US/Dollar/hegemony
The term describes a geopolitical phenomenon of the 20th century in which the U.S. dollar, a fiat currency, became the primary reserve currency internationally. Three developments allowed dollar hegemony to emerge over a span of two decades.
Contents
Stages of development
Abandoning the gold standard
The Bretton Woods system established a fixed exchange rate regime based on a gold-backed dollar in 1945. The USA did not view cross-border flow of funds necessary or desirable for promoting trade or economic development. In response to the accrual of negative consequences from the Triffin dilemma[1], President Richard Nixon abandoned the Bretton Woods regime in 1971 and suspended the dollar's peg to gold as US fiscal deficits from overseas spending caused a massive drain in U.S. gold holdings.
Petrodollar
Denomination of oil in dollars after the 1973 Middle East oil crisis increased demand for US dollars; see petrodollars.
Deregulation
The emergence of deregulated global financial markets after the Cold War made cross-border flow of funds routine.
Advantages for the USA
- Lower import costs/domestic inflation than what would exist by normal trading alone.
- Ability to run large trade deficits (by exchanging valuable resources for paper IOUs)[2] A variation on this is that the USA cannot face a balance of payments crisis, because it can purchase imports in its own currency (that it can simply print). [3]
- Increased demand for US financial assets (driving up prices of stocks and bonds and lowering interest rates, therefore increasing (apparent) household wealth).[4]
- Foreign-held US dollars can be used as "hostage capital". In the event of political conflict between the United States and another nation, the former with all its military power can confiscate or freeze these assets or otherwise limit their use. It can impose special regulations or at least use regulations for a time, in order to attain certain political, economic, or other goals.[5]
examples
The unilateral American fine against BNP Paribas for violations of U.S. sanctions that were not laws of France or the other countries involved in the transactions.[6]
References
Notes
See also
video: The_absurdity_of_Dollar_hegemony
Page credit
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