#76 Gold, Dollars and World Trade
Neo-liberal policies can only work as long as there is a stable world currency and system of international exchange. For the last two centuries, the dominant world powers have controlled the issue of a stable trading currency. The most enduring character of world power has been the global acceptance of the world's trading currency. Today if you wish to trade with other countries, you do so by using US dollars. There are exceptions to this rule, in the European Union you use Euros; countries that trade with China are beginning to use the renminbi. I will come back to these exceptions later in this blog. Generally though, large or small, everyone needs a US dollar account with a bank to trade internationally. Since 1944, the US Dollar has remained the world’s standard currency of exchange. And, as a result, the world’s neo-liberal policies were created with the US dollar.
The US Dollar in the 1970s
In earlier blogs, I discussed the Bretton Woods arrangements in 1944. This was where it was agreed between Britain and the USA that the US dollar would take over from the pound sterling as the world's currency of exchange. I also mentioned that as the US central bank ran out of gold due to her needs in the Vietnam war, the USA came off the Gold Standard in 1972. Her gold reserves were insufficient to maintain her position in the world as the world banker based on gold.
Unlike the earlier periods of relative chaos, between 1914 and 1945, when Britain came on and off the Gold Standard, the USA came off the Gold Standard in 1972 in a relatively orderly way; the major currencies were allowed to float on the world market. Floating on the world's market meant that the value of the dollar altered on a minute by minute basis. Because the world's trade was already valued in US dollars, the dollar remained as the world's key currency. The key change after 1972 was that the value of the dollar moved up and down in value, according to supply and demand for the currency in relation to every other national currency. But because the USA’s economy was the largest in the world, everyone continued to accept US dollars as their international trading currency.
The Unique benefits for the USA[i]
The US dollar as the worlds' currency of trade had major advantages for the USA. Every country that traded in the world needed a supply of US dollars. The USA treasury provided these dollars on the condition that they were held in banks in the USA. The USA charged a small interest rate on the dollars loaned at the same time. As a summary, the consequences for the USA went as follows:
1. The volume of US dollars in existence was far larger than was required by the US economy. As a result, uniquely among nations, she did not have to bother with balancing her world trade, her imports and exports, as almost every country in the world had to do. She had a huge excess of dollars, and she spent this largely on her armed forces. The result has been that the US possesses by far the largest army, navy and air force in the world. The USA balance of payments is more unbalanced compared to any other nation-state. This alone in future might be her Achilles heel but for the moment it offers the USA a unique place in the world over all other Nations.
2. The USA can and does use the dollar balances of every other nation to discipline 'errant' nations. This action is called 'sanctions', where a country is denied the use of its own US dollars held in US banks. Sanctions offer the US a powerful weapon to control the trade of Nations she disapproves of. Sanctions can bring a country to it knew. There are many examples. Iraq for instance was sanctioned in this way for 10 years before she was invaded.
3. There is one major country that the USA cannot sanction, and that is China. China consciously built up huge dollars reserves after 1972 by allowing USA companies to enter her territory and manufacture their goods using China’s lower-paid workers.
4. The US dollars system works also against the interests of many smaller so-called developing states. Small states across the world need to import gas and oil. If they do not have the export to gain sufficient dollars they need to borrow US$ from the IMF or the World Bank. Both these two global institutions, set up at Bretton Woods in 1944, have used their global banking muscle to de-develop countries so they cannot industrialise their nations. This process has been called ‘structural adjustment’.
Trade Sanctions
The dollar system for trade works well enough for the Western countries. But for any country which the USA disapproves of, she imposes 'sanctions' and that limits the availability of dollars for trade. Cuba has been sanctioned for decades by the USA. Today there are now many new examples: Russia, Venezuela, North Korea, Iran, and Syria are perhaps the main sanctioned countries. Domestic banks across Europe are forced to demand that their customers conform to US foreign policy.
There are now movements to combat these hindrances. China has for some years wanted to use her currency, the renminbi, for world trade. China has already begun to avoid the dollar system, which regularly infuriates the leaders in Washington. The USA’s global dominance rests largely on her control of the world’s trading currency, so as China supports sanctioned countries to trade, like Iran, the US feels threatened.
The importance of these events should not be lost. It has often been argued by knowledgeable commentators that the US invasions in Iraq in 2003 and Libya in 2011 had little to do with the public utterances of politicians at the time, but rather because the leaders of both countries had threatened to trade their oil in Euros in Iraq's case and gold in Libya's. It is impossible to know for sure whether these arguments are right or wrong, as explanations for these invasions will be hidden for years to come.
At first sight, this connection between US expenditure on her armed forces and world trade may seem strange. US world dominance depends on the combined control of the worlds currency and the overwhelming character of her armed forces. The size of these forces has to be global and more powerful than all others. I will expand on this aspect of world power in future blogs.
The money to pay for USA world military dominance does not become a surplus on her domestic account, rather, the surplus comes out of her loans of US dollars across the world for international trade. So, if major traders, like oil-rich countries - in this case, Iraq and Libya - start selling their oil in other currencies, the USA feels sufficiently threatened to overthrow their governments. And as China is now supporting countries like Iran and Russia that are sanctioned by the USA, the Americans begin to feel deeply threatened.
Today, as the world stands on the brink of multiple crises – the covid-19 pandemic, climate catastrophe, mass migration, the long depression followed by inflation and low growth and now new waves of struggle led by Black Lives Matter – the threat to America’s world domination becomes ever more apparent.
[i] The four major issues so briefly discussed here under Advantages for the USA have a huge literature behind them Each of the four items I mention have their own books and researched articles.
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The peoples of Western Europe had risen from one world of relative poverty and had learnt how to take the wealth from the Americas and transfer it to their own countries. This was slavery and latterly until 1920, indentureship. A whole set up of banks, shipping companies, and insurance companies had arisen to make these transfers possible. From the 1750s the European invaders turned their attention to Asia and systematically began the colonisation process anew. At the same time, as they attempted to colonise and extract the wealth of Asia, the colonising countries began the process we now recognise as industrialisation alongside the rapid growth of cities. The surplus resources extracted through colonisation were used to finance the growth of new industries.