The coming currency devaluation

Gold-Eagle.com ^ | Oct 10, 2003 | Cliff Droke

[Soren]

I think this article is bogus, and it's not the first time I've seen a bogus article by Droke. He had one touting gold miner Silverado right before it went down the toilet.

In a sense, the US had a dual currency system from 1944 to 1971. Internationally, the dollar was convertible to gold at $35/oz, but not domestically (since it was illegal to own gold other than numismatics and jewelry from 1933-1974).

Patterson states, "I want every one...to think carefully about this...because we are coming very, very close to the end of the freely convertible domestic dollar. They cut in value could be as much as 50%...

What does this mean, really? Cut against what? You can't devalue with a pen stroke like FDR did in 1934 when the dollar was convertible.

End of the freely convertible dollar? In today's global economy, it's inconceivable. How would transnational corporations function? How would people travel? How would people with foreign real estate pay their bills?

[ARA]

WELL DUH!

[Protagoras]

Existing bills will be legal for use in America for ever. I do not understand concern.

It's hard to understand the ramblings of a paranoid person. It's a form of mild mental illness in most cases.

[Starwind]

Very much appreciate your calm feedback, and clearly you read through the thread before posting.

End of the freely convertible dollar? In today's global economy, it's inconceivable. How would transnational corporations function? How would people travel? How would people with foreign real estate pay their bills?

If in fact a dual currency were re-instated, I assume the international dollars would be treated as a foreign sovereign currency complete with exchange rates for personal and business transactions, and currency exchanges (at banks and customs at the US border) for travelers with cash. Transactions would proceed as if you were paying for something denominated in a foreign currency.

The new wrinkle would be the reporting requirements of where the old greenbacks came from when converting to new 'peachbacks', much as is done today if you bring in/out more than $10K. Domestically, they would have to outlaw old-design greenabcks as no longer being legal tender domestically (forcing one the bank to exchange bills - and report where you got the greenbacks). This point of outlawing what was legal tender (raised only by one poster) seems fraught with problems and the biggest obstacle unaddressed by the article.

Technologically, it seems quite feasible.

The motivation (ostensibly to thwart money laundering by 'filtering' the exchange/flow of new and old currency domestically while not 'inflciting' that new currency on international populations whose confidence and use of dollars we wish to retain) seems plausible.

The 'unintended' consequences of two values for US currency to the detriment of domestic bill holders seems plausible.

But your point about Droke's credibility is noted.

[Polybius]

If that is true (the point being questioned in this thread) the two currencies would circulate in different economies (domestic and international) and could conceivably be assigned different values by their respective markets. That mechansim - two different markets, not different years, - could devalue the domestic currency.

Actually, if there were any devaluation, it would devaluate the old currency that is now circulating overseas as that currency would be riskier to hold.

Consider the case of the "Hawaii Dollar":

This U.S. currency, with "Hawaii" printed on it, was issued during World War II for circulation in Hawaii. If the Japanese had ever captured the Hawaiian Islands, the U.S. Government could have immediately declared all "Hawaii dollars" to be worthless.

The old U.S. currency circulating overseas has now become the 2003 version of "Hawaii Dollars".

By demonitizing the old currency after a period when it can be exchanged only at banks, the U.S. Government can, at any time of it's choosing, convert the narco-traffiker's and terrorist's cash reserves of billions of U.S. dollars into souveniers that would be bought and sold in the "Obsolete Currency" category on eBay.

[Lonesome in Massachussets]

You left off the "TIN FOIL HAT ALERT"!

[Lonesome in Massachussets]

By demonitizing the old currency after a period when it can be exchanged only at banks, the U.S. Government can, at any time of it's choosing, convert the narco-traffiker's and terrorist's cash reserves of billions of U.S. dollars into souveniers...

What is money? It cannot breath life into the now-dead dreams of childhood. It cannot heal a broken heart nor repair the shattered portals of a broken home. I speak, of course, of Confederate money. - Joel Chandler Harris

[Polybius]

What is money? It cannot breath life into the now-dead dreams of childhood. It cannot heal a broken heart nor repair the shattered portals of a broken home. I speak, of course, of Confederate money. - Joel Chandler Harris

Actually, the Confederate money I bought in 1985 is worth quite a bit more now than the U.S. greenbacks I bought them with. :-)

[Starwind]

It cannot breath life into the now-dead dreams of childhood. It cannot heal a broken heart nor repair the shattered portals of a broken home.

Ya gotta know where to shop!

[headsonpikes]

Are there two quarter systems?

Yes, actually, except that the good quarters were driven out of circulation by the new quarters back in '65.

The same principle will operate on paper money if the article's premise is true.

The 'sky' is not falling - everything is just 'business as ususl' when it comes to politicians and printing presses.

[verity]

I was referring to "paranoia" and not to the misguided implications of the article.

[hedgetrimmer]

Some notes on dual currency> Argentina went to dual currency to try to keep small dollar investors solvent. Also Europe is going through a dual currency phase now to phase out national monies and convert all transactions to Euros.

On May 21, IMF Managing Director Horst Köhler said he
welcomed Argentina's efforts for a debt swap it claimed would support medium-term financing sustainability. Eleven days later,Minister Cavallo engineered a swap that obliged Argentine banks to exchange relatively good, liquid government bonds fornew longer-dated, illiquid paper. The central bank was obliged to inject liquidity into the banking system (a feature which is not
present in orthodox currency board systems), which greatly
expanded the monetary base and reduced dollar reserve backing of the currency below 100 per cent for the first time.

Soon after, on June 15, Minister Cavallo announced a dual
exchange-rate regime: one for imports and another for most
exports. When markets worried again about devaluation, interest rates spiked and capital flowed out of Argentina. A week later, IMF Director of External Relations Thomas Dawson told a press conference that the IMF continued to support Argentina's efforts.

By September 7 last year, three events had occurred, with the IMF's approval, which seriously compromised the credibility of the convertibility system. Predictably, this did not stop the IMF from augmenting Argentina's stand-by credit to $21.57 billion. IMF First Deputy Managing Director Anne Krueger appeared utterly oblivious in a press release, saying: "The [new Argentine] program aims at restoring the credibility of the fiscal position and
the convertibility regime."

At the end of November, Mr. Cavallo further undermined the
convertibility system by requiring banks to exchange treasury bills for illiquid new ones. As a result, banks could not meet demands for deposit withdrawals, so he instituted restrictions on deposit withdrawals and transfers of funds abroad. A week later Thomas Dawson informed us "there is no Fund staff view on the
subject."

Dissatisfaction with these measures led to rioting and a revolving- door political crisis, producing five presidents in two weeks. Eduardo Duhalde became Argentina's fifth president on January 1, 2002, and ended convertibility five days later. He broke the monetary contract and created a new exchange-rate regime which stole about 40 per cent of the value of the peso—similarto FDR's breaking our domestic gold standard contract and devaluation.

This ended the legal right of people to convert pesos into dollars,amounting to outright theft of the central bank's foreign reserves. Duhalde's administration proceeded to violate contracts with foreign companies, steal the dollar deposits of Argentines, and wreak havoc on the banking system. Since Argentina's devaluation, all eyes have been on the IMF to come to Argentina's aid. And the Duhalde administration is already penciling in a bailout package to support its budget.
http://www.enterstageright.com/archive/articles/0302/0302argentina.txt

[Phaedrus]

Dual currency systems never work because they create huge black markets and lawlessness in general.

[calljack]

Relax, my post wasn't directed to you personally.
How much you are worth and where it is dosen't interest me in the slightest. Lighten up Francis.

[wardaddy]

or when we stopped silver certificates.

[Soren]

If in fact a dual currency were re-instated, I assume the international dollars would be treated as a foreign sovereign currency complete with exchange rates for personal and business transactions

Some questions to think about:

Would the exchange rate between the two be fixed or float? If fixed, would each float against other currencies? Seems like there would be problems unless the domestic currency was convertible only into greenbacks, and then greenbacks could be exchanged into foreign currency at exchange rates that float.

Would the US maintain 2 money supplies: domestic and greenback? Beyond money supply management, the simple wearing out of paper bills would force new issuance.

How would transition work? Seems like a lot of people would dump the peachbacks if devaluation relative to greenbacks was expected.

Is the purpose of all this to maintain the dollar's global role, while plundering the savings of US residents to inflate away debt?

[Tauzero]

"color-shifting ink, whose appearance changes from copper to green as the bill is tilted against the light"

That ought to fascinate my 2-year old.

[Tauzero]

"embedded vertical plastic strip"

What's that for?

[Beck_isright]

"Existing bills will be legal for use in America for ever."

Historically that is not true. Try using a 1928 gold certificate or a Federal Reserve Bank Note. Currency can be invalidated or declared illegal at the whim of the government. Remember FDR and gold during the Great Depression?

[Starwind]

Tauzero: "embedded vertical plastic strip" What's that for?

Speculating: Optical or holographic scanning, possibly encoded with the serial number and anti-counterfeit measures. It may aid in tracking a bill's history, at least which banks it's been cleared through and maybe who deposited/exchanged them.

As to Soren's points (in the following 'peachbacks' are the new currency to be circulated only domestically, 'greenbacks' are the old currency to be circulated only internationally):

Would the exchange rate between the two be fixed or float? If fixed, would each float against other currencies? Seems like there would be problems unless the domestic currency was convertible only into greenbacks, and then greenbacks could be exchanged into foreign currency at exchange rates that float.

Don't know. Save for your last question, I would assume both peachbacks and greenbacks might float against other currencies and each other at rates set by the market. I would further assume peachbacks are convertible to greenbacks only at US borders or currency exchanges for people leaving the US, and convertible back to peachbacks for people entering the US. I assume this would be enforced by treating peachbacks internationally as counterfeit money when discovered by banks or authorities and treat greenbacks likewise as counterfeit domestically (this is where the greenback legal tender issues arise). Merchants would readily recognise either currency and refuse to accept the disallowed currency in transactions, knowing their banks will confiscate them in merchant deposits. However a black market could operate.

The exception would be anyone could walk into a bank or currency exchange and voluntarily exchange disallowed currency for allowed currency with accompanying form explaining where the disallowed currency originated. Presumably this would be routine for amounts below say $10K and more scrutiny applied for larger amounts. If the identity of the holder or the serial numbers on the bills tripped an alert, the cash police descend upon the hapless tourist.

Would the US maintain 2 money supplies: domestic and greenback? Beyond money supply management, the simple wearing out of paper bills would force new issuance.

Yes I would assume so. The existing mechanisms for recognizing worn out greenbacks would remain in force as well as be applied to the peachbacks. Exchange would simply be in accord with what is the 'allowed' currency based on domestic or international location. The treasury would retain responsibility for printing both currencies and dispensing new bills to (and collecting old bills from) banks domestic and international as they do now.

Money supply management could be more focused and adjusted differently for domestic and international supply targets, as the Fed felt inclined in pursuit of its policies. Which given two separate money supplies, could now have diverging policies each customized for a particular goal.

How would transition work? Seems like a lot of people would dump the peachbacks if devaluation relative to greenbacks was expected.

Don't know. Peachbacks would be difficult to dump assuming they'd be the only game in town (domestically) and the envisioned enforcement measures. But I could imagine two black markets forming depending on relative valuations.

Is the purpose of all this to maintain the dollar's global role, while plundering the savings of US residents to inflate away debt?

That, in my opinion, is the real question.

Assuming there are no technical nor operational barriers to having this dual currency and black markets are not a significant factor in setting floating exchange rates, it would seem plausible peachbacks could be used to contain or partition some of the effects of the Fed's inflationary policies (but not entirely) while retain at least the appearance of the greenbacks being the favored reserve currency internationally, and thus helping to avoid/minimize the effects of devalued greenback denominated bonds.

Any thoughts as to the feasibility, practicality, plausibility of this last point (your question)? Maybe in light of this last question, the peachback/greenback exchange rate should be fixed, relative to each other and the greenback floats as it does now? I dunno? But given the mindset of the Fed & Treasury these days, the above seems like something they'd want if they thought they could make it fly.