The US dollar is the undisputed hegemon of the international currency market. Although the Bretton Woods system collapsed and the US dollar broke off the link with gold, the US dollar still plays an irreplaceable role in international trade.
The US dollar is the undoubted hegemon of the global currency market today. Of course, the supremacy of the US dollar is not achieved overnight, but with the leap development of the US national power gradually from the corner of the American continent into the vast international market, and after the Second World War replaced the British pound as the internationally recognized hard currency.
The history of the rise and fall of the US dollar in the past 300 years can be divided into three stages: the first stage — the Rough period, the birth of the US dollar, which is the stage in which the North American continental currency gradually from chaos to standardization;
The second stage is the hegemonic period, in which the US dollar gradually becomes the hegemonic power and gradually replaces the British pound and plays a leading role in international finance and trade.
The third stage, the post-hegemonic period, was challenged by the euro, the yen and other currencies, especially after the collapse of the Bretton Woods system, the credibility of the US dollar faced unprecedented challenges.
With the emergence of the renminbi as a dark horse, the international monetary system will become more competitive, but it will remain a superpower for a long time to come.
As shown below:
1. The US dollar was born before the outbreak of the North American War of Independence. Out of commercial needs, the thirteen colonies in North America issued the first currency in 1690, which was used to raise military expenditure to cover the cost gap of military expeditions.
These currencies were short-lived and soon abandoned by the market.
With the continuous economic development of the colonies in North America, Enlightenment ideas from the European continent continued to spread to the North America, and the calls for independence of the 13 colonies kept coming. In order to prevent the formation of a unified market in the economy of the 13 colonies in North America, the British rulers banned the colonies from issuing currency in 1764, and uniformly paid gold and silver to the taxes of the colonies in North America.
The result is a lack of capital in North America.
When the War of Independence broke out in North America, the United Continental Congress of the thirteen colonies, in order to raise funds, held a meeting in Massachusetts on May 10, 1775, and approved the issuance of a total value of two million dollars of paper money, known as the “continental coin”. Since one dollar is worth 24.057 grams of silver, roughly equivalent to a Spanish silver dollar, the continental coin was interchangeable with the Spanish silver dollar.
Spanish silver was one of the main currencies in circulation in the United States until the outbreak of the Civil War, and most banks in the United States used Spanish silver as a reserve currency.
Alexander Hamilton, the first Secretary of the Treasury of the United States, promoted the gold standard, but due to the lack of a central bank in the United States, the responsibility of currency issuance was shared by private banks and the United States Treasury and private banks. The Treasury and private banks issued various kinds of paper money, such as Treasury bills and gold bills, and the money market was quite chaotic until the establishment of the Federal Reserve system in 1913.
By issuing Federal Reserve notes, America’s troubled money markets were fundamentally improved.
After the outbreak of the First World War, all countries banned the import and export of gold and silver as strategic resources. Due to the lack of sufficient gold as the currency reserve of the gold standard, the gold standard system was broken up. In order to raise war funds, all countries printed paper money arbitrarily, resulting in a substantial devaluation of the currencies of all countries.
In 1933, it ended the circulation of gold coin notes, allowing only foreign central banks to exchange gold for the United States at official prices.
2. Establishment of the supremacy of the dollar At the end of the First World War, the United States entered the war and the Allied powers were greatly strengthened. Due to the strong industrial manufacturing capacity and rich resources of the United States, while Britain and France and other countries suffered from the long war and had no manufacturing industry, various American goods poured into the European continent.
At the end of the war the United States became Europe’s biggest creditor.
After the war, Germany’s huge war reparations led to the collapse of the German economy. At this time, Wall Street led an international consortium to lend money to Germany to keep the German economy from collapsing. At this time, Wall Street lent money to Germany to ensure that Germany had enough fiscal revenue to pay the war reparations to Britain and France, and Britain and France used most of the war reparations to repay the war loans to the United States.
Thus dollars flowed out of Wall Street and eventually back into Wall Street, and the dollar’s status soared.
Before the First World War, Britain was the most economically powerful country in the world, and the pound played a pivotal role in national trade. Britain had sufficient gold reserves to maintain the gold standard. However, the First World War caused the collapse of the British economy and it could not continue to maintain the gold standard, and the status of the pound was questioned by international capital.
With the help of the First World War, the US dollar became one of the world’s currency hegemons. Wall Street’s international financial status rose rapidly, and it surpassed the City of London to become the largest capital exporter in the world.
By the end of World War II, Italy had surrendered, Germany had shifted to strategic defense on the eastern front, Japan had lost its ability to conduct large-scale campaigns in the Pacific, and its domestic economy was close to collapse.
The economic power of Britain and France was severely damaged during the war;
The situation of the Soviet Union was similar to that of Britain and France, the third five-year Plan had not been completed and was invaded by fascist Nazi Germany;
Only the United States prospered from the war and enjoyed unprecedented economic development.
In 1945, the gross national product of the United States accounted for 60% of the gross national product of all capitalist countries. The gold reserves of the United States increased from 14.51 billion US dollars in 1938 to 20.08 billion US dollars in 1945, accounting for 59% of the world’s gold reserves, equivalent to 3/4 of the gold reserves of the entire capitalist world.
This made it the dominant player in the capitalist world.
Under such circumstances, the international monetary system with the dollar as the center was formed after the Second World War.
In July 1944, on the eve of victory in World War II, the 44 Allied nations, organized by the United Kingdom and the United States,
The United and Allied Nations International Monetary and Financial Conference, held at a hotel in the village of BrettonWoods, NewHampshire, attended by 730 people,
The Agreement of the International Monetary Fund (IMF) and the Agreement of the International Bank for Reconstruction and Development (IBRD), collectively known as the Bretton Woods Agreement, were adopted based on the White Plan proposed by the Assistant Treasury Secretary of the United States, and the Bretton Woods system began, thus establishing the supremacy of the dollar.
3. After the Bretton Woods System established the supremacy of the dollar in the post-hegemon period of the dollar, the United States, with its strong military and economic strength, borrowed heavily to European countries through the “Marshall Plan” after the Second World War, exported capital, controlled the European continent and launched several wars in Asia, thus strengthening the global supremacy of the dollar.
But as the economies of Europe and Japan recover, that dominance is being challenged.
Through the gold reserves, we can find that in 1949, the gold reserves of the United States was 24.6 billion dollars, accounting for 73.4% of the total gold reserves of the whole capitalist world at that time, which was the highest number after the war.
However, since 1950, there have been deficits in every year except a few years with a slight surplus.
In the first half of 1971, the deficit reached $8.3 billion.
As the balance of payments deficit gradually increased, the United States gold reserves are dwindling.
Especially in the 1960s and 1970s, the United States was Mired in the Vietnam War, its fiscal deficit was huge, the international income situation deteriorated, the credibility of the dollar was affected, and several dollar crises broke out.
A large number of capital flight, countries have sold their own dollars, snapped up gold, so that the United States gold reserves sharply reduced, the London gold price rose.
In order to restrain the rise of the gold price, maintain the exchange rate of the dollar and reduce the loss of gold reserves, the United States and eight countries including the United Kingdom, Switzerland, France, West Germany, Italy, the Netherlands and Belgium established the gold pool in October 1961. The eight central banks took out a total of 270 million dollars of gold, and the Bank of England acted as the agent of the pool and was responsible for maintaining the gold price in London.
Various measures were taken to prevent foreign governments from exchanging dollars for gold.
In the late 1960s, the United States further expanded the war of aggression against Vietnam, the balance of payments further deteriorated, and the dollar crisis broke out again.
In the half month of March 1968, more than $1.4 billion of American gold reserves flowed out. On March 14, the turnover of London gold market reached a record 350 ~ 400 tons.
The United States was no longer able to maintain the official price of gold. After consultation with the members of the Gold Board, the United States announced that it would no longer supply gold to the market at the official price of $35 an ounce.
In the early 1970s, with the rise of Japan and Western Europe, the United States was weakened economically and unable to bear the responsibility of stabilizing the exchange rate of the US dollar. With the rise of trade protectionism, it announced the devaluation of the US dollar twice in succession.
Countries have abandoned the fixed exchange rate between their currencies and the US dollar and adopted the floating exchange rate system.
The international monetary system centered on the US dollar collapsed and the status of the US dollar declined.
Many people across Europe once refused to accept dollars.
In London, a traveler from New York said, “The banks, the hotels, the shops are all the same. They look at our dollars as if they are carriers of germs.”
In Paris, taxis hang signs saying No more Dollars, and even beggars write No Dollars on their hats.
The dollar has lost its supremacy but remains by far the most important international currency.
Although the dollar was no longer linked to gold after the collapse of the Bretton Woods System, Saudi Arabia and other OPEC oil producing countries used the dollar as the settlement currency of crude oil under the threat and incentive of the United States, and the dollar still occupies the first place in international trade settlement with the help of oil transactions. In today’s international trade, the dollar settlement accounts for about 60% of the total trade.
After the inclusion of RMB in the SDR in 2016, the weight of US dollar in IMF’s Special Drawing Rights was still as high as 41.73%, ranking the first among all major currencies. It can be seen that petrodollar plays a crucial role in the continuation of US dollar’s hegemony.
After the golden development of Japanese economy in 1960s and 1970s, Japan became the second largest economy in the world at one stroke. The international status of yen skyrocketed, which once posed a threat to the supremacy of the US dollar. However, with the birth of the Plaza Agreement between the US and Japan in 1990s, Japan fell into a 20-year recession, and the yen had no chance to recover.
In the 21st century, the birth of the euro posed the most direct challenge to the supremacy of the US dollar. The international community once believed that with the economic integration of the eurozone, the euro would replace the US dollar and become the hegemon of the international monetary system, especially the US subprime crisis in 2007.
However, the good times did not last long. With the outbreak of the Greek debt crisis in 2010, the Euro depreciated sharply, and the international community questioned the stability of the euro one after another. Subsequently, the European Central Bank implemented the monetary policy of quantitative easing, and the pressure of negative interest rate led to a significant reduction of the credibility of the euro in the international community.
The euro lost its chance to challenge the dollar’s supremacy.
Since its birth, the euro has been highly expected by the international community to break the dominance of the US dollar and break the trap of the US reaping global wealth through the Federal Reserve’s monetary policy. However, due to its congenital defects, the euro is unable to fulfill this task.
With the development of China’s reform and opening up over the past 30 years, China has become the second largest economy in the world, and the internationalization process of RMB has been accelerating. The international status of RMB has also risen accordingly. In particular, China joined the SDR basket currency system of the International Monetary Fund in October 2016, and the international status of RMB has soared significantly.
As a result, the international monetary system has entered a period of “warring states” in which the U.S. dollar dominates and the euro catches up with the yuan and the yen.
