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Santana F. King
Dec 8, 20195 min read

The Dominant Dollar: A brief explanation of U.S. currency hegemony


The strength of the United States’ currency, the Dollar, is enormously advantageous to the health and prosperity of the U.S. economy (the world’s largest economy) and international security. Though, the economic advantage of having a strong currency is coupled with a vulnerability in international trade.

Background:

After World-War II, the powers of Europe were devastated in the aftermath of fighting; the war laid waste to their economies and currencies. As a result, the conventional balance-of-power dynamic had expired and the United States had emerged as the paramount state and the overt leader of the west.

Before the dollar's hegemony and much of history, the value of a nation's currencies was contingent on its gold reserves (for much of history, currencies were coins of gold and/or different valuable metals); this caused their currencies to fluctuate and become unstable.


In 1944, at the Bretton Woods conference, the western powers established a new global monetary system were all currency were denominated to dollars and dollars were denominated to gold. Since the United States was the most powerful nation that emerged from the war and had the majority of the global gold reserves (70%), the U.S. dollar was pegged to a specific amount of gold. This achieved the intended aim of making the dollar the world’s reference currency that all other currencies are denominated to; hence, the dollar become the global medium of exchange for international trade. Although, this dollar-to-gold convertibility system did not last. Because of spending on multiple wars and social programs, the U.S. Dollar outgrew its gold reserves, resulting in global currency devaluations and inflation.

In 1971, President Nixon suspended the dollar-to-gold convertibility, ending the previous monetary order and begun a new order of fiat currencies. This continued to be to the U.S.’s avail. Now, currencies were appraised by the markets, by supply and demand, and the U.S. had created a formula that provides a constantly equal amount of demand for the supply of dollars.

Since the U.S. was/is the largest and most stable economy with vast markets and the globes most robust financial system, there was an existing demand for dollars that matched the global supply. Although, with the end of the dollar-centric gold-convertibility order and the future of the dollar’s preeminence seeming uncertain, President Nixon and Secretary of State Kissinger worked with Middle eastern nations to birth the Petro-dollar. The U.S. made an accord with Saudi Arabia to sell their oil exclusively in dollars, and in return, the U.S. will offer them military protection and assistance. With oil being the world’s most sought commodity, the U.S. had managed to artificially create a constantly high demand for the U.S. dollar that supplemented the existing demand. In essence, it saved the dollar’s supremacy as the world’s leading reserve and reference currency.

The Strong Dollar’s Impact:

A strong dollar greatly benefits the United States and gifts it many monetary privileges that support the health of the U.S. economy and advance it’s national Interest. Conversely, those benefits are paired with disadvantages.

A global monetary system that is predicated on a strong dollar is advantageous to the U.S. and is part and partial to the foundation of the U.S.’s international supremacy. The U.S. has what some experts call exorbitant privilege; this term refers to the many benefits the U.S. is afforded by having its currency being the chief global currency. The United States' monetary advantage of its dollar's hegemony , with dollars permeating the globe in high demand, has allowed the U.S. Government to continue to run large budget deficits year-after-year with minimal risk of serious inflation. Since the dollar is stable and in incessant demand, the U.S. Government can continue to create dollars and increase the money supply without risking serious inflation and devaluation.

Furthermore, the U.S. can spend an awesome amount of money on its military, which they, in turn, use for national security and advancing U.S. national interest. For instance, the U.S. can manage the expenses of maintaining hundreds of military bases abroad to act as a deterrent towards aggression and keep a Navy presence in the South-East Asian Sea—to promote, protect, and free maritime trade in the most populated region of the globe.

In addition, with the dollar being the world's dominant median of exchange, the United States can financially sanction bad actors—not allowing them to obtain dollars for trade or access financial markets. Since nearly all currencies and products are priced in US dollars, when nations trade with one another, they use dollars as the median of exchange. International transactions take place between each bank’s or nation’s accounts in the U.S. Federal Reserve—in essence meaning a majority of international trade involves and goes through the United States and must adhere to its laws. When the United States wants to financially sanction a bad actor (nations, people, or companies), they restrict their access to the Federal Reserve; hence, hindering their ability to gain dollars, for trade.

Furthermore, since the dollar and the U.S. government are incredibly stable, U.S. financial markets are tremendously attractive to international investors. This results in a large influx of capital into the U.S.


Also, a strong dollar gives Americans more buying power; Americans can import products for modest prices and when traveling abroad, Americans will be able to purchase and consume more when their dollars are exchanged for the local nation’s currency.


America has the power to boost the economy of other nations. If the U.S. gives monetary aid to a developing nation with a weaker currency, they will be able to stretch that aid and use it more effectively: what may seem like a modest amount of aid to the U.S. will be a lump sum for the recipient. This allows the U.S. to establish relationships with emerging markets--with the aim of expanding trade in the future. Although, the converse is true; loans denominated in dollars are more difficult for a developing nation to repay.

Though, the U.S. cannot ignore the colossal-sized disadvantages they dollar's hegemony presents them. Just as the dollar gives Americans more buying power to purchase foreign products and services, the converse is also true. A strong dollar also means U.S. products and services become extremely expensive for foreign nations; hence, hurting U.S. exports. This leaves the U.S. at a trading disadvantage to rival nations, like China. Also, it leaves the U.S. vulnerable to nefarious currency manipulation practices (Link: Chinese Monetary Ambitions).

Conclusion:

Post World-War II U.S. has benefited from the dollar being the world’s hegemony currency—it is the world’s leading reserve currency (2/3 of all global reserves being dollars). It has allowed the U.S. to comfortably manage an exorbitant amount of debt by printing money without risking serious inflation (exorbitant privilege), but it also leaves the U.S. more vulnerable in trade and at a competitive disadvantage to rival states in foreign markets. Nations like China are beginning to threaten the Dollar’s hegemony, which the U.S. views as an indirect threat to their international supremacy.




Sources:

Photos:

Thumbnail: https://www.streetwisereports.com/article/2018/09/18/the-beginning-of-the-end-of-the-dollar.html

Photo one: https://www.aljazeera.com/ajimpact/dollar-share-global-currency-reserves-year-190930215926143.html

Photo two: http://www.thesleuthjournal.com/dollar-collapse-losing-reserve-currency/

Photo three: https://www.forbes.com/sites/kenrapoza/2016/04/27/for-some-china-is-single-biggest-threat-to-dollar-hegemony/#566921db57ee

Photo four: https://splinteredeye.wordpress.com/2017/07/31/unpacking-dollar-hegemony/

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