Globalization The US and the World Dollar

The US overtly took over as the world financier at the Bretton Woods agreement in 1944. Very simply, the US dollar was now fixed to a certain weight of gold. This system was adopted by all the countries in the world as the system of financial control.

Then, in 1971 the US unilaterally decided to come off the gold standard and allow the dollar and the currencies of all the other countries to float in the world’s money markets. Floating meant that demand and supply simply decided the value of one currency against another. The US dollar, not surprisingly, remained supreme.

But the US no longer needed gold in its central bank in New York, and that meant that, for the first time in world affairs, it did not need to balance its outgoings and income of money. From 1971, when a country earned too many US dollars, the US Treasury simply offered them a US Treasury Bond and thus exchanged the bond for the surplus dollars. Most other countries, of course, had to balance their payments between exports and imports, and if they did not they were forced to borrow with very unattractive terms.

The US could now spend abroad much more than it earned from its exports. In fact, it could now afford to go to war with any country thanks to the dollars, which that country and other countries had spent in payments for US imported goods. We are all paying for American excesses abroad.

In simple terms, it is rather as if I earned $100.00, spent $150.00, and then bought back with a bond the excess $50.00 and spent it again. A quite extraordinary system, and it may be the Achilles heel of the present US Empire.

The system of finance on a global scale is, unsurprisingly, organised in the interests of the superpower of the day. At the beginning of the twenty-first century wc have a deeply unstable situation whereby the US alone is able to import vastly more than it exports and to consume therefore much more than it produces. Some superficial observers argue that this is a major benefit as it allows weaker economies to import into the US economy more than would otherwise be possible. These arguments assume that the system of world finance will be forever as it stands now. But as we have seen it will not always be so.

Should, for instance, China, or a group of countries, decide to trade in their own currency, they would sell their US Treasury Bonds and create immediate chaos in the US economy, and thereby possibly bring the whole edifice down. Such ideas are being considered as I write.

Roger van Zwanenberg

Source: Essays on Muslims and the Challenges of Globalisation, Institute of Policy Studies, Islamabad. Republished with permission.