EPW Commentary
March 19, 2005
US Dollar Hegemony
The Soft Underbelly of Empire

The costs of sustaining the US's new 'Empire' will become apparent to its public only when these costs directly accrue to them. This will happen, as this article suggests, only when (i) other nations stop subsidising the US's imperial adventures by colluding in them and (ii) the dollar loses its role as the world's reserve currency.
Rohini Hensman, Marinella Correggia
What we intend to argue below is that if the US’s ability to undertake imperial conquests like that of Iraq depends on its obvious military supremacy, this in turn is ultimately based on the use of the US dollar as the world’s reserve currency. It is the dominance of the dollar that underpins US financial dominance as a whole as well as the apparently limitless spending power that allows it to keep hundreds of thousands of troops stationed all over the world. Destroy US dollar hegemony, and ‘Empire’ will collapse.
David Ludden’s article ‘America’s Invisible Empire’1 sums up the problem of the world’s most recent empire with remarkable clarity. Constituting itself at a time when decolonisation was well under way and other empires were disintegrating, US imperialism could never openly speak its name. Initially, it disguised itself as the defender of democracy against communism; when the Soviet Union ceased to exist, the pretext became the ‘war against terror’. National security and national interest were invoked as the rationale for global dominance.
Ludden’s description evokes the image of US citizens (and a few others) living in a ‘Truman Show’ world, a bubble of illusion created by state deception and media complicity that prevents them from being aware of the reality of empire although everyone outside can see it only too clearly. It sounds quite credible that ‘the empire will not be undone until its reality and costs become visible to Americans’ (Ludden: 4777). However Ludden’s claim that ‘US taxpayers and voters pay the entire cost of the US empire’ (ibid: 4776) is less credible. If that were true, many more Americans would see their empire and oppose it; the Democrats would have put up a principled anti-war, anti-occupation candidate at the recent presidential elections, and the overwhelming majority of the US electorate would have voted for her or him. But it is the rest of the world that has been paying for the US empire: that is why it is almost invisible within the US.
As Emmanuel Todd wrote,2 an imperial economy depends on drawing wealth from abroad, without any reciprocity. The US is now more dependent on the rest of the world than the rest of the world on the US. This explains their behaviour: not only their strategic need to get their hands on the world’s resources, but also their need for hegemony. To counterbalance their economic dependence, they must keep themselves – at least symbolically – at the centre of the world. They must demonstrate their ‘omnipotence’: that is why they wage so many wars against militarily weak enemies. At the same time they must appear as benefactors – hence their whirlwind tour of the countries devastated by the tsunami disaster in order to make use of the photo opportunities it provided.
History of Dollar Hegemony
The core advantage of the US economy, the source of its financial dominance, is the peculiar role of the US currency. It is because the dollar is the world’s reserve currency that the US is able to maintain its twin deficits (fiscal and trade) and depend on the world’s generosity. It needs a subsidy of at least 1.2 billion dollars per day to keep up its level of spending. Its military superiority is one reason why it it is unlikely ever to face an embargo, but more importantly, it can continue to live beyond its means because of US dollar hegemony. But for long?
The dollar mechanism has been described extensively elsewhere,3 so we will merely summarise here. The strength of the US economy after second world war enabled the US dollar, backed by gold, to become the world’s reserve currency. When the US abandoned the gold standard in 1971, the dollar remained supreme, and its position was further boosted in 1974 when the US came to an agreement with Saudi Arabia that the oil trade would be denominated in dollars.4 Most countries in the world import oil, and it made sense for them to accumulate dollars in order to guard against oil shocks. Third world countries had even more reason to hoard dollars so as to protect their fragile economies and currencies from sudden collapse. With everyone clamouring for dollars, all the US had to do was print fiat dollars and other countries would accept them in payment for their exports. These dollars then flowed back into the US to be invested in treasury bonds and similar instruments, offsetting the outflow.
As a reserve currency fulfils world needs in addition to the functions of a domestic currency, the favoured country can build up debt for a protracted period on a scale that would wreck any other country’s currency. But this advantage is a double-edged sword.5 It allowed the US economy to decline unnoticed, its fiscal and trade deficits to climb steeply: by 2004 the US trade deficit had reached $503 billion, the current account deficit $413 billion, the gross national debt around $7 trillion. Globalisation destroyed the US as a manufacturing nation; the outsourcing of services means that even this sector is gradually being shifted out of the US.6 Only its pre-eminence in the global financial services industry remains intact.7 And this is underpinned by US dollar hegemony.
As Pierre Lecomte, a French financial analyst and supporter of the campaign ‘Dette et dollar’ (to reject the dollar as world currency) says, “while the rest of the world must toil hard to earn dollars which are needed to buy goods internationally, or to pay off foreign debt, the US just needs to print dollars”.8 And as Frederic Clairmont wrote in Le Monde Diplomatique (April 2003): “Living on credit is the credo of the foremost power in the world”.
Various campaigns around the world have asked people to ‘boycott Brand America,’9 but most products with American brand-names are not made in the US. Therefore refusing to buy such things may reduce royalties to America, but will not seriously undermine US economic power. On the other hand, ‘the longest-lived and most widely seen American ‘brand’ in the rest of the world is almost certainly not Coca-Cola nor McDonalds, but rather the US dollar.’10 Taking this into account, the secretariat of the international ‘Boycott Bush campaign,’ based at the Mother Earth association in Belgium, recently asked members if they were ready to open another front, ‘to boycott the dollar’. Most of them have responded ‘yes’.
Dollar hegemony is what concealed the costs of Empire, which were effectively being paid for by the rest of the world, from US citizens. Other countries were compelled to accept fiat dollars because they had no choice. It was the world’s only reserve currency.
Choosing the Euro
Until…the euro came into being. Even then, the choice was only a potential one, as the euro initially lost value, making it unattractively risky as a reserve currency. The first non-European countries that made a move in its direction did so for political rather than economic reasons. When Saddam Hussein switched to the euro in late 2000 and converted Iraq’s $10 billion reserve fund at the UN to euro, some analysts commented that this political gesture would have a heavy economic cost.11 But against all expectations, he actually made a profit when the euro staged a recovery.12 Iran is another country which in 2002 converted more than half its foreign exchange reserves to euros.13 Both Iraq and Iran being oil-producing countries, the impact of their shifting currency allegiances would be significant. By contrast, North Korea’s official shift to the euro for trade in December 200214 was negligible from the standpoint of the world economy, yet it signified a trend that US imperialism had to stop at all costs. Suddenly George Bush’s diatribe against the ‘Axis of Evil’, which seemed so arbitrary and laughable at the time, does not appear quite so funny. Add to this picture the fact that Hugo Chavez – against whom the US supported a coup in April 2002, and who continues to be under attack by the Bush regime – has taken a large part of Venezuela’s oil trade out of the orbit of the US dollar,15 and the economic compulsions driving US foreign policy become clearer. Military might alone does not seem to be a sufficient basis for sustaining an empire: economic power is crucial. And for the declining US economy, US dollar supremacy is essential for maintaining its economic clout.
This is no longer unchallenged. Before the Iraq war, one Iranian economist and the Moroccan magazine, L’Indépendant, suggested that Islamic businessmen and countries should drop the dollar as their foreign exchange reserve currency, in order to weaken the US or at least deter them from their aggressive foreign policy. Given the deteriorating relations between the US and the Arab world, quite a few west Asian oil-exporting countries have begun to increase the proportion of international settlements made in euros. Reportedly, Russia may also follow suit. In 2003, a senior Iranian oil representative suggested in a speech in Europe that European oil purchases might be increasingly traded in euros in future. China and Russia have hinted that they may begin to hold more of their foreign currency assets in euros instead of dollars. An article in China Daily on September 28, 2004 by Jiang Ruiping, the director of International Economics at the China Foreign Affairs University, pointed out that China is already losing due to the dollar slide and would lose even more if it crashes, and recommended moving out of dollars into euros and possibly also yen, as well as using its dollar reserves to stock up on oil.16 Other countries like South Korea and Taiwan also plan to shift some of their foreign currency assets out of dollars.17
All this has weakened the US dollar, but this does not necessarily mean that it will decline to the point where it ceases to function as world currency. There are contradictory pressures, both from the US and from its major creditors. Within the US, there could be hopes that a weaker dollar would spur exports, but this now seems unlikely, given how uncompetitive US industry has become.18 More importantly, the US deficits shrink as the dollar declines. Federal Reserve chairman Alan Greenspan summed up the US dilemma in November 2004, in a speech where he seemed to accept the inevitability of the dollar decline in order to help ease US deficits. This would be a boon to the US so long as the dollar retained its role as world currency, but it would inflict enormous losses on countries that have amassed large quantities of dollar reserves. China and Japan alone hold about a trillion dollars, and while countries like India (and smaller economies) may hold much smaller quantities, the devaluation of those reserves is already hitting them, and would hit them even more if the dollar crashes.19 These countries could therefore think of selling dollars and moving their reserves to some other currency, which in turn would jeopardise the status of the dollar as the world currency.20 An attempt to counteract this is probably what was responsible for rumours in January 2005 that the Federal Reserve might hike interest rates. For countries exporting to the US there is also a dilemma. Japan, for example, bought billions of dollars in order to hold down the value of the yen and keep its exports competitive. In the short term, it may benefit from propping up the dollar, even though it would lose massively if the dollar crashes. Debtor countries would gain from a dollar slide, since their debt is denominated in dollars; but if they have foreign exchange reserves in dollars, these would be devalued, and they would also suffer if they depend on exports to the US which the US would no longer be able to afford. Thus there are also powerful forces resisting the displacement of the dollar as the world’s reserve currency.
This brings us back to the dilemma posed by David Ludden. The costs of empire will become apparent to the US public only when they have to pay those costs, and this will happen only when (a) other nations stop subsidising its imperial adventures by colluding in them, and (b) the dollar loses its role as the world’s reserve currency. A weakening of the dollar while it retains its role as world currency, which is what has been happening so far, could actually help US imperialism by reducing the value of its fiscal and trade deficits; only when there is a large-scale shift away from dollar reserves will the rest of the world stop paying for the US empire. This may not happen in the near future if it is left entirely to economic forces, and meanwhile the occupation of Iraq and Palestine will go on, Iran may be invaded (as Bush has threatened repeatedly), and so on and so forth. On the other hand, if currency speculators get into the act and the dollar goes into free fall, it could pull down the world economy with it! Avoiding this, too, requires planning and coordination.
Courses of Action
For citizens of the world who are opposed to US imperialism, that suggests several possible courses of action. The ‘world’s second superpower’, world public opinion, made a hugely impressive showing prior to the invasion of Iraq, yet it failed to stop the invasion itself; stronger action is required. But the armed struggle taking place in Iraq is killing and maiming hundreds of thousands of Iraqis and thousands of Americans, most of them from poor families; surely this is not desirable. The alternative we propose is non-violent non-cooperation with the imperial monster. For example:
(1) Putting pressure on all other governments not to participate in the occupation of Iraq in any way, and/or voting out of power governments which are colluding in this enterprise and voting in alternatives who promise to pull out of Iraq. In Britain, for example, if the Liberal Democrats are willing to make a commitment to withdraw British troops from Iraq, all anti-war activists, including those who would normally vote for Labour or Left parties, should campaign for them in the forthcoming elections. Similarly with other governments backing the US like those in Italy and Japan. This will leave the burden of running their empire fairly and squarely on the shoulders of the US administration.
(2) Refusing to use the US dollar except within the US itself. Even if this is done on an individual basis, it will have the effect of undermining the role of the dollar as the world currency. Other economic actors, like the international fair trade movement, should also shift to other currencies for their international trade: the movement is increasing, and it would be an important gesture symbolically. Both academics and activists should stop using dollar equivalents to measure incomes in third world countries, etc; for the moment, the euro can be used as a standard. Mass action of this sort played a major role in ending British rule in India and thus the British empire. Employed on a much wider scale, it can help to undermine the US empire.
(3) Putting pressure on governments in third world countries to shift foreign currency assets out of dollars, and to create regional currencies to strengthen regional commercial and economic ties. This would not only be a gesture of solidarity to the beleaguered peoples of Iraq, Palestine and others oppressed by the US empire, but would also make good economic sense. The dollar is sliding, and developing countries which hold all or most of their foreign exchange reserves in dollars are losing money as it loses value. If it crashes, their reserves could be wiped out.
(4) Putting pressure on governments in oil-producing countries not to denominate their oil trade in US dollars. This does not necessarily involve a wholesale shift to the euro. Venezuela has concluded several barter deals with other Latin American countries including Cuba, giving them oil in exchange for goods and services,21 and this is a pattern other oil-producing countries could consider. For example, tens of thousands of migrant workers from south and south-east Asia work in Gulf countries; if their remittances in dinars, dirhams, etc, can be used directly for oil imports, all parties would benefit. Barter deals which do not involve oil could also be concluded between developing countries.
(5) Changing world trading patterns. If the dollar sinks drastically with world trade unchanged, many countries which now rely on exports to the US will be affected adversely by its inability to import their goods with a weakened dollar. A reorientation of trade away from the US would therefore be necessary. For example, plans to constitute SAFTA as a regional bloc free of tariff and immigration barriers should be pursued at greater speed, and trade with other countries promoted at the same time. The European Union and MERCOSUR in Latin America provide examples that others could emulate. China and Japan, the biggest creditors of the US, suffer most from the decline of the dollar, and would have to work out alternative trade patterns to safeguard their economies.
(6) Campaigning nationally and internationally for policies of employment creation, protection of workers’ rights, shorter working hours, enforced payment of minimum wages that are adequate to support a decent standard of living, and so on. This will redirect resources from hugely wasteful military expenditures into social consumption (nutrition, health, education, etc) and expand mass markets, especially in third world countries but even in Japan, Europe and North America.
(7) In addition to these economic measures, ending US imperialism would require pressing for the development and implementation of international humanitarian law, international law and multilateral treaties (such as the Geneva Conventions, Rome Treaty of the International Criminal Court, Chemical Weapons Convention, Biological Weapons Convention, Comprehensive Test Ban Treaty, Land Mine Treaty, ILO Core Conventions, CEDAW and the Kyoto Protocol), and the strengthening and democratisation of multilateral institutions (like the UN, ILO and WTO). A recent example of such action was the open letter by eminent South Africans (including former president Nelson Mandela and Archbishop Desmond Tutu) protesting against US attempts to oust Kofi Annan, which says, ‘Those who call for his resignation betray the objectivity his position as secretary-general demands, and regard the United Nations as a mouthpiece to extol and exonerate the politics of the US, right or wrong.’22 Also important are actions ‘trying’ the US for violations of international law, as in the world tribunal on Iraq which is being carried out in various countries by hundreds of movements. Of course the effectiveness of international law and multilateral institutions is seriously undermined by US non-participation and sabotage, yet if other countries persist in working for global democracy, the US will come under greater pressure to comply.
Even if all possible adjustments are made, there is no doubt that the decline and fall of the dollar as world currency will cause pain, both within and outside the US. But the alternative is incomparably worse. The world order cannot much longer survive having a heavily armed rogue state on the rampage in violation of all international law and multilateral treaties. The world economy cannot afford to depend on the currency of a bankrupt nation with a colossal military budget. And the earth itself is put at risk by a country which devours massive quantities of fossil fuels and spews out greenhouse gases at a catastrophic rate.
US imperialism would not be able to pursue its destructive policies without the unlimited supply of blank cheques extended to it by the rest of the world, so it is the responsibility of the rest of the world to withdraw that source of funding. The beast has to be killed by attacking it at the point where it is most vulnerable. Meanwhile, if enough people in the US work to ensure that the next elections (2008) install a president and representatives who undertake to abandon the pursuit of empire and instead seek to reintegrate the US into the international community as a law-abiding, fiscally-responsible, non-polluting member, the result will be a far safer and more stable global order, world economy and environment.
email: rohinihensman@yahoo.co.uk
Notes
1 David Ludden, ‘America’s Invisible Empire,’ Economic and Political Weekly, Vol XXXIX, No 44, Mumbai, October 30, 2004, pp 4776-77. 2 Emmanuel Todd, Dopo l’impero – la dissoluzione dell’impero americano, Marco Tropea editore (Italian translation, 2003). 3 William Clarke in particular makes an impressive case, with a great deal of evidence, in his web-based essay ‘Revisited: The Real Reasons for the Upcoming War with Iraq: A Macroeconomic and Geostrategic Analysis of the Unspoken Truth’ (www.ratical.org/ratville/CAH/RriraqWar.html January 2004), which is a revised version, with addenda, of his original essay of January 2003. Many of the references in this article are taken from him. See also Henry C K Liu, ‘US Dollar Hegemony Has Got to Go,’ Asia Times, April 11, 2002 and Rohini Hensman, ‘A Strategy to Stop the War, Economic and Political Weekly, April 19, 2003. 4 David E Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets, Cornell University Press, 1999. 5 Paul Craig Roberts, ‘The Coming Currency Shock,’ Counterpunch, November 16, 2004, www.counterpunch.org/roberts11162004.ht ml. 6 Paul Craig Roberts, op cit. 7 Lawrence G Franko, ‘US Competitiveness in the Global Financial Services Industry,’ www.financialforum.umb.edu/documents/Franko per cent, 20 Fin per cent, 20 Svcs per cent, 20 Global per cent 20 Comp.pdf, October 2004. 8 Pierre Lecomte, Comment sortir du piège américain? (ed), F X de Guibert, Paris 2003. 9 Such campaigns are coordinated by the network ‘Boycott Bush’, www. boycottbush.org10 Lawrence G Franko, op cit. 11 See for example Charles Recknagel, ‘Iraq: Baghdad Moves to Euro,’ Radio Free Europe, November 1, 2000. 12 Faisal Islam, ‘Iraq Nets Handsome Profit by Dumping Dollar for Euro,’ The Observer, February 16, 2003. 13 ‘Forex Fund Shifting to Euro’, Iran Financial News, August 25, 2002.14 Caroline Gluck, ‘North Korea Embraces the Euro,’ BBC News, December 1, 2002.15 William Clark, op cit.16 Gary North, ‘Asian Doubts Regarding the Dollar’, www.LewRockwell.com/north/north308.html, October 1, 2004.17 Phillip Day and Hae Won Choi, ‘Asian Central Banks Consider Alternatives to Big Dollar Holdings’, Wall Street Journal, February 5, 2004.18 Roberto Panizza, ‘Movimenti Internazionali di Capitali dal Rinascimento ai Nostri Giorni’, in Gli spazi della globalizzazione, edited by F M Parenti, Diabasis, Reggio Emilia, 2004.19 See, for example, Ila Patnaik, ‘Day of the Declining Dollar – How should India Be Responding to This Trend?’, The Indian Express, December 18, 2004.20 Mike Dolan, ‘Dollar Fall Will Come at a Price for All,’ Reuters, November 21, 2004 www.reuters.com/news Article.html? type = top News and Story ID = 6876686 21 Hazel Henderson, ‘Beyond Bush’s Unilateralism: Another Bipolar World or a New Era of Win-Win?’ InterPress Service, June 2002.22 M P Muttiah, ‘US Backs Out on Annan’, Sunday Observer, Colombo, December 12, 2004, p 9.