The US Dollar and Global Hegemony

Thomas Costigan, Drew Cottle

• Publisher: VIJ Books (India) Pty Ltd
• Year: 2019
• ISBN:
  9788194261810
• Edition: 1
• Topic: Economics
• Subtopic: Economic Policy
• Index: Economics

The book traces the origins of US hegemony from the planning conducted by the Council on Foreign Relations in the late 1930s to the implementation of strategies for US dominance at the Bretton Woods conference of 1944, where the US dollar was installed as the world's reserve currency. The book demonstrates how the US dollar's reserve currency status underpinned the economic primacy and power of the United States in the post-war period. It highlights the importance of the 1974 deal between the United States and Saudi Arabia to exchange US dollars for Saudi oil. It also examines the debate about the future of the US dollar's status within the global financial system.

CHAPTER ONE

Pre-War US Capitalism

Pre-1939

This chapter examines how the US dollar became an important source of international liquidity in the interwar years. Prior to the Bretton Woods conference of 1944, the US dollar and the US financial system more broadly were already playing a vital role in world finance. The United States emerged from World War I in a powerful political and economic position, but due to domestic conflicts, it did not exercise its newfound power. Several overarching features marked the pre-World War II period. Western capitalist power had been slowly shifting from Britain to the United States. The Gross Domestic Product (GDP) of the United States had overtaken that of Britain in the 1870s and the dollar was becoming increasingly important as a source of liquidity to Europe, given that many European nations, particularly Britain, were experiencing debt and deficit problems associated with the costs of World War I. In addition, there was no clear hegemon to regulate world affairs, or the economic and political matters of the Western capitalist world.

The purpose of this chapter is to demonstrate how US capitalism, and more specifically the US dollar, emerged from its continental isolation to play a critical role in world finance. To achieve this, the chapter examines how the internationalisation of the US state proceeded from the late 19th century and extended up to and beyond World War II, when the relationship of the US to the rest of the world took on a markedly wider scope in practice and conception. From the late 19th century American capitalism began to take on a more internationalist outlook and sought out new markets and investments across the globe. This transformation required giving primacy to the property rights of private investors, and the establishment of suitable political administrations (Reinsch, 1902). This expansion became critical to America’s economic relations with the Caribbean and Latin America. Panitch and Gindin (2012, p. 41) argue that this transformation required the US to adopt a policing role to superimpose on other nations the policies necessary to guarantee the property rights of private investors outside US borders.

Several important changes occurred in how the United States expanded its influence overseas. The Open Door policy, the establishment of the Federal Reserve Board in 1913, and the gold standard were instrumental to the growing consolidation and confidence of US capitalism. The United States’ victory against Spain in the 1898 Spanish-American War cemented US control over much of the Caribbean and the Pacific. This was combined with the reproduction of the American state’s legal, administrative and political methods of control. These changes were designed to facilitate the dominance of private capital beyond the borders of the United States, and they demonstrated how the dollar was becoming increasingly internationalised. United States government support for regimes that were less than liberal, in contrast to the stated liberal world order it was pursuing, show that the motive was the reproduction of United States capitalism abroad(Schmitz, 1999). What began to emerge from this expansion is what Panitch and Gindin (2012) term an “informal empire”. The world was increasingly being divided into spheres of influence and the Western powers competed for control of markets and resources. In the pre-World War II period, the world had still not been subsumed under a single capitalist power that was able to regulate a new world system.

This chapter explains the importance of the role that the US dollar played in financing European war expenditure during World War I. Through this role, the dollar was becoming an ever more important source of liquidity in the world economy. However, unlike the situation after World War II, the US did not develop a coherent geo-strategic worldview or conception of its place or function in the world system, preferring to concentrate on domestic matters. However, during the presidency of Woodrow Wilson, there was a very strong drive to continue the expansion of American industry and finance. The diplomatic negotiations between the United States and other powers, particularly Britain, are examined in this chapter, which also focuses on increasing US concern about aggression in Europe and Asia which led to World War II.

The Internationalisation of US Capitalism

The United States victory in the brief Spanish-American War cemented US dominance over important geo-strategic spheres essential to the US economy and US security. The victory also provided the US with a launch pad into Asia, particularly China. In 1898 the Treaty of Paris was signed to officially end hostilities. The Treaty required Spain to cede control of Guam, Puerto Rico and the Philippines to the United States, thereby expanding US influence across the Pacific. The Treaty also guaranteed the independence of Cuba from Spain. During the conflict, the United States annexed Hawaii, and through an act of Congress, Hawaii officially became US territory on 12 August 1898. From this victory, the United States emerged as a power in the Pacific. The importance of the victory in strategic terms allowed the United States to create a large sphere of influence with the ability to project economic and military power into Latin America and Asia (‘The Spanish-American War, 1898’, n.d.).

Growing US influence in the Pacific after its victory over Spain saw the US adopt an Open Door Policy towards China. With Spanish influence in the Pacific vastly reduced, the US sphere of influence reached all the way to into East Asia. The Open Door Policy was intended to secure international consensus on the trading rights of foreign nations operating in China. China experts Alfred E. Hippisley and William W. Rockhill proposed an open trading policy for foreign nations doing business in China. With advice from Hippisley and Rockhill, on 6 September 1899 Secretary of State Hay sent the first of the Open Door Notes to the other great powers operating in China – Britain, France, Russia, Germany and Japan. The Notes proposed free and open access for trade, and respect for spheres of influence established in China by the great powers. Hay believed that benefits would accrue to American traders in China by harmonising access to that country and helping to mitigate disputes. The policy largely aimed to secure American interests in China through a mutually beneficial diplomatic agreement with the Chinese (‘Secretary of State John Hay and the Open Door in China, 1899–1900’, n.d.).

A critical moment for the dollar occurred in 1913 with the US Federal Reserve Act. The United States Federal Reserve played a crucial role in internationalising the dollar. The Act was the culmination of a long process aimed at greater regulation and currency stabilisation in the United States dating back to the mid-19th century. The 1907 financial shock demonstrated that the US financial system was unable to deal with the instability created by uncontrolled competition between increasingly large banking cartels. Prior to World War I, New York had surpassed London as a major source of liquidity and the United States had far surpassed Britain in industrial output (Panitch &Gindin, 2012, p. 42). By this time the US financial system had become so large that a “bankers’ bank” was needed to mitigate the financial crisis. This was achieved by melding government and Wall Street together to protect and promote US capital, by giving investors the confidence in the backing of the US government. With the ability of private finance, led by J.P. Morgan, to have their credit guaranteed by the Federal Reserve, these private financiers had succeeded in taking control of the US money supply (Engdahl, 2011, p. 44).

With the power of private capitalists and their close institutional association with the US government, the US dollar could proceed to spread into Europe as a critical source of liquidity to both governments and private firms alike. In this way, as the US dollar was internationalised, so too was the American state (Panitch & Gindin, 2012, p. 43). The gold standard played an important role in the history of US finance. Until 1971, the US was on either a bi-metallic standard throughout the 19th century, or a singular gold standard that existed until 1971. The gold standard functioned as a geo-strategic confidence builder in the US dollar, and it had the effect of bringing nations that adopted it into the economic orbit of the US.

The gold standard and its relationship to US geo-strategy in the context of expanding US trade in Latin America was crucial and it came to be referred to as “dollar diplomacy” (Rosenberg, 1985). From 1900 to 1915, US policy makers sought ways to stabilise trade and bring confidence to investors in Latin America. The use of the US dollar as a national currency for Latin American nations was openly advocated. Economists, led by Charles Contant, believed that the use of the dollar in the region would help bring “progress and modernisation” to the region (Helleiner, 2003). This would be achieved by US trading partners in Latin America depositing their gold in the US and denominating their holdings in US dollars. With this arrangement in place the US could begin to “dollarize” the region.

An example of this arrangement at work can be found in Puerto Rico. Puerto Rico was the first jurisdiction where the US attempted to encourage a gold standard. The adoption of the US dollar and gold standard for Puerto Rico was a straightforward process, with important business interests supportive of the move which would make accessing the US much easier. By 1933 the gold standard had come to an end. After the Great Depression, which began in 1929 and lasted for more than a decade, the US government, as well as the nation’s financial institutions, required a much more liquid financial system. A gold standard has the effect of restricting the issuance of capital by tying it to the amount and valuation of gold (Elwell, 2012). When President Roosevelt came to office in March 1933 he took a series of drastic measures to end the gold standard and supply capital markets with liquidity. The convertibility of gold was abolished and private gold holdings were nationalised. Roosevelt declared a bank holiday lasting from 6 March 1933 to 9 March 1933, preventing withdrawals of privately held gold (Roots, 2000).

World War I

World War I was a conflagration that consumed the empires of European nations. But while the history of World War I battles is well known and studied, the simultaneous battle that was being waged by diplomats, politicians and business people is less well understood. Amongst allied and enemy nations, negotiations over how to fund the war effort were fraught with tension and subterfuge. Debt became a defining feature of the war for all participants and would be one of the War’s strongest legacies (Hudson, 2003, p. 39). The interwar years were also remarkable for the number and seriousness of the economic and political crises that gripped both Britain and the United States, the most notable of these being the start of the Great Depression (1929) and the sterling crisis of 1931.

World War I and the interwar years which followed it marked a turning point in the trajectory of Western hegemony. Britain had been the major hegemon in the world system for approximately two centuries. However, with the British Empire in decline and the emergence of new strategic competitors, the world system was entering an era of profound instability. During the period from approximately 1914 to 1939, no nation possessed the full array of strategic resources necessary to dominate the world and establish a new political order. The United States did have at its disposal massive industrial, economic and financial power; however, it lacked a clear strategic conception of its role in the world during the interwar years. The Grand Area policy drawn up during World War II is a stark contrast to the ad hoc nature of US diplomacy and military strategy during the interwar years.

The British war effort in World War I was largely dependent on material and financial support from the United States. This dependence reflected new political realities for Britain. By World War I, Britain and the United States had become near equals in the economic sphere. World War I further aggravated the economic difficulties that Britain was experiencing, forcing the government to sell assets to pay for the war. The United States was able to supply to Britain all of the war materials and economic assistance that it required. This is symbolic of the changing fortunes of Britain, and the fact that it was so heavily reliant on the United States demonstrated the new distribution of world power. After World War I the United States became an important creditor for the world (Lake, 2000). In the post-World War I period, financial power shifted from London to New York.

At the same time, the United States began to practice a more interventionist approach in protecting private US investments. President Woodrow Wilson’s worldview and economic outlook greatly expanded the international scope of US hegemony. The US took on the characteristics of an empire by making links between the economic and commercial concerns of private enterprise and the geo-strategy necessary to ensure these interests remained in US hands. Schmitz (1999) argues that the US claims to be committed to liberal democracy and human rights, but more pragmatic policy objectives cause the US to support right-wing autocrats who are ideologically more acceptable to US capital than populist and leftist regimes. Schmitz states that this approach has since come to be institutionalised in the formulation of US foreign policy. Beginning his study in 1921, Schmitz argues that the administration of Woodrow Wilson played a critical role in determining the way that US policy towards foreign nations was shaped, particularly about the role played by US investments. Wilson’s approach was to initiate policies that were conducive to US investments (Schmitz, 1999). Panitch and Gindin (2012) also argue that it was the administration of Woodrow Wilson which saw the US taking a more keen interest in how foreign nations related to US commercial interests.

US Diplomacy Leads

The formation of post-war policy in the Roosevelt administration is intertwined with the personal relationships and world views of the individuals involved. One of the most crucial of these individuals was Under Secretary of State Sumner Welles. Welles played a decisive role in the formation and direction of policy in the Roosevelt administration. Welles came to work in the State Department at a time when it was in virtual crisis due to the departure of Bill Phillips in 1937. Roosevelt was well acquainted with Welles, and had provided him with a reference to join the US Foreign Service in 1916. Welles had enjoyed a successful diplomatic career long before his work on post-war planning. In 1920 aged 28, Welles became the Chief of Latin American Affairs Division in the State Department and was considered an authority on the region. He later informed the “good neighbour policy” (Rofe, 2007). Welles had direct access to Roosevelt in the White House. Welles’ vision of United States diplomacy and how post-war policy should be structured was influenced by another American President: Woodrow Wilson. Harper (1994, p. 60) explains that:

Welles’ diplomacy was inspired in part by Wilson’s “peace without victory” formula of 1917—by the hope of bringing American leverage to bear during the military stalemate in order to settle European matters definitively and in a manner favourable to the United States.

Similarly, O’Sullivan (1999) argues that Welles used the post-war planning opportunity that Roosevelt had initiated to put into practice his own views on what role the United States should take after the war. He viewed his “leadership of post war planning as an opportunity to realize his neo-Wilsonian vision of a world reordered along lines desired by the United States” (O’Sullivan, 1999).

The American population in the late 1930s held predominantly isolationist views (Welles, 1997). It was in this context that the Roosevelt administration tried to avoid war with Japan. With isolationist sentiment in the US growing, Roosevelt delivered his “Quarantine” speech in October 1937 in Chicago, the heartland of isolationism in the United States (Borg, 1957). This speech contained much of the thinking and planning that the Roosevelt administration had done regarding Japanese expansion in the Pacific. The word “quarantine” is indicative of the global outlook that the Roosevelt administration was increasingly taking as it responded to the movements of the Japanese in Asia, and Germany in Europe.

Sumner Welles was described as “FDR’s global planner” due to the increasingly global scope of Welles’ diplomatic and planning work in the late-1930s, which was conducted in the context of a world that was quickly spiralling towards war (Welles, 1997, p. 205). After Roosevelt’s “Quarantine” speech in October 1937, Welles formulated a two pronged plan and submitted it to Roosevelt in December 1937. The plan was designed to use the influence of the United States to assure allies and enemies alike that the United States would not remain uninvolved in world affairs. The plan avoided making any direct military commitments by the United States. The tactics of this plan were twofold. The United States would offer to cut tariffs, cooperate on disarmament and give greater access to raw materials to other nations. The second phase of the plan involved creating an “executive committee”. It was intended that nine nations from Latin America as well as Europe and Asia would join this committee with the intention of organising an international contingent of nations, centred upon the United States, aimed at preventing war (Welles, 1997).

It is important to note here that United States’ planning was based on two priorities. The first was to restrict Japan’s sphere of influence and ability to operate militarily in Asia. The second priority up until 1939 was to prevent war by offering inducements to other nations not to go to war as per Welles’s plan of 1937. With this policy the United States was beginning to think in global terms about its security and economic situation. As a major international actor, the United States was part of a newly emerging world order in which it would increasingly play a fundamental role. The consideration of world events far away from the continental United States, and how these events would impact United States’ interests, became the foundation for later hegemonic policies that Sumner Welles would advance during the Second World War.

Although the US State Department took the lead in foreign relations and government planning, the Treasury Department also played a crucial role in United States’ post-war policy and in cementing the US dollar’s global hegemony. Henry Morgenthau Jr. led the Treasury Department. He became Secretary of the Treasury in 1933, replacing William Wooden who had fallen ill. As Morgenthau was of Jewish descent, he was vocal in his opposition to Nazi Germany and began to use his new role to combat the Nazi regime. He did this by imposing tariffs on German imports under the Smoot Hawley Tariff Act. However, this led to friction with the US State Department, which still wanted to maintain a reasonably friendly relationship with Hitler’s government, fearing a loss of trade, which by 1940 represented US$206 million in the German automotive sector, up from US$151 million in 1936 (Offner, 1977). Morgenthau had called the State Department approach “timorous and conventional, dominated by the foreign office notion that you get things done by being a generous host at diplomatic banquets” (Blum, 1959). However, Morgenthau did respect Sumner Welles’s contribution to the foreign policy of the United States. As Secretary of the Treasury...

Table of contents

• Cover
• Title page
• Copyright page
• Acknowledgements
• Contents
• List of Acronyms
• Introduction
• Chapter One: Pre-War US Capitalism
• Chapter Two: The ‘Grand Area’ and US Dollar Hegemony
• Chapter Three: Global Fracture
• Chapter Four: The Relative Decline of US Hegemony
• Chapter Five: The US Dollar: the Cleanest Dirty Shirt in the Hamper?
• Conclusion
• References
• Index