full two minutes before explaining that their currency is useless outside of Poland.
I had prepared for this eventuality and already had an answer. I told him that I was a student in college and this was for my presentation. He gave me 300 zloty and I gave him 10 Swiss Francs in return. When I arrived in Warsaw, the custom officer dutifully asked me if I had any Zloty with me. "No," I lied.
For six days I saw empty business after empty business. One night I remember seeing a huge line outside on the department stores. It was bone chilling cold, yet these people acted as if it were a mild autumn day. I decided to see what they were in line for. When I got to the head of the line, upstairs and around nearly half of the building, I found myself standing in front of empty shelves. I then noticed that behind the 6 clerks chatting in one corner six pairs of jeans glistened faintly. I thought to myself "the 7th guy and the others were SOL. What a sad system!" Such was the power of Bretton Woods.
Debt ceiling? We don't need no debt ceiling
Even though the concept of a debt ceiling is not new to us, it was started in 1917, its purpose originally was just a simple guide for government spending. But by August of 1971, President Nixon destroyed the Bretton Woods system by removing the restraints of a gold-backed US dollar. Suddenly, not one country carried the precious metal as a guarantor of their money. The only way to keep the rest of the world from collapse and maintain the US dollar as world currency was to promise to never raise the debt ceiling except on a temporary basis which has since meant every time our budget got close to it.
Hegemony usually ends by indigestion