Since its first print in 1914, the US dollar is the yard on which both global politics and the world economy are measured. In less than three decades, the US dollar featuring President Andrew Jackson became a reserve currency for other countries outside of the US. After making the necessary institutional arrangements, the Gold standard was adopted to bulwark any fluctuations in the paper currency issued by different banks.
WWI and the US
Before WWI, the US economy was booming faster even than that of the United Kingdom, the sole superpower that governed almost all of this Globe. 26 million square kilometers and 23 per cent of the whole world population were in the realm of the British Empire!
While the US total GDP value at that time was estimated to be $37 billion, the GDP of the British Empire before WWI was $13 billion.
The five years’ War from 1914 to 1918 contributed positively to the economy and economic growth of the US.
As the gold standard adopted by the UK and other countries before the outbreak of war, gave them leverage to control and manage their national economies realistically.
The gold acted as a weighing stone to value and assess the currency value of a country but the war exigencies made it impossible for them to continue this Gold standard anymore.
The third year of WWI broke the financial stamina of Great Britain and for the first time, it borrowed from others.
The national debt rose from 650 million pounds to 7.4 billion pounds for the first time in British history and the main lender was US to finance this war.
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In 1931 British government abandoned the measuring Gold standard system and took to the Fiat system of the currency which prioritizes and values paper currency issued by the central bank of any government.
It proved to be a turning point for the US and the dollar to dominate the world economy onward!
The US entered WWI on April 4, 1917, while the armistice was declared on November 11, 1918. The Treaty of Versailles officially signed on June 28, 1919, ended the First World War.
The 19 months of war actions of the US were indeed excruciating for it, but not so much as compared to those of Allies who were smashed politically, economically, and militarily!
WWII and the US
After a lull of two decades, WWII erupted which again disrupted the short-lived world peace and tranquility. For another seven years again there was a bloodbath among humans.
The Japanese attack on Pearl Harbor on December 7, 1941, left no option for Washington but to enter WWII.
The war is an evil beyond imagination but these two wars proved to be a blessing in disguise for the US and its dollar.
During WWI, most countries paid in gold to meet their war expenditures to the US which became the country having the most and largest gold reserves after WWI. That gave leverage to the US and its dollar even after the end of WWII.
With already depleted gold reserves and fighting another war in merely twenty years, other world countries were not in a position to revert to the gold system or challenge the US dollar hegemony in international trade.
The Bretton Woods Conference held in New Hampshire, USA, founded a foreign exchange system in which all countries agreed to calculate their respective national currency value based on the US dollar estimation, instead of the gold standard.
While the US dollar was linked to gold due to heavy gold reserves possessed by the US.
In this way, the US dollar became a fulcrum or a pinpoint between gold and these other countries’ currencies giving it the power to make or break them. This is what is known as the Bretton Woods Agreement of 1944.
Countries are now moving away from the US dollar and opting out to trade in their local currencies (LCT). Several facts could be counted for this De-dollarization process.
Among the foremost and quick ones are the ongoing war between Ukraine and Russia and the sanctions imposed on Moscow by the US and the West.
But this traction does not appear all of a sudden. It has its roots in the near past that now give it an impetuous albeit with a varying degree but the process has alarmed Washington about the future status of the dollar and also its value and role of Soft power as a world power.
Whether in future the place of the dollar as a reserve currency by countries for economic and political stability would be maintained or not now rakes the minds of both political and economic intelligentsia of the US.
In the past, this De-dollarization was an attempt by the anti-capitalists to crack down on the hold of Washington and the dollar on world politics and the economy.
The main mover of this move was the former USSR and its communist allies during the cold war era. But the impact was not so much powerful and pungent as it now felt.
In the last two decades, the dollar share drastically dwindled from 73 per cent to 55 per cent. A more cutting punch comes to it with the sanctions imposed on Moscow by the West and the US after the Ukrainian war.
There was another 8 per cent reduction in the dollar share in the World Forex market from 55 per cent to 47 per cent after the imposition of these sanctions.
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That’s why Elon Musk tweeted that if you continuously weaponize your currency it would lose its utility. Other countries would surely try to protect and defend themselves against this weapon!
This is fast happening phenomenon that is now taking the stage in the world economy.
Bilateral and multilateral arrangements
If we consider the only last decade in which different arrangements and agreements have taken place for the De-dollarization, we find bilateral arrangements for trade in local currencies;
- China-Australia trade agreement in national currencies (2013).
- Brazil-China trade agreement (2013).
- Iran, Brazil, Russia, Japan, and Australia use Yuan for their bilateral trade with China since 2011.
- In 2015 China launched CIPS as an alternative to SWIFT and payment in Yuan.
- The European Union’s Instrument of Trade Exchanges program (2019), or INSTEX program, is an initiative to avoid breaking the American sanctions on Tehran and for trade and payment in non-dollar currencies. The first INTEX trade between Iran and the EU took place in March 2020. Tehran bought medical equipment for COVID-19 treatment and prevention from the EU.
- Beijing since 2018 is buying oil supported by gold-backed Yuan.
- Bangladesh and India have also decided in May 2023 to trade bilaterally in Taka and Rupee to avoid dominance by the dollar.
The great emerging competitors of the US dollar are the Chinese Yuan, the gold and the gold-based trading system of Beijing, cryptos, the euro, and the possible common currency of 5 BRICS countries, which may try to erode the dollar hold.
The dollar decline may translate into a loss of Washington’s importance and value as a world power and also erosion of its Soft power which is the direct result of its dominance in politics, economics, and the military as the center stage of world politics.
The process may be speedy or slow but it has already set in motion.
Countries, people, and organizations that used and still cling to the dollar have now started questioning this de facto currency of the world!