A very important issue of international relations on which open and free discussion is often avoided relates to the extent to which maintenance of worldwide domination of US dollar is important for the USA and the extent to which it is reflected in US policy. Transparency and unbiased discussion on this issue is clearly very important.
The period of dollar dominance started to some extent in 1920 and got firmly entrenched in 1944. However when the US dollar replaced the British pound, it was more of a friendly pass-over due to the close ties of Britain and USA. Hence the issue got resolved without much tensions, but the situation today is different. Britain was both willing and also under compulsion to surrender the pound dominance in the special conditions of 1944-45, but the issue of world currency reform involves much more tensions today and the USA is known to take a much more aggessive posture to defend dollar dominance. Hence several questions continue to be raised regarded which aspects of US policy are motivated by this to a lesser or greater extent. From the point of view of world peace and stability what is important is that the special position of dollar dominance should not be used for anything which causes distress, disruption and harm to others.
The very special position of the US dollar as the world’s reserve currency has continued for a long time and several economists predict this to continue for a long time. At the same time it cannot be denied that the US dollar ( or just dollar in short ) has come under increasing strain in recent times.
The special position of dollar as reserve currency confers certain very important trade, financial and political advantages to the USA. In a widely discussed paper titled ‘An Existential Threat to the US Dollar’ the authors Daniel Tenengauzer, John Vellis and Geoff Yu ( BNY-MECCON—Aerial View Magazine, September 2020) say, “ The status of the USD allows the US, as its issuer, to run huge international deficits in its own currency, and has allowed international liabilities to be paid off at a lower rate of interest than the US receives in income from abroad.” Clearly it is a huge advantage to clear international payments in its own currency. As such the USA authorities would like this arrangement to continue for as long as possible.
However this excessive power should not be used in arbitrary ways and to inflict undue and high costs on others, as in the case of imposing sweeping sanctions. In the case if Iraq, which had been earlier devastated by an invasion led by the USA, these sanctions are reported to have led to around half a million deaths. This was followed by a second invasion as well.
Such hostile use of dollar dominance should be avoided and in addition this should not become an issue of dangerous confrontation. That would be too risky for the entire world. If alternatives are to be found, this should be done over a period of time gradually without creating a situation of crisis, instability and serious harm to either the USA or to anyone else. On its part, as long as its position of special privilege continues, the USA should not misuse this to create serious problems for its opponents and rivals.
Historically, in recent centuries, domination in political, military, trade and economic terms has often been linked to currency domination as well, and this is one reason why the USA may be keen to protect dollar dominance. With the growing integration of world economy starting from the 15th century, first the Dutch currency, then the Spanish dollar, then the British sterling pound had gained wide acceptance as currency used worldwide. The British pound dominance continued up to World War I. During the two decades 1920-1940 the USA dollar emerged as a serious competitor and shared almost equal honours with the British pound in terms of acceptance as international currency. During World War-II Britain suffered heavy economic loss and its foreign debt mounted. Hence the British pound lost its dominance to the USA dollar. This reality was formalised in Bretton Woods Agreement of 1944, where various countries agreed to peg their currency to the US dollar and the USA in turn agreed to keep its dollar convertible into gold. Since then the USA dollar has remained the dominant international currency, with nearly 60 per cent of the reserve currency of the world still being held in the US dollar by various central banks.
However, there have always been some reservations about this acceptance. The opposition to the dominance of the dollar as international currency in 1944-45 was not confined to just the Soviet Union and its allies. One view has been that in the increasingly complex world the currency of any one nation should not be the dominant international currency and some other alternative should be evolved by the international monetary and financial institutions.
However as long as the USA retained its economic and political dominance of the world (and this was accepted by some of the richest countries with big economies), the acceptance of the US dollar as the international currency did not see any major problem. It was assumed, or at least hoped, that the USA will use this special privilege in a responsible way. Valery Giscard d’Estang, Finance Minister of France said in 1965 that the US dollar’s prominence in global finance is an “exorbitant privilege”.
A few years later, in 1971, Richard Nixon made a unilateral declaration that the USA is not obliged any more to provide gold in exchange of dollar. This one-sided de-linking from gold, without due international consultation, led a scholar Susan Strange to observe, that now it is a situation of ‘super exorbitant privilege’. Nixon’s Secretary of Treasury told opponents with arrogance—Dollar is our currency, your problem.
In an interview Nobel Laureate USA economist Paul Samuelson told People’s Daily online on December 26 2005 (interview with Yong Tang), at a time when the US dollar was regaining strength, “In the short run the dollar appreciates relative to the Euro and Yen. That can last for as long as these countries recycle eagerly their trade surpluses with the US into holding dollar assets (such as low-yielding American treasury bonds). Be not misled. So strong and irreversible are American balance of payment deficits, we must accept that at some future date there will be a run against dollar. Probably the kind of disorderly run that precipitates a global financial crisis.”
Samuelson also said that the situation is being worsened by a less then responsible use by the USA of its privileged position. He told the interviewer, “President Bush is a reckless economist leading a reckless crew of subordinates. Spending on a hopeless imperialist caper in Iraq plus Bush giving away to the rich much of America’s tax base, will eventually depreciate the American dollar. Those now abroad who hold dollar assets will then reap the capital losses that they are not now expecting.”
In 2008 Jonathan Kirshner, of Cornell University, USA, wrote in a paper titled ‘Dollar Primacy and American Power : What’s at Stake? – “There are good reasons to anticipate fundamental changes in the international role of the dollar, and concerns about the future of dollar are heard with increasing frequency. Such a change would not only have considerable economic implications; it could shake up foundations of international power politics.”
He added that US trade deficits have been shattering record after record, surpassing $700 billion in 2005. He commented wryly, “Most other countries would find their back to the economic wall under such circumstances.”
Since then the situation has deteriorated further. As Daniel Tennengauzer and co-authors have reported in their paper quoted above,“According to the latest report from the Congressional Budget Office (CBO), the 2020 US federal deficit is projected to be $3.3 trillion, or 16% of GDP, a post-war record. By the end of the decade, the CBO projects US debt held by the public to exceed $33 trillion, more than 108% of GDP. Issuing so much new public debt and the Fed role in absorbing the issuance, undermines the attractivenes of the USD, especially if inflation erodes the value of the currency significantly and threatens the credibility of the Fed itself.”
The share of the USA in world economy has been declining as well but what rattles people more is the irresponsible use of its privileged position to impose sanctions against countries like Iraq, Cuba and Iran in ways which are widely considered to be unjust. There have been several protests that the USA has not been using its ‘exorbitant privilege’ in a just and fair way, harming others at times to the extent of denying basic needs to people, as could be seen in the context of sanctions imposed on Iraq.
Our approach should be to resolve the difficult issue before it is too late, i.e. before it results in a very serious crisis, perhaps of the kind Prof. Samuelson warned in his 2005 interview, perhaps even worse. The unresolved currency issue has already led to violence in the past and this can be repeated in future also. So we really need to resolve this well in time and in peaceful ways. There can also be innovative, truly international currency which can be help to create a just and fair international financial order. But the world must have the ability to reach these solutions in conditions of peace and stability.
What all parties—the USA, its rivals, others—need to understand is that the world is passing through very sensitive and high risk problems which together constitute a survival crisis and we need conditions of peace , stability and cooperation to resolve the survival crisis at world level. So we cannot allow serious economic and financial issues like the currency issue to blow up into a serious crisis and worse, into open confrontation and hostilities. Peaceful solutions which do not seriously harm anyone and allow sustainable, reality based solutions to emerge are needed. Ultimately this may even be useful for the USA because its privileged position has sometimes led its authorities to take irresponsible economic decisions which have created problems for the US economy in the longer term. Till such time that a satisfactory solution acceptable to all parties is found, a solution rooted in economic realities and hence sustainable, the USA must avoid using its privileged position to impose heavy costs on others, by imposing sweeping sanctions and in other arbitrary ways.
Bharat Dogra is Convener, Campaign to Save Earth Now. His recent books include Planet in Peril and India’s Quest for Sustainable Farming and Healthy Food.
