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The Hegemony of the Almighty Dollar -- PART 1|
01 August 2014.
For 70 years, a key element of American power has been the dollar's standing as the world's premier currency.
But Washington's repeated use of economic sanctions as a foreign policy weapon has encouraged other powers to consider financial alternatives.
Since World War II, America's geopolitical supremacy has rested not only on military might, but also on the dollar's standing as the world's leading transactional and reserve currency.
Economically, dollar primacy extracts "seignorage", the difference between the cost of printing money and its value from other countries, and minimizes U.S. firms exchange rate risk.
Its real importance, though, is strategic: dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency. This is precisely how Washington has funded its hard power projection for over half a century.
Since the 1970s, a pillar of dollar primacy has been the greenback's role as the dominant currency in which oil and gas are priced, and in which international hydrocarbon sales are invoiced and settled.
This helps keep worldwide dollar demand high.
It also feeds energy producers accumulation of dollar surpluses that reinforce the dollar's standing as the world's premier reserve asset, and that can be "recycled" into the U.S. economy to cover American deficits.
Many assume that the dollar's prominence in energy markets derives from its wider status as the world's foremost transactional and reserve currency.
But the dollar's role in these markets is neither natural nor a function of its broader dominance.
Rather, it was engineered by U.S. policymakers after the Bretton Woods monetary order collapsed in the early 1970s, ending the initial version of dollar primacy (dollar hegemony 1.0).
Linking the dollar to international oil trading was key to creating a new version of dollar primacy (dollar hegemony 2.0) and, by extension, in financing another forty years of American hegemony.
Dollar primacy was first enshrined at the 1944 Bretton Woods conference, where America's non-communist allies acceded to Washington's blueprint for a postwar international monetary order.
Britain's delegation, headed by Lord Keynes, and virtually every other participating country, save the United States, favored creating a new multilateral currency through the fledgling International Monetary Fund (IMF) as the chief source of global liquidity.
But this would have thwarted American ambitions for a dollar-centered monetary order.
Even though almost all participants preferred the multilateral option, America's overwhelming relative power ensured that, in the end, its preferences prevailed.
So, under the Bretton Woods gold exchange standard, the dollar was pegged to gold and other currencies were pegged to the dollar, making it the main form of international liquidity.
There was, however, a fatal contradiction in Washington's dollar-based vision.
The only way America could diffuse enough dollars to meet worldwide liquidity needs was by running open-ended current account deficits.
As Western Europe and Japan recovered and regained competitiveness, these deficits grew.
Throw in America's own burgeoning demand for dollars to fund rising consumption, welfare state expansion, and global power projection, and the U.S. money supply soon exceeded U.S. gold reserves.
From the 1950s, Washington worked to persuade or coerce foreign dollar holders not to exchange greenbacks for gold.
But insolvency could be staved off for only so long: in August 1971, President Richard Nixon suspended dollar-gold convertibility, ending the gold exchange standard; by 1973, fixed exchange rates were gone, too.
These events raised fundamental questions about the long-term soundness of a dollar-based monetary order.
To preserve its role as chief provider of international liquidity, the U.S. would have to continue running current account deficits.
But those deficits were ballooning, for Washington's abandonment of Bretton Woods intersected with two other watershed developments: America became a net oil importer in the early 1970s; and the assertion of market power by key members of the Organization of Petroleum Exporting Countries (OPEC) in 1973-1974 caused a 500 percent increase in oil prices, exacerbating the strain on the U.S. balance of payments.
With the link between the dollar and gold severed and exchange rates no longer fixed, the prospect of ever-larger U.S. deficits aggravated concerns about the dollar's long-term value.
These concerns had special resonance for major oil producers.