Japan
Due to strong demand for military supply, the economy of Japan gained strong momentum during the Korea war. The US was exceptionally generous to its once biggest enemy, offering financial aids and technology transfer to booster the Japanese economy development in post war era. In Asia, the largest military presence of the US was in Japan. The Japanese was so dependent on the US in terms of economy, military and politics, that the US played an indispensable and decisive role on Japan’s affairs. In the late 80’s of last century, Japan had accomplished great success in technology advancement and the development of economy, and became the second largest economy of the world. When the Japanese felt they would be ahead of the US in the near future, they did not content with its subordinate status anymore and the ‘say no to the US’ sentiment was prevailing. As such, the Japanese paid effort to persuade the world, especially countries in Asia Pacific region, to use Yen as an alternative to the Dollar. This challenged and eroded the Dollar’s hegemony. Owning to pressure from the US, Japan was requested to sign the Plaza Accords in 1985, which obliged Japan’s central bank to lower the interest rates. This sudden and detrimental measure inflated the bubble economy of Japan that burst in five years, leaving Japan a financial wreck. The Japanese economy underwent its ‘lost decade’, and was unable to challenge the US again.
Western Europe
The EU and the US were in close cooperation to combat the Soviet Union during the cold war. When the Soviet Union collapsed in early 90’s of last century, the ally seamlessly harvested the heritage of the Soviet Union together. The US gained handsome seigniorage revenues from the huge request for the Dollar reserves by the central banks of Russia and newly independent former soviet republics and satellite states. In addition, the Wall Street rewarded enormously from investing in high quality assets of the former Warsaw Pact countries. On the other hand, the EU gained huge geopolitical benefits by integrating the Eastern Europe into its sphere. The unification of German made the EU even powerful. Some figures of real economy of the EU were even ahead that of the US.
Currency hegemony is an integral part of a great nation. The pursuit of currency hegemony is an inevitable step so as to gain strategic high ground on competing as superpower in modern world. The EU proposed to launch sovereign currency, namely the Euro, in 1999. Washington clearly perceived that a strong and united EU was not of the US’s strategic interests, while the birth of the Euro posed immediate threat to the Dollar hegemony. Therefore, the US imminently launched the Kosovo War at the end of 1998, just before the birth of the Euro. The military bombing had not only destroyed the Federal Republic of Yugoslavia, but also the stability of geopolitical environment of Eastern Europe and inventors’ confidence on the Euro. The exchange rate of the Euro to the Dollar dropped substantially after the war. Enormous outflow of capital converted from the Euro to ‘safe haven’ currency i.e. the Dollar. The Kosovo War was fought to undermine the Euro, and thus the superpower dream of the EU.
The US’s military action clearly declared to the world that military might was the strongest ‘backing‘ of the Dollar. A supranational currency without supreme military backing could not act as a safe reserve currency. After the Kosovo War, the Dollar’s influence occupied every corner of the world. The US had been the sole superpower enjoying all-around preponderance on world stage and was ambitiously heading to the road of unipolarity.
Through studying of history, we can know draw lessons and make predictions on future. There are a few points that deserved our attention as shown in below:
There only exist two nations of currency hegemony in human history, namely the Great Britain and the US. Only superpowers are eligible for the throne of currency hegemony.
The wider the acceptance of reserve currency status of its currency from central banks of the world, the greater the power and benefit the nation possesses.
In order to maintain its currency hegemony, the US knocked down any competitor, even allies, by any means, even waging war. WWII provided an excellent opportunity to the US for accomplishing its strategic target. As such, the US faced relatively less confrontation from the Great Britain and paid relatively less effort to persuade the world accepting the Dollar.
The military pillar of the US provides the strongest “backup” for the Dollar. The most crucial platforms for the military might of the US are the three security frameworks.
The Dollar hegemony is the basis for monetary hegemony, which in turns, contributes to the US hegemony. The road to the US hegemony is proved to be long enduring and with twists and turns, while the gain is gigantic.
If the Dollar hegemony status is lost, not only the US hegemony would be collapsed, but also the whole financial system of the US. The direct consequence is the collapse of the country.
All great nations including the US, EU, UK, China and Japan, having its currency as major international reserve currency status, would definitely endeavor a wider acceptance of its currency from the rest of the world, and would not allow its share to be diminished.