Rising and hegemony of the dollar
Before the Second World War, the pound sterling was the main currency of trade and international reserve in the world. The currencies of all the countries were referred to the pound, and their possession assured the insertion and the capacity of purchase in the international commerce.
This changed after the Second World War. The main economies of Europe and Asia were in rubble and needed to be rebuilt. The United States, on the other hand, with a complete economy and with a gross domestic product that represented more than half of world production, stood as the country capable of leading and leading the reconstruction of the world.
To promote reconstruction and facilitate international trade, countries agreed to use the US dollar as a standard currency of exchange: a single currency would make commercial transactions more fluid, while at the same time more stable the global economic system, which was also supported , in the fact that the United States is the country with the largest amount of gold reserves in the world (Bretton Woods Agreement, 1944). On the same occasion, the World Bank and the International Monetary Fund were also created. Perhaps few people understood, at that time, that by setting the dollar as an exchange currency, they were giving the United States a special power and privilege that largely sustains the geo-political and economic power that it holds today.
In addition, to promote reconstruction, the United States government issued loans in dollars to the countries of Europe and Japan, partly intended for the purchase of US products. In turn, the United States opened its markets and provided technology to accelerate the reconstruction process (Marshall Plan). The dollar being the currency of exchange, the countries of the world are got used to negotiate in this currency and a commercial infrastructure and ecosystem was developed that would facilitate the use and diffusion of the dollar.
At first it was agreed that every dollar paper issued by the Federal Reserve would have its real gold backing. However, everything changed in the 1970s (government of President Richard Nixon, 1971), when the Federal Reserve did not have enough gold reserves to support the large amount of dollar papers issued to cover the exorbitant spending of the US government and, then, the Federal Reserve decided to decouple the dollar from gold. The dollar papers that would be issued from now on would only be wet papers in ink without any real physical support. The economic power of the United States was getting bigger because now it can buy the world with pure paper, and the world accepts those papers.
To give more solidity to its decision, the United States and some countries of OPEC (Organization of Petroleum Exporting Countries) signed a secret agreement whereby, in exchange for political and military protection, they should sell oil only in US dollars. This would create the need for dollars from oil-importing countries, and "more real" support would be given to the value of the dollar. Keeping the dollar as an exchange currency was and is a strategic economic objective of the United States.
Years passed and the use of the dollar continued to spread throughout the world, while the United States was controlling the supply and flow of dollars according to its own economic and hegemonic interests. Henry Kissinger had said it the year 1973: "if you control the flow of money, you control the world" (Kissinger was Secretary of State between the years 1973 to 1977). The creation of the euro, and its introduction into the world financial markets in the year 1999, reduced the demand for dollars in Europe but is far from displacing the dollar as an exchange currency in other countries.
The SWIFT financial network and the control of the flow of money in the world
On the other hand, the year 1974 was created the SWIFT system (acronym for Global Interbank Financial Telecommunications Society), a financial communications network that brings together more than ten thousand financial institutions in the world: each institution has a SWIFT code that identifies it and allows you to make transactions with any other institution that is part of the system. SWIFT is currently the system de facto used by banks in their international financial transactions. SWIFT transaction information is recorded, including the data of the issuer, the receiver and the banks participating in the operation.
SWIFT is managed by a steering committee with some members appointed by the US government who, in this way, have access to information about money flows in the world: know what people, institutions or governments send and receive money and, therefore, Therefore, it can interfere with transactions by preventing unwanted money flows.
The dollar, a powerful weapon of economic sanction
The spread of the dollar as an exchange and reserve currency, as well as US access to the SWIFT system, have turned the dollar into a missile that is part of its vast military arsenal. It does not make noise or lift smoke, but it can create chaos and crisis, it can knock down or strengthen governments, all aimed at maintaining the hegemonic power of the United States.
On the one hand, raising and lowering the interest rate, the Federal Reserve can promote easy credit (with low rates) and difficult repayment or refinancing (with high rates) which has produced economic crises in several countries. A clear example is the debt crisis experienced by Latin American countries in the eighties that ended up being called the lost decade. Another example is the current economic crisis facing Argentina and that motivated the request for an aid loan to the IMF International Monetary Fund to cover its trade deficit and stop the collapse of the Argentine peso.
On the other hand, the US government imposes economic sanctions on countries that do not act according to the order that the US country has imposed. Countries such as Russia, Iran, Libya, North Korea and Venezuela have been economically sanctioned and prevented from using the SWIFT system, thereby making it impossible to import and export in the formal international market: no financial institution in the world (not only in the United States but of the world) can facilitate monetary transactions with these countries. If they do, they will be sanctioned through their assets in the United States, as well as the loss of access to the US financial market.
Several banks in France, Germany, and Italy have had to pay significant fines to the US government for facilitating financial transactions with Iran or North Korea. Although the transactions were made outside the United States, they were forced to pay the fines so as not to lose access to the US financial market. The SWIFT system allowed the direct identification of the participating banks.
Likewise, for the purchase of Russian weapons, Turkey, a NATO member country that houses US military bases, received economic sanctions of up to 50% of steel export tariffs, as well as the inclusion of SWIFT blacklists to members of the Turkish government who cannot carry out international financial transactions. As a result of the sanctions the Turkish lira was devalued at about 30% and its economy has entered into recession the year 2019. Russia has also been subject to various economic sanctions, both from the United States and from Europe, for the annexation of Crimea in the year 2014.
Economic sanctions have been reimposed to Iran the year 2018 by the government of Donald Trump. The country is disconnected from the SWIFT financial system and cannot sell the large amount of oil and petrochemicals it produces and which constitute its main source of income. This has slowed its economic activity and caused the fall of the Iranian rial. Similar sanctions have been imposed on Venezuela and its company PdVSA prevented from exporting oil, as well as buying machines and spare parts necessary to put its oil infrastructure into operation. PdVSA has also lost control of CITGO, its oil refining and marketing company in the United States.
On the other hand, recently the Chinese telecommunications company ZTE has been sanctioned for selling equipment to Iran and North Korea. ZTE had to pay a significant fine while it was forced to restructure its steering committee in order to continue buying electronic components from US companies.
Also, in December of the 2018, the financial manager of the Chinese telecommunications company Huawei, which is also the daughter of the owner of the company, has been arrested in Canada, at the request of the government of Donald Trump, on the grounds that a subsidiary of Huawei sold telecommunications equipment to Iran and North Korea. Huawei is less dependent on American technology than ZTE, so its sanctions have had less impact.
Measures that countries take to reduce the power of the dollar
US economic sanctions have increased significantly during the Donald Trump administration and many of them are considered a product of their temperamental and conflictive form of government. Several countries are seeking and proposing strategies to get out of the influence of the dollar and the US sphere of control in order to minimize the impact of economic sanctions.
Russia and China have been implementing mechanisms to boost and develop their business transactions in their own currencies: rubles and yuan. In addition, Russia has significantly reduced its international dollar-denominated reserves and is replacing them with gold, euros and yuan. Likewise, Russia, China, India, Iran and Turkey have been proposing an alternative global financial network to SWIFT to avoid US control.
For its part, Iran, affected by trade sanctions, has been accepting payments in Chinese yuan or Indian rupees for the sale of oil and gas. In addition, China, in a commercial war with the United States, continues to buy Iranian oil despite the sanctions imposed. The proximity to Iran allows China to have more accessible oil at a lower price.
In January of 2019, the European Economic Union created INSTEX (which stands for Trade Exchange Support Instrument) as a mechanism that allows trade with Iran without going through the SWIFT system, and is used only for products for humanitarian purposes . Although INSTEX is already in operation, its usefulness is limited since it does not apply to products of commercial interest to the Iranian government.
On the other hand, the emergence and dissemination of cryptocurrencies as a decentralized, secure and efficient means of payment can displace the dollar as an exchange currency affecting the economic power of the United States, as well as its ability to sanction governments and institutions. Thus, countries such as Russia, China, among others, have been exploring the potential of cryptocurrencies for international trade away from SWIFT supervision and control. However, cryptocurrencies still have a long way to go.
Dollar power limits and rise of China
Globalization and the opening of the US economy greatly facilitated the adoption and dissemination of the dollar as an international currency. However, some current events may affect the strength and global acceptance of the dollar:
- Protectionist and restrictive policies by the US government (such as the recent import tariffs and trade wars promoted by Donald Trump) along with the economic sanctions imposed by the United States, which make countries seek and reinforce other markets, and try to reduce The dependence of the dollar. In addition, the excessive application of sanctions limits its effectiveness and ends up undermining the leadership of the United States.
- The rise of China as a world economic power, with a vast market of great growth. The magnitude of the Chinese Gross Domestic Product is similar to that of the United States, has a population almost five times greater, and has been growing at a rate three times greater. Moreover, it is projected that by the year 2030, the economies of China and India will be the largest in the world relegating the United States to third place.
The Chinese government has been developing measures to increase the international importance of the yuan (also known as renminbi: people's currency). The year 2018 was created the Shanghai International Oil Market for the purchase and sale of oil with prices set in yuan. Although it has not yet achieved the magnitude of its similarities in New York and London, it has great growth potential considering that China is the largest importer of oil in the world.
Likewise, the ambitious investment plan that China has been developing in countries in Africa and Asia, boosts its geo-political influence in those regions of the world. It is no accident that the first Chinese military bases outside its borders are located in Djibouti (East Africa) and Tajikistan (Central Asia). Chinese investments are supported by the Chinese Development Bank that offers yuan financing primarily for the purchase of Chinese products.
Also, in 2013, China promoted the creation of the Infrastructure Investment Bank of Asia (AIIB), with operations in the Asia-Pacific region, and that competes with the goals and objectives of the World Bank and the International Monetary Fund, two instruments of the economic power of the United States.
The dollar maintains its hegemony. The future is uncertain
The economic structure of today's world is different from what prevailed after the Second World War: the importance and relative influence of countries has changed, new powers have emerged with an ambition for geo-political and economic power. Likewise, movements and policies to reduce the hegemony of the dollar in international markets become more intense. However, everything seems to indicate that the dollar will remain in force for some years (or decades) ahead: currently, more than 60% of the countries' international reserves are in dollars, more than 50% of international trade is made in dollars and More than 40% of foreign currency loans are denominated in dollars.
The predominance of the dollar as an exchange and reserve currency is no longer based on gold bullion or other precious metals, but on the strength and economic openness of the United States and its great military power. To this is added its solid democracy, the independence of the Federal Reserve and its judicial system, its free press and its solid institutions. As long as your governments maintain this openness and cultivate these values, the world will continue to accept the leadership of the United States and the use of its currency as a medium of exchange. To this is added the fact that it is not easy to change in a short time the entire infrastructure and international commercial ecosystem based on dollars.
The center of economic gravity of the world is moving to Asia, which increasingly assumes a greater leading role in the destinies of the planet. It is expected that, finally and after a few decades, the forces of history and human civilization will set their course and the era of Pax Xinica, with China imposing the rules of the world game.
History shows that changes in the power structure are not easy and are generally conflictive: Spain lost much of its predominance in Europe when its Invincible Navy was defeated by the English at the end of the 16th century and went into decline a few decades later. France and Napoleon lost power over Europe after the Battle of Waterloo in the first decades of the 19th century, which pointed to England as the hegemonic power of the world until World War I in what became known as the century of the Pax Britannica. Then came the preponderance and dominance of the political and economic power of the United States in what is known as the Pax americana. History and humanity follow their course of change and uncertainty, and the powers that dominate the world as well.