by Christopher P Shelley

Created on: May 27, 2008   Last Updated: April 15, 2011

For almost two centuries the strength of the dollar came from the gold and silver which backed it. This solid backing came to an end in 1933 when FDR signed executive order 6102 which ordered all US citizens to turn their gold over to the federal government at $20.67 per ounce. Further debasement came in 1965, LBJ signed the Coinage Act of 1965 taking all the silver out of our coins. This countermanded the Coin Act of 1792 signed by George Washington himself which clearly stated:

"That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained...every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death."

Finally in 1972 Nixon completely removed the US Dollar from the Limited Gold Standard. The OPEC countries did not want (and still don't want) an unbacked fiat currency in payment for their oil and so the oil embargo ensued.

Today we perceive the crashing dollar as a rise in oil and gasoline prices. In fact if we were still using silver in our dimes (a 1964 silver dime is worth $1.32), three dimes would still buy a gallon of gas just like it did in 1964.

So in effect our dollar has degraded into a worthless fiat currency. Sooner of later all fiat currencies go to zero; it's an inarguable historical fact. But the Euro is also a worthless fiat currency, so why has it risen so fast against the dollar?

The answer is: supply and demand. The dollar had a monopoly as the world's oil currency. Now most of OPEC oil is sold to Europe, while the US gets most of its oil from Canada, Mexico and Venezuela. Now that Europe has its own currency why should they not use it to price up and buy mid-east oil? Additionally, many OPEC countries strongly dislike the US and would prefer not to use dollars as a matter of religious principle. These factors and some others, have led to a downward shift in the world demand for dollars.

Case in point: In 2006 Iran stopped accepting Dollars for their oil. Countries like Japan and China which have huge reserves of dollars, cannot use them to buy Iranian oil. They must convert them to Euros. This has resulted in an oversupply of dollars and a run on Euros, a change that is reflected in the currency markets. Other OPEC countries like Saudi Arabia, Qatar and UAE, have for the first time ever, de-pegged their currency from the dollar, throwing gasoline on an open fire, no pun intended.

But this is not the first time there's been a run on the dollar. As mentioned before in the 1970's after the dollar was taken off the gold standard, inflation grew to over 12 percent and like now, the dollar lost much of its value.

What cured that devaluation? The same thing that will cure it this time, short of going back on the gold standard: 17 percent interest rates.

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