De-dollarization is in progress

Isaac Witkin, Baalbec, 1968
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By JUSTIN PODUR*

A new global monetary system, or at least one in which there is no quasi-universal reserve currency, would amount to a geopolitical reordering not seen since the end of World War II.

De-dollarization, apparently, “like it or not”, is happening and is here to stay. This is what a video from May 2023 of the Quincy Institute for Responsible Statecraft, a peace think tank based in Washington, DC. But he is not alone in the discussion of de-dollarization: political economists Radhika Desai and Michael Hudson outlined its mechanics in four programs held between February and April 2023, on the YouTube channel, Geopolitical Economy Hour.

Economist Richard Wolff provided a nine-minute explanation of this topic on the channel Democracy at Work. On the other hand, media such as Business Insider assured their readers that the dominance of the dollar will not continue. Journalist Ben Norton, at a two-hour congressional hearing held on June 7 – “Dollar Dominance: Preserving the US Dollar's Status as a Global Reserve Currency” – spoke about defending the US currency in the face of de-dollarization. During the hearing, members of Congress expressed optimism, but also great anxiety, about the future of the dollar's paramount role. But what motivated this debate?

Until recently, the global economy accepted the US dollar as the world's reserve currency and as the currency for international transactions. Central banks in Europe and Asia had an insatiable appetite for dollar-denominated US Treasuries, which in turn gave Washington the ability to spend money and finance its debt at will. If any country steps out of line, Washington can sanction it politically or militarily, excluding it from the rest of the world's dollar-denominated global trading system.

But for how long? Following a summit meeting in March between Russian President Vladimir Putin and Chinese President Xi Jinping, Putin declared: “We are in favor of using the Chinese yuan in agreements between Russia and the countries of Asia, Africa and Latin America". Putting that statement into perspective, CNN's Fareed Zakaria said, "The world's second-largest economy and the world's largest energy exporter are together actively trying to reduce the dollar's dominance as the anchor of the international financial system."

By the way, noted Fareed Zakaria, Russia and China are holding a smaller portion of their central bank reserves in dollars; they are, moreover, settling most of their trade in yuan, while other US-sanctioned countries are turning to trade based on bilateral transactions in order to avoid dependence on the dollar.

A new global monetary system, or at least one in which there is no quasi-universal reserve currency, would amount to a reorganization of political, economic and military power: a geopolitical reordering not seen since the end of the Cold War or even since World War II. World.

Looking at its origins and evolution, it is clear that a global exchange pattern is relatively recent; moreover, there are no hard-and-fast rules that determine how it should be organized. Let's take a brief tour of the tumultuous monetary history of global trade and then consider the factors that could trigger another stage in its evolution.

imperial commodity money

Before the dollarization of the world economy, the international monetary system was based on a gold standard anchored in the naval supremacy of the British Empire. But a monetary system backed by gold, a commodity mined from the earth, had an inherent flaw: it could cause deflation. If metal mining could keep pace with economic growth, the gold standard would work properly. But, as Karl Polanyi noted in his 1944 book, the great transformation, “the amount of gold available could [only] be increased little over the course of a year… not suddenly, or so much over a few weeks, as would be necessary to well mediate a sudden expansion of transactions. In the absence of token money, business would have to be reduced or maintained at much lower prices, thus inducing a slump and creating unemployment”.

This deflationary spiral, supported by many in the economy, is what former US presidential candidate William Jennings Bryan described in his famous speech to the 1896 Democratic Party convention, in which he declared: “Mankind must not be crucified. on a golden cross.” For the truly wealthy, of course, the gold standard was a good thing, as it protected their wealth from inflation.

The alternative to the “golden cross” was for governments to ensure the circulation of enough currency to keep business going. For this they could produce, instead of gold or silver commodity money, fiat or printed money: i.e. paper money issued at will by the state treasury. The problem with token money, however, was that it could not circulate on foreign soil. How, then, in a global economy, would it be possible to conduct foreign trade in commodity money and domestic business in paper money?

The Spanish and Portuguese empires had a solution to keep metals flowing: commit genocide against the civilizations of the Americas, steal their gold and silver, forcing indigenous peoples to work themselves to death in the mines. The Dutch and later British empires obtained this gold using a number of mechanisms, including the monopolization of the slave trade through the Assiento of 1713 and the theft of Indian lands in the United States and Canada. The stolen silver was used to buy valuable goods in China. Great Britain stole this silver from China after the Opium Wars. The middle empire had to pay huge indemnities (in silver) after losing such wars.

Once established as a global manager, the British Empire insisted on the gold standard in Europe while placing India on the silver standard. In his 2022 doctoral thesis, political economist Jayanth J. Tharappel called this scheme “apartheid bimetallic”: Britain used the silver standard to purchase Indian goods and the gold standard to trade with European countries.

India was thus used as a money pump that allowed British control of the global economy; moreover, it was squeezed as needed: India had a trade surplus with the rest of the world, but at the same time was in a trade deficit with Great Britain. It charged its colony “domestic taxes” for the privilege of being plundered. Britain also collected taxes and customs revenues in its colonies and semi-colonies simply by seizing goods, which it resold at a profit. The oppression was such that it often spread famine in India, thus leading tens of millions of people to death.

The system called council bills it was another very clever scheme: this paper money was sold by the British Crown to merchants in exchange for gold and silver. These merchants used this money to buy Indian goods for resale. Indians who held this kind of money could cash it back in exchange for rupees (that is, money that had been paid in the form of tax debts). The result of this whole operation was that Britain drained $45 trillion from India between 1765 and 1938, according to research by economist Utsa Patnaik.

From gold to gold-backed currency to the floating dollar

As the XNUMXth century progressed, an indirect result of Britain's highly profitable management of its colonies – and particularly the dumping of its exports into markets it controlled – was that it lagged behind Germany in advanced manufacturing and technology. and the United States – countries into which he poured, through investments, the wealth drained from India and China.

Germany's industrial superiority and Russia's withdrawal from the tacit alliance with Great Britain after the Bolshevik Revolution left the British weakened: lo and behold, it could have asked for Germany in the First World War, despite having attracted millions of people from the Indian subcontinent to serve during that war. Afterwards, as is well known, more than 2 million Indians would serve in World War II alongside British soldiers.

American financiers lent so much money to Great Britain that if she had lost the First World War, American banks would have suffered an immense loss. When the war was over, to Britain's surprise, the United States insisted on being reimbursed. Britain pressed Germany for reparations to repay US loans; thus, the world financial system broke down through “competitive devaluations, tariff wars and international autarky”, as Michael Hudson reported in his 1972 book, super imperialism. As is known, these reparations prepared the fundamental conditions for the Second World War.

After the end of the war, Washington insisted on the end of the sterling zone; the United States would no longer allow Britain to use India as a private money pump. But John Maynard Keynes, who had written Indian Currency and Finance (1913) The Economic Consequences of the Peace (1919) and General Theory of Employment, Interest, and Money (1936), believed he had found a new and better way to provide a substitute for the commodity money needed for foreign trade, as well as the token money needed for domestic affairs, without crucifying anyone on a golden cross.

At the 1944 international economic conference in Bretton Woods, New Hampshire, Keynes proposed an international bank with a new reserve currency, the “bancor”, which would be used to resolve trade imbalances between countries. If Mexico needed to sell oil and buy cars from Germany, for example, the two countries could trade in “bancor”. How, then, would the balancing process take place?

If Mexico found itself in debt or Germany ran a growing surplus of that money, an International Clearing Union would apply pressure on both sides: it would demand a currency depreciation from the debtors, but also a currency appreciation, as well as punitive interest payments, to the creditors. Meanwhile, the central banks of debtor and creditor countries could follow Keynes' domestic advice, using their money-creating powers to stimulate the domestic economy as needed, within the limits of domestically available resources and the workforce.

Keynes made his proposal, but the United States had a different plan. Instead of “bancor”, they wanted the dollar to be the world's money. It would be backed by gold held at Fort Knox. The dollar would be the new reserve currency and medium of exchange in world trade. Having emerged from the war with its economy intact and most of the world's gold, the United States would lead the Western war against communism in all its forms, using weapons ranging from coups and assassinations to development aid and finance.

On the economic side, US instruments included reconstruction loans to Europe, development loans to the Global South, and balance-of-payments loans to troubled countries (the infamous International Monetary Fund (IMF) “rescue packages”). Unlike the International Clearing Union proposed by Keynes, the IMF imposed all penalties on debtors and gave all rewards to creditors.

The dollar's unique position gave the United States what one French finance minister called an "exorbitant privilege." While every other country needed to export to get dollars to buy imports, the US could simply issue currency and start buying goods and assets from the rest of the world.

The gold bond remained for a decade and a half, but the cost of world domination became considerable even for Washington during the Vietnam War. Starting in 1965, France, followed by others, began to demand that the United States keep its word and actually exchange US dollars for gold stored in the Treasury donkeys. This demand persisted until Washington canceled the dollar's formal link to gold and the dollar began to float freely in 1971.

The floating dollar and the petrodollar

The cancellation of the gold-backed international trade currency was made possible due to the exceptional position of the United States in the world as a supreme military power: it possessed broad spectrum dominance and had hundreds of military bases around the world. The US was also a magnet for the world's immigrants; were also holders ofsoft power”, that is, a standard of living that followed the Hollywood style; moreover, they maintained leadership in technology, science, and manufacturing.

The dollar also had other tangible support even after the golden peg was broken. The most important commodity on the planet now became oil, and the United States controlled the tap through its special relationship with oil superpower Saudi Arabia.

As is well known, in a meeting held in 1945 between King Abdulaziz Al Saud and then President Franklin Delano Roosevelt on an American cruiser, the USS Quincy, on the Great Bitter Lake (great bitter lake), in Egypt, a lasting agreement was sealed. However, when the oil-producing countries formed an effective cartel, the Organization of Petroleum Exporting Countries (OPEC), and began to raise the price of oil, the oil-deficient countries of the Global South began to suffer, while oil exporters oil exchanged their resources for large amounts of dollars (“petrodollars”).

The United States prohibited these dollar holders from acquiring US assets or strategic industries, but allowed them to invest their dollars in the United States by buying weapons or purchasing US Treasury bonds: thus, they would simply hold dollars, but in another form. Economists Jonathan Nitzan and Shimshon Bichler have called this the gun-dollar-petrodollar nexus (weapons-dollar-petrodollar) in his 2002 book, The Global Political Economy of Israel.

As documented in Michael Hudson's 1977 book, Global Fracture (a sequel to the book super imperialism), OPEC countries hoped to use their dollars to industrialize and catch up with the West. However, through coups and counterrevolutions, the US maintained the global fracture and pushed the global economy into the era of neoliberalism.

The US relationship with Saudi Arabia was key to curbing OPEC's power, as Saudi Arabia followed US interests, increasing oil production at key times to keep prices low. At least one author – James R. Norman, in his 2008 book The Oil Card: Global Economic Warfare in the 21st Century – argued that the relationship was also central to other US geopolitical priorities, including its effort to hasten the collapse of the Soviet Union in the 1980s.

A 1983 US Treasury study calculated that a $1 drop in the price of a barrel of oil would reduce Russia's hard-currency earnings by as much as $1 billion; thus, a fall of US$ 20 per barrel would put it in crisis. An examination of this process can be found in Peter Schweizer's book, Victory.

In 1985, Norman reported in his book, Saudi Arabia "[opened] the floodgates, [cut] its prices and [pumped] more oil into the market." While other factors also contributed to the oil price collapse, “Russian academic Yegor Gaidar, Russia’s acting prime minister from 1991 to 1994 and former economy minister, described [the drop in oil prices] as clearly the mortal blow that destroyed the faltering Soviet Union”.

From petrodollar to de-dollarization

When the USSR collapsed, the United States declared a new world order and launched a series of new wars, including against Iraq. The currency of the new world order was the petrodollar – that is, the arma-dollar (weapondollar). An initial bombing and partial occupation of Iraq in 1990 was followed by more than a decade of application of a sadistic economic weapon, which had a far more devastating effect than ever had on the USSR (or even other targets such as Cuba).

Iraq was not allowed to sell its oil, nor to buy necessary medicine or technology. Hundreds of thousands of children died as a result. Several authors, researchers from the Unit of Research in Political Economy of India, in the 2003 book Behind the Invasion of Iraq, as well as the American author William Clark in a 2005 book, Petrodollar Warfare, have argued that Saddam Hussein's final overthrow was triggered by a threat that he might start trading oil in euros instead of dollars. Iraq has been under US occupation ever since.

It appears, however, that the era of the dollar gun is winding down and this is happening at "'impressive' pace". After the Putin-Xi summit in March 2023, CNN's Fareed Zakaria publicly worried about the plight of the dollar in the face of efforts by China and Russia to de-dollarize world trade. The dollar's problems have only grown since then. All the pillars supporting the dollar gun are now shaky:

(i) The United States is no longer the dominant industrial producer; China, on the other hand, is reaching the frontier of knowledge in science and technology. (ii) The United States no longer seems to be an attractive development model for countries in the Global South. They are no longer able to compete with China, which now operates through the Belt and Road Initiative in Africa and other parts of the developing world. (iii) The United States has sanctioned so many countries (Russia, Iran, Venezuela, Cuba and China) that they are starting to trade with each other, thus reaching a critical mass.

(iv) US military power is no longer seen as supreme after its failure to bring about regime change in Syria and its withdrawal from Afghanistan. (v) Although the United States may have managed to drastically reduce sales of Russian gas to Europe – not least because it exploded the Nordstream pipelines – it has not been able to convince India or China to follow their plans to isolate Russia: both countries are buying Russian energy and reselling it too.

(vi) After seeing the United States steal Russia's reserves and Venezuela's gold and force the sale of Venezuelan oil company CITGO, even US allies are reluctant to hold dollar assets or keep their assets in the United States lest they be seized. Saudi Arabia will trade with China in yuan instead of dollars, canceled its US-backed war in Yemen, made peace with Iran and welcomed Syria's President Bashar al-Assad to Arab League summit in May 2023 .

But what will replace the dollar?

“A globalized economy needs a single currency,” – Fareed Zakaria told CNN after the Xi-Putin summit. “The dollar is stable. Dollars can be bought and sold at any time and the exchange rate is governed largely by the market – not by the whims of a government. This is why China's efforts to expand the yuan's role internationally have not worked.” But the current governance of the US dollar is following the “whims of one government” – namely, the United States; well, this is exactly why countries are looking for alternatives.

Fareed Zakaria consoled himself with the fact that the dollar's replacement will not be the yuan. “Ironically, if Xi Jinping wanted to cause the United States the greatest suffering, he would liberalize its financial sector and make the yuan a true competitor to the dollar. But that would lead him to opt for the logic of the market and openness, which are the opposite of his current domestic goals”. Fareed Zakaria is wrong. China does not need to liberalize its financial sector to internationalize the yuan. When the dollar was paramount, the United States simply excluded holders of foreign dollars from buying American companies or assets and restricted them from holding US Treasuries.

But as Chinese economist Yuanzheng Cao, a former chief economist at the Bank of China, argued in his 2018 book, Strategies for Internationalizing the Renminbi (the official name of the currency whose unit is the yuan), Beijing can internationalize the yuan without trying to replace the dollar and incurring the widespread resentment that would ensue. He just needs to ensure that the yuan is used strategically as one of several currencies and in a wide variety of transactions, such as currency swaps.

Keynes's post-war idea of ​​creating a global reserve currency is being revived on a more limited and regional scale. A regional version of the “bancor”, the “sur”, was proposed by the president of Brazil, Luís Inácio Lula da Silva. For his part, Ecuadorian economist and former presidential candidate Andrés Arauz described the “sur” as follows in an interview in February: “The idea is not to replace the national sovereign currency of each country, but rather to have an additional currency, a complementary currency, a supranational currency for trade between countries in the region, starting with Brazil and Argentina, which are a kind of two powers in the Southern Cone, and which could later expand to the rest of the region”.

Lula continued the idea of ​​“sur” through the idea of ​​a BRICS currency; Russian economist Sergey Glazyev proposes a kind of “bancor” supported by a basket of commodities.

Monetary systems reflect power relations in the world: they neither create nor modify them. The English gold standard and the US dollar standard reflected imperial monopoly power for centuries. In a multipolar world, however, we should expect more diversified monetary arrangements.

*Justin Podur is a professor at the Faculty of Environmental Studies, York University. Author, among other books, of America's Wars on Democracy in Rwanda and the DR Congo (Palgrave macmillan).

Translation: Eleutério FS Prado.

Originally published on the portal counter punch.


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