US dollar: The power and the glory (2)
Continued from last week
The dollar per se predates the United States’ dollar. It is a common name for more than 21 currencies around the world, including the USA, Canada, Australia, Hong Kong, Singapore, New Zealand, etc. The US dollar is the focus of this topic because of its pervasive influence and use. It is being used as the official currency of over 40 countries and territories, and is unofficially being used in several others such as Afghanistan, Bolivia, Cambodia, Guatemala, Lebanon, etc. Besides, many economies such as Nigeria, peg their currencies to the value of the dollar, making them the junior partner to the US dollar, and concomitantly subject to the whims and caprices of its Central Bank, the Federal Reserve. As a matter of fact, a majority of the US dollar bank notes are held by people and institutions outside the territory of the USA.
Based on our earlier discussion in part one, last week, the ambitious boy whose exuberance for the dollar sparked this three-part essay is only one of several millions of individuals around the globe enthusiastically holding on to their hundred dollar bills. Interestingly, more than 70 per cent of the US$100 bills are held outside the USA. This puts the USA in either a precarious or indeed powerful position, depending on whichever angle one chooses to look at it. The world was not always been beholding to the US dollar to this extent though; what happened?
At the turn of the Industrial Revolution in the 18th century, Britannia (UK), “ruled the waves” as it is said. As the greatest sea power of the time, it led the way in steam and locomotive engines used to move goods across countries and continents. The Sterling provided the financial stability that aided international trade until World War 1 exerted a great toll on Britain’s ability to finance its military and the expansion of its economy. Thereafter, the USA stepped in to guarantee a stable international exchange. Part of what led to the war was the “Mercantilist” doctrine of the great powers in the economic sphere, which basically encouraged a beggar-my-neighbour approach to economic development. Countries were busy trying to exploit loopholes in the international financial system such as it was, by engaging in competitive devaluation strategies, limiting imports and expanding exports. It was a recipe for disaster, which partly accounted for the two World Wars.
It was against this background that 44 “Allied nations” (direct participants in the Wars), gathered together for the United Nations Monetary and Financial Conference inside Mount Washington Hotel, Bretton Woods, New Hampshire, USA, in 1944, to jaw-jaw about conflict and financial instability in the world. The meeting culminated in an agreement; the “Bretton Woods Agreement”, to set up what we know today as the International Monetary Fund, commonly known as the IMF. The Agreement also included the setting up of an International Bank for Reconstruction and Development, which is better known today as the World Bank. These two institutions were set up primarily for the reconstruction of Europe, and the United States, not having been affected too much by the ravages of the Wars (much of Europe laid in ruins), understandably stepped up to the plate by taking the leading role in reshaping international trade and finance. It was ‘Pax Americana’ of some kind. Thereafter, the dollar took a preeminent role in guaranteeing international exchange backed by the powers of the newly formed “Bretton Woods Institutions” i.e. the IMF and World Bank.
In a nutshell, therefore, the dollar became the number one reserve currency of the world throughout the 20th century, the American century as it has been dubbed. This has allowed the US to pursue an expansionary economic and foreign policy anchored on the “military-industrial complex”, giving itself the latitude to borrow at will, while taking punitive financial measures to deter others from doing the same thing. Europe soon recovered, but the rest of the world needed to catch up, and take advantage of the new global economic order. The Bretton Woods Institutions now shifted their attention to the countries left behind by the original Agreement, the so-called “developing” and “third world” countries. These countries came on board a system already rigged against them; where the rules of the game had already been set in favour of the “foundation members”. Whereas the USA and other Western European nations can use monetary policy to increase government borrowing, other nations have to go through the IMF to do the same thing. Rich countries, especially the USA, became net importer of capital from developing countries, most notably China. The USA, through an aggressive policy of low interest rate, uses Treasury bills to attract money from other countries. The Chinese, on the other hand, have been pursuing their own aggressive growth strategy, which has seen their economy grow by an average of eight per cent in the last couple of decades. The excess cash generated by that is then used to buy American Treasury bills in huge quantity.
Based on this, the USA has seen a steady rise in the level of its public debt, which now stands close to $17tn and rising. Just imagine, Nigeria was struggling to issue Treasury bills to offset a meagre $3bn debt last month! Yes, the USA has a $17tn public debt profile, but who cares? It is roughly equivalent to its annual GDP. Any company that maintains such a huge black hole in its books would have long been declared bankrupt. Moreover, any developing country that tries anything close to the Americans would have the IMF crack team of technocrats parachuted in from Washington to give advice on “urgent reforms” of its financial institutions. Anyone that attempts such a reckless economic policy; anyone but the USA, would have its fingers badly burnt, and quite rightly so in many people’s view. The question though is, why has this not affected the dollar as the number one reserve currency in the world? Why has the dollar’s dominance not been affected even at the time of severe global economic crisis of 2008, which saw many US banks going bankrupt, the housing sector in a meltdown, and several manufacturing industries laying off workers?
To be concluded next week…
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