We all know that the US Dollar is the world’s reserve currency. However, it has faced some trust issues because of its over-leveraging. The US Dollar has been used to finance countries, companies, and organizations like the World Bank and the International Monetary Fund for the last 75 years. All countries measure their economy in the Dollar. When we talk of wealth we say, “That family has a net worth of $100 Billion”. That is the level of hegemony the US Dollar enjoys. A common person hardly knows, what leverage it brings to the United States. The United States can impose unilateral sanctions on independent nations because of the US Dollar. It has been doing so for a very long time now. However, this over-leveraging might have caused a trust deficit in the United States.
History:
The Bretton Woods Agreement:-
Post World War 2, the United States had become the world’s largest economy. If Pearl Harbour hadn’t happened, the United States would have never involved itself in the war and would have continued helping the Allied powers (France, Britain, and USSR) in exchange for Gold. The United States had the world’s largest Gold Reserves post-war. The war had devastating effects on the European economy. To get the European Economy back on track, the Bretton Woods Agreement took place under the leadership of the United States. This agreement laid the foundation for the Dollar to become the world’s reserve currency, which means that two independent countries would not trade in their local currencies but USD. Firstly, the US Dollar was pegged to the gold (1 ounce = $35), which means if you took your $35 to the US government, they would give you 1 ounce of gold. Secondly, that agreement gave birth to the IMF and World Bank. These institutions finance countries and help countries in trouble with financial aid in Dollars.
Gold backing boosted the trust in the Dollar making it the world’s reserve currency. This gave power to the US to dictate global trade, and that's how the hegemony was established.
The Nixon Shock:-
The Gold convertibility allowed countries to exchange their excess dollars for gold, however, the convertibility rate (1 ounce=$35) made it a headache for the US as the dollar supply in the global economy was significantly higher than the gold reserves they had accumulated because they had printed a lot more dollars without additional gold accumulation. It means, that if all the money came back to the US, they would have possibly emptied their gold reserves and still defaulted on their obligation to give an ounce of gold for $35.
On August 15, 1971, while Indians were celebrating their 25th Independence Day, the then President of The United States of America — Richard Nixon, took the Dollar off the Gold Standard. He “temporarily suspended” the dollar's convertibility to gold. This move meant that henceforth the only backing the US dollar had was the faith in the US economy. But it allowed the US to go on an unchecked Money-printing spree. They could print as much money as they wanted.
In 1974, the US was said to have reached an agreement with the Arab World, which stated that in the event of a conflict with Iran, the US would defend them, but they would sell their oil to the rest of the world only in dollars. This created a huge demand for the US dollar in the global markets as oil was required for growth. But here comes the catch, the more money the US government printed, the more they got into debt.
How Money is Printed?
This is somewhat technical. Let’s assume the US wants to print $100, they don’t do so directly. The US government issues a $100 bond, purchased by countries, individuals, their Reserve Bank – The Federal Reserve(the one which prints money) and corporations. This is mostly a long-term bond and the US government pays small interest for borrowing money. So when we say that Bharat has XYZ in forex reserves in US dollars, it means the US owes Bharat XYZ amount + interest. This XYZ amount is flowing into the US economy.
This means the only way money entered the US economy or any other economy with a fiat currency was via debt. However, because USD was the reserve currency, the demand kept the US aloof from all the problems of money printing. Had any other country done the same thing, it would have gone bankrupt within months because of high inflation, interest rates, and poverty.
To be continued….
Do subscribe to me for such interesting stories….
Comments
Post a Comment