The complete dominance of the dollar began with the Breton Woods agreement after World War II, after the British could no longer afford to be the keystone of the global economic system. The dollar became exchangeable for gold upon demand, and because of the dominance of the US economy after the War, the US dollar became the global reserve and trade currency. Thus, if you want to buy oil in large quantities for whatever reason, BBQ's or something like that, you could just call up a guy in Saudi Arabia, and he'll sell you his oil and take your dollars, no questions asked. No hassle for anyone wanting to buy anything in the US. No time spent weighing out gold coins out of a sack. Oh no, the Tea Party would say. we would have a system where you could carry around paper checks that were linked to gold. Like ETFs. I bet you can even carry money that was double the price of gold. What's the difference between fed backed paper money and gold backed paper backed money?
Not much except the money supply depends on miners instead of economists.
So after the ruinous Vietnam War, which nearly lasted for an entire generation, Nixon decided to take the US off the Gold Standard and onto a floating exchange because of the massive amounts of money spent on that war. This move, moved the fulcrum of economic power from the Treasury, which had the right to issue debt to increase the money supply, to the Federal Reserve, now no longer constrained by the hold of the Gold Standard, the Federal Reserve Bank of New York, can press a button and create trillions of new dollars. Many of these new dollars are used to buy Treasury bills, the proceeds of which are then used to pay for government programs and fighting wars. The largest holder of US Treasury debt is not China, or Japan, or Saudi Arabia, but the Federal Reserve, and it should stay this way. The interest is returned to the treasury, or used to pay for the operations, and the mandatory profit given to the owners of the Federal Reserve. This isn't something I made up. My supervisors told me this. Now, this isn't as insidious as it all sounds, because the people who work at the Fed, by and far, are people of good conscience who consider themselves to be part of an upstanding academic institution. And I have not met a member of that organization who has not acted in the interests of the economy as a whole.
However, this system, only instituted in the 1970s, has also created a somewhat perverse system, where the United States holds the trigger to the Doomsday machine for the entire global economic system. Thus, the interests of any player within the global economic system, who have accumulated huge amounts of dollars, is to perpetuate the current system. The simplest means is to continuously recycling profits from trade back into dollars and the US economy. This may occur in many ways. In China, where the government requires that all dollar currency be exchanged for yuan with the central bank, the Bank of China then purchases Treasury bills, either from the Federal Reserve, or from a US treasury Auction. When interest rates go up, the value of these bills go down. No one likes it when their securities go down in value. As Hamilton once quipped, and this is paraphrased, the more people who hold our debt, the more interest they will have in us. Fortunately for us, We are on the receiving end of the institution and have nothing to worry about.
This system in many ways is brilliant because it locks the interests of the vast majority of the world to the interests of the US currency, which, ultimately is controlled by Americans. This is why the media makes such a big deal when Iran threatens to switch to the Euro for pricing oil exports, or when China diversifies its basket of foreign currency holdings. Thus, despite the hollowing out of our industry, somehow America is more prosperous, or WAS more prosperous than ever. Somehow average income continued to climb, despite that fact that the only things America Exports are Guns, Drugs, and US Dollars -- something eerily reflective of the foreign trade of North Korea. However, this is a symptom of the system, as the distortions it creates come to a crisis point.
The people at the Fed have certain mechanisms to "inject" money into the system. The first and foremost mechanism of injection is the fed funds rate, which the Fed charges other banks to borrow short term money. This affects the money supply within the economy because banks will lower their interest rates due to the lower cost of money, i.e. the lower interest rates. Lower interest rates means more affordable home prices, which means more demand for homes, which leads to high home prices -- we all remember that, so I won't go into how that led people to borrow more money against their homes, which they bought on borrowed money, because of the low interest rates the Fed set.
Those were great times. But now that part of the system doesn't work anymore. The fed has another avenue, the Stock Market, which is also affected by low interest rates. And we have seen the stock market go up, recently. Unfortunately, the rise in stock prices will soon end due to demographic forces, where net sellers in the US will begin to far outnumber Net buyers, with no end in sight, unless the shares are sold to foreign investors, which they very well might be. But the point here is that no addition real growth in the economy has occurred. Just a transfer of existing assets. This is why the so called Service Industry has grown so much in recent years, because there isn't really that much to do. Since the current monetary policy seems to only encourage asset transfer, rather than real aggregate productivity growth.
Next, the Fed can give money to the federal government, which can then spend the money on whatever it likes, possibly distorting the economy, and possibly improving it as well. But no one really wants to have more public debt, even though because of the Fed, it is meaningless to the majority of ordinary people, since in reality, the Fed can simply inflate away the debt, as all our debt is denominated in Dollars, unlike Germany, Unlike Zimbabwe, Unlike Argentina and all the other countries the Tea Party Gold Bugs like to cite. However, if the Gold bugs succeed, then our national debt can no longer be managed, since no one can print more money. The Tea Baggers have just given away our ability to control our own, and consequently the global money supply. Why would they do that? Why would they try to destroy the only source of income Americans have left? Finance -- the US doesn't have enough gold mines to support the liquidation of the debt. They have legitimate reasons. The arrogance of those who benefit from the generosity of the federal reserve, -- a generosity not bourne from captured interests, but rather from impotence. The federal reserve does not know how to put money into the system, except by giving people who already have money, some more money, and then hope they will spend it. Or to give the government money, if all else fails. Only top down, not bottom up.
The Tea Party Hates Inflation. Only the very rich who have saved a lot of money need to worry about inflation. To debtors, who are the vast majority of Americans, inflation is great news. Another avenue that exists, low interest rates, causes the dollar itself to lose value, which increases exports, further injecting money into the system. However, because of the lack of raw materials, and the high cost of labor in the US, this system of export is also stalled. There are other avenues of monetary policy that exist, but all of them seem to operate from a top down perspective, with no support from bottom up banking, which would allow direct lending to both consumers, and consumers who want to turn into entrepreneurs.
The Federal Reserve System, is undoubtedly one of the most brilliant currency Unions ever created -- a Union that spans the global. However, in order for it to continue to serve the economy as a whole, bottom up avenues of monetary injection must also be built. The Tea Party wants to rid the US of the Federal Reserve, and ruin the foundation of our international system. Why? Because most of they have bought their gold. Because they hate the corporatism that has begun to dominate not just the American Economy, but also American Society. However, the lack of a mechanism for direct injection of funds to the small guy has caused the system to distort towards large corporate, hierarchical bodies. The Fed has a final opportunity to rescue itself, if it has the will to develop a means to more equitably distributed stimulatory monetary policy.