Most working people think of the buck as the way they pay their bills. But its use goes far beyond the USA’s borders. The greenback is the major world currency for trade and finance. This international role bestows vast power on the U.S. government and the rich. But its status doesn’t help ordinary people much.
Fundamentally, the exchange of commodities and investments under global capitalism requires generally accepted forms of money to buy and sell them with. And the notes issued by the largest and richest economies tend to be employed the most. Today, the dollar is the most widely used, followed by the euro, the British pound, the Japanese yen, and since 2015, the Chinese yuan.
These world currencies have many uses. Besides international trade in commodities, there is foreign exchange, which is the buying and selling of the legal tender of different countries. Governments must hold foreign currency reserves to back up their money in case of economic crises, especially massive speculation in their own notes that can cause their value to collapse. In weaker and smaller economies, many everyday transactions take place in dollars or other international bills rather than the official local money. Some countries, like Panama, don’t have their own currency, and instead use the dollar.
How the greenback became king
Dollars backed by the government began (except for a brief unsuccessful run during the Civil War) with the creation of the Federal Reserve Bank in 1913. Government-backed notes allowed the USA to compete with Britain and its pound for economic dominance. In World War I, and later World War II, U.S. businesses profited mightily from supplying the combatants, and the country became the center of global finance. In 1944, representatives from over 40 countries met in Bretton Woods, New Hampshire, and signed an agreement that the dollar would be the world currency, convertible to gold by central banks at fixed exchange rates.
That arrangement lasted until 1971, when massive deficit spending on the war in Vietnam inflated the greenback and caused other countries to demand its exchange for gold. President Nixon ended this international convertibility, effectively devaluing the dollar.
The other result was that all currencies floated in value relative to each other, and there was no longer one official world paper money. The chaotic capitalist market prevailed, and a whole new arena of finance flourished — currency speculation.
But since the U.S. economy still dominated world finance and trade, the buck retained much of its international financial role. For instance, at the end of 2016, almost 64 percent of known foreign exchange reserves were held in dollars. They still predominate — so far — because of the size and relative strength of the economy of the USA and the dominance of its financial markets.
Who does a strong buck benefit?
To listen to the financial press,workers and business have the same interests. When governments, institutions and rich individuals are buying U.S. securities, stocks and real estate, interest rates tend to stay low and Wall Street booms. But that mainly benefits the rich who live off investments.
A rising greenback is a danger to workers and the overall economy. In this time of economic stagnation, when wealth is flowing almost exclusively to those at the top, the demand to buy dollars as an investment has soared, and so has its value. Between mid-2014 and 2016, the dollar appreciated 20 percent in relation to other main currencies.
This in turn has made the U.S. trade deficit explode. That is because as the buck rises, imports become cheaper to buy (in dollars) and exports to other countries become more expensive. Not only do exports fall, but production for the home market does too, as it becomes cheaper for consumers to buy foreign products.
This results in job cuts. Domestic production shrinks and national businesses try to reduce their costs by increasing automation. The high value of the greenback becomes a drag on the whole economy.
Calls for protectionism tend to increase, often along with xenophobic and racist movements. Witness the Trump phenomenon, and fascist-based movements in Europe. But neither protectionism nor “free” trade is good for workers anywhere. Capitalism is all about pitting working people against each other.
Feeding the war machine
One of the major ways governments and institutions hold dollars is in the form of U.S. Treasury securities. The buyer is lending their money to the government. The buck’s high value helps Uncle Sam to sell ever more bonds. Unfortunately, much of the proceeds are plowed into military spending. This process has been funding the war industry since WWII. It has pushed the explosion of military actions that are devastating the Middle East and destabilizing many countries. It has cemented U.S. imperialism and world dominance at the cost of mayhem and misery.
Military spending plays a significant role in the economy of the USA, making large parts of the country’s production not for human use, but for destruction. However, it props up the economy only so long as the greenback is an attractive investment. The United States can’t maintain this house of cards forever, and it behooves workers here to remember that their interests remain with all the world’s workers, not with “our” ruling class.
Send feedback to author Megan Cornish at email@example.com.
Freedom Socialist newspaper, Vol. 38, No. 3, June-July 2017