International trade is a game. A game in which the United States produces dollars and the rest of the world produces things that dollars can buy.
The US can buy all the crude oil and natural gas in Nigeria free of charge. All they have to do is to print papers (US dollars) and Nigeria will gladly accept it for their oil.
Why? Because the world’s economies no longer trade to capture a comparative advantage, they compete in exports to acquire the needed dollars to service their debts (which are in dollars) and to sustain the exchange value of their currencies.
The world’s central banks are forced to acquire and hold more dollar reserves because critical commodities, most especially oil, are denominated in dollars.
Everyone accepts US$ because it can buy oil. This phenomenon is known as “dollar hegemony”. Since oil is denominated in dollars, and the US$ is a ‘fiat currency, the US owns the world’s oil for free.
By definition, before any country can acquire US$, in order for it to buy oil or other commodities, it must trade directly or indirectly with the US. Dollar reserves must be invested in US assets and this creates a capital-account surplus for the US economy.
It costs almost nothing for the US to print a $100 bill, but other countries must produce actual goods worth $100 before they can get a $100 bill from the US.
This means that the rest of the world is supporting and subsidizing American living standards.
But wait, how did we get here? Before I delve into the real story, let me joggle our memory back to elementary economics class. I hope we all remember the promissory note.
The Bank of England used to issue promissory notes to people who had gold in the bank. It worked like a cheque, so whenever you want to pay for a commodity, you give your seller the promissory note and he can go to the bank to redeem the gold.
Unfortunately, the Bank of England was issuing more promissory notes than gold in the bank, but that’s another story.
This promissory note eventually became the currency that we have today and it was backed by gold until 1971, when the US government terminated the Bretton-Woods agreement, thereby rendering the dollar and other currencies fiat currencies. But what was the Bretton-Woods agreement?
This is where the real story began. In 1944, 44 countries met in Bretton-Woods, New Hampshire, to develop a global monetary system that they can control. Those countries agreed to put forward a single currency as the standard for gold. This currency will be directly redeemable for gold and other currencies will be pegged at the value of this single currency.
The US insisted that this single currency should be the dollar since the US controlled 2/3 of the world’s gold. This was agreed upon by the 44 countries and signed into law.
Thus, the dollar took over the role that the gold played, and most international transactions were dominated in US$.
A few people proposed that this single currency should be a World Currency Unit or the “Bancor” but the US objected to that and insisted on the dollar.
This gave the US an unfair advantage called “American Exorbitant Privilege”.
Some people were not happy with the system, most notably French president Charles de Gaulle.
In February 1965, Charles de Gaulle at the french parliament expressed his dissatisfaction with the system. de Gaulle insisted that world trade should be established on an indisputable monetary base that doesn’t belong to any country in particular.
Since the law permitted it, France began to send dollars to the US and were redeeming it for gold, thereby building their own gold reserves. This created a problem for the US because the US had been cheating the system, printing more dollars than they had gold.
This resulted in the depletion of the US gold reserves and in the Nixon shock of 1971. In 1971, President Nixon without consulting the members of the International Monetary System announced that the US will no longer redeem the US$ for gold.
This was against the law but who will challenge the US? This announcement eventually brought the dollar and other currencies into fiat currencies, currencies not backed by any tangible resource. But the US had another game in mind, the petrol-dollar system.
The status of the US$ as the “king currency” and the currency of international transactions was under threat. This took a new dimension when the Arab-Israeli war broke out in 1973.
The oil embargo Saudi Arabia placed on the US (because of its support for Israel) resulted in the price of oil skyrocketing. This led to the US entering its first recession in more than 20 years.
The US then sought an alternative way to motivate countries to hold US$, which was losing its value. In July 1974, US Secretary of States, Henry Kissinger, sent US Treasury Secretary, William Simon to Saudi Arabia to make a deal with King Faisal.
This deal resulted in the emergence of the Petrodollar system. The US convinced Saudi Arabia to sell its oil for only US$, and in return, the US will provide Saudi Arabia with weapons and protection/infrastructure.
The deal also meant that Saudi Arabia will reinvest the dollars made from the oil proceeds in US banks. US banks can then use “petrodollars” as loans to developing economies in Latin America, Africa, and Asia.
These economies will then purchase exports from the US. This process is known as “Petrodollar recycling”.
Saudi Arabia as a leading OPEC country was able to get other oil-producing countries to sell crude oil only for dollars. Thus, the Petrodollar system ensured the US$ once again cemented its position as the world reserve currency.
The implications of this system are that: – Whenever the dollar loses value, the oil loses value. If the value of US$ falls, the value of goods and services in the country falls, since their local currency is pegged to the US$.
This system has kept the US economy booming despite the recurrent financial crisis in the world. Currently, the US debt is over $31 trillion.
It doesn’t have to pay it since the US can print its own currency, while the rest of the world have to earn it. The system has distorted globalization into a process of exploiting low labour-cost economies to produce items for exports to the US market so they can get the almighty US$
This system keeps developing economies in need of capital since surplus dollars must be reinvested in US treasuries to prevent their currencies from collapsing.
The US carries out an economic/financial program called Quantitative Easing. This simply means increasing the supply of a currency. When you increase a currency’s supply, you are decreasing its value.
This process means the US has been devaluing the US$ by printing more dollars and putting it on the world market. This creates a negative effect on other currencies.
The Brazil, Russia, India, China, and South Africa (BRICS) countries have criticized the US multiple times because of this. Since their currencies are tied to the dollar, QE causes inflation to rise in their countries and other countries pegged to the dollar.
As a way out, the reality is that the world needs a new financial and economic architecture different from the current one based on fiat and thrives on fraudulent accounting.
One of the leading organizations championing the movement to change this is The Schiller Institute.
Niyi Sulaiman , is an Artist. Monotheist. Pan-Africanist. He writes from Nigeria.