In Washington, the Administration does not seem to be much concerned. The President’s response was to raise the US Government’s debt limit to $8,180 billion. In his first term he has raised expenditure and cut taxes to an extreme degree. Real expenditure during his presidency has risen by an annual average of 5.1 per cent, compared with 1.5 per cent under President Clinton.

The Federal Reserve is becoming extremely anxious. Alan Greenspan, the chairman, is an outstanding central banker, whom we ought to take very seriously. He gives a warning that the US current account deficit is unsustainable. The deficit has now risen to the point where the US has to borrow almost £2 billion a day. Mr Greenspan thinks that foreign investors may go on strike because they have too many dollars already. He would like to see a reduction in the US budget deficit in order to reduce the external deficit. That, however, would mean deflationary policies, and President Bush does not like deflation.

The problem is not a new one. It is based on the structural weakness of the world’s leading currency, whichever that might be. In the 1920s the key currency was sterling, but the pound had been weakened by Britain’s financial losses in the First World War. London was still the centre of the world exchange system, and Britain still had great, though declining, power to borrow. Eventually, Britain could not take the strain and had to abandon the gold standard in 1931. The slump of the 1930s followed.

As early as the 1960s the French were complaining that the dollar was following the same track. In 1965 Jacques Rueff, President de Gaulle’s economic adviser, gave an interview to the American financial writer Fred Hirsch. Rueff pointed out that “when a country with a key currency has a deficit in its balance of payment — that is to say, the United States, for example — it pays the creditor country dollars, which end up with its central bank. But the dollars are of no use in Bonn, or in Tokyo, or in Paris. The very same day, they are all re-lent to the New York money market, so that they return to their place of origin . . . if I had an agreement with my tailor that whatever money I pay him he returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.”

Of course, the main centre that now sells and lends back is Beijing. Six years after the Rueff interview, the Bretton Woods system of dollar-gold convertibility did break down. President Nixon ended the US commitment to exchange dollars for gold.

There followed the great world inflation of the 1970s and early 1980s. Rueff was right to warn that by 1965 the Bretton Woods system had reached “such a degree of absurdity that no human brain having the power to reason can defend it”.

Since 1971 the dollar has been in an unusual and vulnerable position. It is a dominant, but inconvertible, currency. Such a currency is always at a disadvantage. All the other currencies face the full discipline of the market. If their governments run big budget deficits, the price of the currency will fall. Their exporters must be successful; their imports cannot be excessive. There is still some market discipline on the dominant currency, but that discipline has weakened and needs to be reinforced with self-discipline. The process by which suppliers sell to the dominant country — and then immediately re-lend the proceeds — buffers the impact of normal competition. The politicians of the dominant country can behave with relative irresponsibility, and they usually do. For this reason, a dominant currency tends to become cumulatively less competitive. A dominant currency is likely to become a weak currency as there will be too much of it — the position of the dollar today.

The dominant nation is also likely to accumulate debt, on an horrific scale. This is like the situation that precedes an avalanche. More and more loose snow gathers, until there is a huge overhang. At some point, which cannot be predicted exactly, the appetite for the dominant currency is sated, and people want to sell. Then fear sets in; the avalanche is upon us.

The gold price is a good index of currency fears; if people believe that the dollar is an overvalued currency but lack confidence in other currencies, gold is a natural reinsurance. The gold price has risen in the past three years by about two thirds. The warning signal is quite clear, even though world trade in general is still flourishing.

In the 20th century this decline of a dominant currency happened twice. Sterling declined between 1914 and 1931 and the gold exchange system collapsed. The dollar declined between 1960 and 1970, and Bretton Woods collapsed. The dollar was restored by aggressive deflation in the period around 1980, but it is again in serious decline. It is not clear how the present exchange system of floating non-convertible currencies can be restructured.

The present system depends on the dollar, the keystone of the arch. Without confidence in the dollar, the world has no valid reserve currency. The euro lacks political strength, if nothing else, and itself seems overvalued; the Chinese renminbi is tied to the dollar.

If confidence is not restored, there will be pressure for the familiar false remedies, for competitive devaluation or protectionism. Already the exports of the eurozone are being undermined by dollar competition. Yet the world exchange crisis is being treated as everybody’s problem and therefore nobody’s.

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