The United States of America (US), viewed by many as the land of opportunity, has for a number of years, used the power of the US dollar to control and manipulate other countries. The dollar is the dominant instrument used in global trade for the progressive world, thought global commerce and the growth of the free world. This phenomenon has given rise to the moniker “the mighty dollar”.
The gradual rise in power of the US dollar has allowed for political, military and economic control of many other countries across the globe. US has entrenched itself in all aspect of world affairs, while remaining invulnerable to the ills of its bad decisions. Since the entrenchment of the dollar as the world reserve currency, its dominance has been used to subvert smaller and larger countries alike to surrender their economical independence to further the goals of the US (Das, 2018). The risk of this US foreign policy which aims to castigate countries with economic penalties for subverting the US desires, has forced countries that have fallen victim to such policy to seek alternative to the “autocratic finical system”, in view of trying to balance the leverage of the United States (Amadeo, 2018).
In 1913 the US Federal Reserve Act was created in response to the unpredictability of currency system based on bank notes issued by individual banks (Das, 2018). At that juncture, the U.S. economy had overtaken Britain’s pound as the world’s largest unit of trade, but Britain was still at the helm of world commerce, with most global trade transacted in British pounds. Also of note was that, most developed countries had pegged their currencies to gold to create stability in currency exchange.
In the decades prior to the First World War, international trade was conducted on the basis of what has come to be known as the classical gold standard. In this system, trade between nations was settled using physical gold. Nations with trade surpluses accumulated gold as payment for their exports. Equally, nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment for their imports. However, when World War I broke out in 1914, three years into the war, Britain, which had steadfastly held to the gold standard to maintain its position as the world’s leading currency, found itself having to borrow money for the first time, to be able to pay their military expenses with paper money, which devalued their currencies.
The United States became the preferred lender for many countries that were willing to buy dollar-denominated U.S. bonds. In 1919, Britain finally abandoned the gold standard, which devastated the value of bank accounts of international merchants (Das, 2018), who traded in pounds. This helped to propel the dollar causing it to replace the pound as the world’s leading reserve and many countries abandoned the gold standard. The start of World War II, also known as the Second World War, was a global war that lasted from 1939 to 1945. The vast majority of the world’s countries including all the great powers eventually formed two opposing military alliances, the Allies and the Axis. In 1944, delegates from 44 Allied countries, those countries who opposed the war met in Bretton Wood, New Hampshire (Amadeo, 2018), to come up with a system to manage foreign exchange that would not put any country at a disadvantage.
The Allies at the time decided that the world’s currencies couldn’t be linked to gold, but they could be linked to the U.S. dollar, which was linked to gold. (Amadeo, 2018). The arrangement, now known as the Bretton Woods Agreement, established that the central banks would maintain fixed exchange rates between their currencies and the dollar. In turn, the United States would redeem U.S. dollars for gold on demand. Countries had some degree over the currencies in situations where their currency values became too weak or too strong relative to the dollar. They could buy or sell their currency to regulate the money supply (Lioudis, 2018). .
The attraction of using a gold benchmark system is that it seizes control of the issuance of money out of the hands of persons who might otherwise be influenced or be partial. The benefit of physical quantity of gold acting as a limit to that issuance, a society can follow a simple rule to avoid the ills of inflation. Monetary policy not just prevents inflation, but also deflation, and help to promote a stable monetary environment (Lioudis, 2018) in which full employment can be achieved. A brief history of the U.S. gold standard is enough to show that when such a simple rule is adopted, inflation can be avoided, but strict adherence to that rule can create economic instability, if not political unrest.
‘We have gold because we cannot trust governments,’ President Herbert Hoover’s famously said in his statement in 1933 to Franklin D. Roosevelt (Lioudis, 2018). This statement foresaw one of the most draconian events in U.S. financial history, the Emergency Banking Act. This Act forced all Americans to convert their gold coins, bullion and certificates into U.S. dollars. While the legislation effectively halted the outflow of gold during the Great Depression, it did not change the verdict of gold bugs, who are forever confident in gold’s stability as a source of wealth. Gold has a history like that of no asset class, in that it has a unique influence on its own supply and demand. Gold bugs still cling to a past when gold was king, but gold’s past includes also a fall that must be understood to properly assess its future.
The fiat system, created by the Bretton Woods Agreement, is a monetary system in which the value of currency is not based on any physical commodity but is instead allowed to fluctuate dynamically against other currencies on the foreign-exchange market (Russell, 2016). The term “fiat” is derived from the Latin fieri, meaning an arbitrary act or decree. In keeping with this etymology, the value of fiat currencies is ultimately based on the fact that they are defined as legal tender by way of government decree.
As a result of the Bretton Woods Agreement, the U.S dollar was officially crowned the world’s reserve currency, backed by the world’s largest gold reserves. Instead of gold reserves, other countries accumulated reserves of U.S. dollars (Das, 2018). Needing a place to store their dollars, countries began buying U.S. Treasury securities, which they considered to be a safe store of money. However during the Vietnam War 1955 to the fall of Saigon in 1975, (Russell, 2016) the demand for Treasury securities coupled with the deficit spending needed to finance the Vietnam War and the Great Society domestic programs caused the United States to flood the market with paper money. With growing concerns over the stability of the dollar, the countries began to convert dollar reserves into gold. The demand for gold was such that President Richard Nixon was forced to intervene and delink the dollar from gold, which led to the floating exchange rates that exist today (Best, 2018).
The U.S. dollar however remains the world’s reserve currency through periods of high inflation and deflation, based largely on the size and strength of the U.S. economy and the dominance of the U.S. financial markets. Despite large deficit spending, trillions of dollars in foreign debt and the unrestrained printing of U.S. dollars, U.S. Treasury securities remain the safest store of money (Das, 2018), because of the trust and confidence that the world has in the ability of the United States to pay its debts.
Fast forward half a century later and the US dollar is still the pivot of world trade and commerce. The dollar has however been weaponized by Washington and used as a tool to punish countries which are not obedient to Washington or conduct their affairs in a way that is pleasing. Convinced of an existential threat from competitors, America is weaponizing the dollar to preserve its global economic and geopolitical position (Das, 2018). Whilst the U.S. accounts for approximately 20 percent of the global economic output, more than sixty percent of all global currency reserves and trade are done in dollars. Hinged on the 1944 Bretton Woods agreement, the decomposition of which enhanced the effect of the link between the dollar and gold ended in 1971, when Nixon shock allowing America to control the supply of the currency. This has allowed America to literally bully countries large and small into subverting obligations at America’s request, or face the wrath of the American arsenal. These days the US ostensibly loses a long-standing ally weekly. Most recently the White House admonished Great Britain for its subservient behavior towards China, notably its decision to become a founding member of the $50 billion Asian Infrastructure Investment Bank, which will compete with the Washington-based World Bank and IMF (Lingenheld, 2015). The rebuke was a rare breach in the seemingly “special relationship” that has been a backbone of western foreign policy for decades.
The dollar’s pivotal role an “exorbitant privilege,” in the term coined by then French Finance Minister Valéry Giscard d’Estaing in 1965 (Das, 2018), allows the U.S. easily to finance its trade and budget deficits. The US is immune against balance-of-payments crises, because it imports and services borrowing in its own currency. American’s monetary policies such as quantitative easing, allows it to influence the value of the dollar to gain an economical advantage when it suits Washington (Reuters, 2018). The real power of the dollar however is its relationship with sanctions programs. Legislation such as the International Emergency Economic Powers Act, the Trading With the Enemy Act and the Patriot Act allow Washington to weaponized payment flows. The proposed Defending Elections From Threats by Establishing Redlines Act and the Defending American Security From Kremlin Aggression Act would extend that armory (Best. R, 2018). America has leverage its military might using the mentioned Acts passed by congress to bully countries by destabilizing economies through the blocking of payment system and threating other countries with sanction which do not observes US sanctions. Sanctions target persons, entities, organizations, a regime or an entire country. Secondary curbs restrict foreign corporations, financial institutions and individuals from doing business with sanctioned entities. Any dollar payment flowing through a U.S. bank or the American payments system provides the necessary nexus for the U.S. to prosecute the offender or act against its American assets. When combined with access it gained to data from Swift, the Society for Worldwide Interbank Financial Telecommunication’s global messaging system, the U.S. exerts unprecedented control over global economic activity (Das, 2018).
The risk is real. BNP Paribas SA paid $9 billion in fines and was suspended from dollar clearing for one year for violating sanctions against Iran, Cuba and Sudan,. HSBC Holdings Plc, Standard Chartered Plc, Commerzbank AG and Clearstream Banking SA have paid hefty fines for similar breaches (Hirschfeld- Davis, 2018). Secondary sanctions made it difficult for United Co. Rusal (Windalco a subsidiary) to refinance dollar borrowings when global businesses, banks and exchanges were forced to stop dealing with the Russian company. The Trump administration placed new sanctions on Venezuela, a day after President Nicolás Maduro government won the election. The action comes as Venezuela reels from an economic collapse that has caused a humanitarian crisis, as citizens flee a country suffering from food shortages, soaring prices, a broken-down health system and a rash of crime (Sender, 2018). Unites States has also pulled out of an joint comprehensive plan of action, known commonly as the Iran nuclear deal or Iran deal, which was reached in Vienna on 14 July 2015 between Iran, the P5+1, and the European Union. For this withdrawal US impose new harsh sanctions on Iran claiming Iran was not Adhering to the agreed deal, while European Union and other signatories argued against.
A glance at the foreign-exchange markets suggests that the US dollar looks as powerful and dominant as ever. However, taking a much longer-term view suggests that this impregnable position and the economic heft that comes with it will come under assault (Hirschfeld- Davis, 2018). One consequence of the America First policies of US President Donald Trump will be to create a bipolar financial world, with China at one end and the US at the other. That will mean smaller financial flows between the two, and a much more robust effort from Beijing to eventually challenge the dollar’s status as the world’s reserve currency. That, in turn, potentially has implications for everything from the status of US Treasury securities as the safest assets in the world to how oil is priced.“The Trump administration’s “America First” policy will encourage a long-term move away from the US dollar,” according to (Wood 2017), the arm of Beijing-based Citic Securities, pointing to “the growing American practice of using the dollar as a weapon via the implementation of sanctions and the like” (Sender, 2018).
But this more explicit weaponisation of the dollar has not only incurred the wrath of China, it is increasingly alienating government officials and politicians in Europe, the Middle East and Asia as well as infuriating some bank executives (Sender, 2018). Some of the latter believe the US has been able to impose exorbitant fines for violating US laws because authorities can threaten to lock them out of the dollar-driven financial system. At the Milken Institute’s Asia Summit last month, former French Prime Minister François Fillon spoke of the need for Europe to push its currency as an alternative to the dollar in an effort to bolster European sovereignty. A world in which the dollar is the dominant reserve currency means Washington can chose to dictate policy to Europe as it has, for example, on the question of doing business in Iran. Europe has no choice but to go along or risk becoming the object of sanctions itself. Yet is it wishful thinking to believe the euro, which according to recent data from the International Monetary Fund has about a 20 per cent share of central bank reserves, can play anything but a minor role. Instead Europe, like the rest of Asia, will have to decide where its future lies with China or a shrill but shrinking US (Mayeda, 2018).
When China began trading renminbi-denominated crude oil futures out of Shanghai in March, it was a signal of Beijing’s determination to eventually forge a world in which not everything is traded in dollars. At major Chinese conferences this year, government officials and the heads of some of the most important state-owned enterprises noted that domestic demand for commodities, including oil and natural gas, is so great that it makes far more sense for them to be priced in renminbi. China already uses its own currency to pay for Iranian and Russian oil. Meanwhile, transactions in the Shanghai market are up dramatically. Putin explained Russia’s liquidation of US Treasury holding and increasing of national gold reserves as a strategy to minimize risks (Dos, 2018). US Treasury data revealed that the Central Bank of Russia (CBR) had significantly reduced its holdings of US securities. The Central Bank of Russia has slashed its holding by more than 90 percent, from over $150 billion to just $14.9 billion in May (Reuters, 2018). The regulator explained the sell-off as part of Russia’s strategy to diversify its reserves following a financial, economic, and geopolitical assessment.
Increasingly China, Russia and Europe want an alternative reserve currency system. The problem is that immediate replacement of the dollar is difficult. First, the euro, the yen, the yuan and the ruble are not realistic options. The euro’s long-term future and stability isn’t assured, while Japan’s economy remains trapped in two decades of torpor. The Chinese and Russian political and economic systems lack transparency, and the yuan isn’t fully convertible. However, there’s one reason these countries can’t stand up to the US in any meaningful way the US Dollar. USD is the world’s reserve currency and there’s not even a close second. The US has the world’s most powerful military, rule of law and a credible/independent central bank. The idea that the Chinese Renminbi is about to overtake USD as the currency of choice in global trade is crazy. China just announced plans for deposit insurance and floating interest rates last week. In fact, if China were to declare war on the US right now, America’s most potent weapon might be the Federal Reserve (Mayeda, 2018). A sudden rate hike to 5% (or even 3%) would cause a recession in the US, but it could ignite a revolution in China where jobs are increasingly scarce (Sender, 2018). Donald Trump has in just over two years abandoned the Trans-Pacific Partnership (TPP), ditched the Transatlantic Trade and Investment Partnership (TTIP), withdrawn the US from the Paris climate agreement, and unilaterally removed American participation in the Iranian nuclear agreement known as the Joint Comprehensive Plan of Action (JCPOA) (Best, 2018).
Observing the consequences of these political choices in the months since, it is easy to see how the world has reacted in a more or less similar fashion, which has been by ignoring the United States and emphasizing cooperation amongst themselves (BBC, 2017). The TPP, with its agreements between 11 countries, has remained in place without Washington. The development of relations between ASEAN and China continues on without Washington’s participation. While the TTIP has been halted, the Comprehensive Economic and Trade Agreement (CETA), is in its final approval stage, an agreement between Canada and the EU that bypasses the American-inspired TTIP (Kollewe and Wearden, 2014). The Iran deal remains in force despite Washington’s cowardly withdrawal, and the five countries remaining in the Iranian nuclear agreement have every intention of respecting the JCPOA, which had been negotiated over a number of years.
To understand the consequences of these actions, it is important to note how presidents prior to Trump worked to advance American imperialism. As noted, following the wars in Iraq and Afghanistan, several countries began to anticipate and plan against scenarios of American aggression (BBC, 2017). Alliances have been strengthened (Pakistan with China, India with Russia, Qatar with Turkey, Iran with Russia and China, Iran with Russia and Turkey), many issues are being slowly resolved (India and Pakistan, South Korea and North Korea) and many countries prefer to buy arms from Russia and China in order to keep American imperialism at bay.
The methodology of color revolutions, in the light of the protection now being offered by the likes of Russia and Iran, was employed in the place of direct military intervention (as occurred in Iraq and Afghanistan) in other theaters (Libya, Ukraine and Syria). After the wars in 2002 and 2003 in Iraq and Afghanistan, China, Russia and Iran drew a red line regarding Washington’s interventionism. The effectiveness of color revolutions was diminished when the Russians, the Chinese and Iranians started expelling the various NGOs funded by the likes of Soros and other globalist financiers to bring about regime change under the cover of democracy and human rights. The outlook of Washington’s political establishment is based on military hard power that is now inferior in offensive capability than the Sino-Russo-Iranian one, ensuring the strategic independence of Eurasia and its partners (Turkey, India, Qatar, Pakistan, Lebanon, Syria, Libya, Egypt, the Philippines,) (Mitchell, 2013).In terms of color revolutions, the artifice has now been brought to light, and countries on the receiving end of such attacks can now recognize them and quickly act to forestall them, as happened in Hong Kong in 2014. (Cordesman, 2014)
Donald Trump seems to have resorted to the only weapon left available to him, namely, the economic power of the US dollar, offering him the opportunity to shape events (BBC, 2017). It is a strategy with short-term benefits by devastating effects for Washington in the long run. Indeed, the only way to combat US financial dominance is to ditch the US dollar for other currencies. Washington’s economic power derives from the use that the world makes of the dollar. Clearly, then, Trump’s decision to use the US dollar as a weapon will cost his country dearly in the future, the dollar probably bound to lose its role as a global reserve currency. As history has shown, when a reserve currency is transferred to another currency, the empire that depended on this reserve-currency status itself went into decline. This occurred with the France and Britain (Triffin, 1978) and it will likely occur with the United States.
