Introduction

Abstract

The 2007–2008 global financial meltdown revealed a dangerous feature of the inconvertible reserve currency system that replaced the gold standard of the pre-1914 era. Reserve currency countries could do almost what they wished, with adverse fallouts for other countries. Facing practically no foreign exchange restraint, reserve currency governments undertook one of the most expansive fiscal and monetary policies on record. They forced interest rates toward zero, printed unlimited quantities of money, bailed out those among their institutions that had floated or acquired toxic debt, pushed more debt into the financial system, and attempted to reinflate prices. Some of the real losses associated with the crisis were transferred from reserve to non-reserve countries, causing the most vulnerable people to suffer much of its consequences. The reserve country banking system has, in turn, played the part of a wealth redistributor, with a historical pattern of over-indebtedness-crisis- bailout followed by over-indebtedness-crisis-bailout, a pattern that can become pervasive and endless as long as the reserve currency is widely accepted. The reserve currency governments and central banks have prevented the liquidation of debt, which would not have been possible under a gold standard system.