During World War II, major industrial countries including British, German, Soviet Union, France as well as Japan were catastrophically ruined in wars. Geographically separated from Asia and Europe, the US got involved in war in the later stage of WWII when Germany was defeated by Soviet Union and the Japan attacked on Pearl Harbor. This enabled the US not only to free from war damage in local territory, but also to develop the war machine and economy due to sharp military supply demand overseas. When WWII ended in 1945, the United States emerged as the undeniable world leader, possessing around two thirds of the world gold reserve and more than 50% of the world industrial productivity. The predominant economic and military might helped the US to achieve its hegemonic currency and monetary status in the post-WWII era.
Being the chief planner, the US led its victorious allies, mainly British, France, Soviet Union and China, to establish various world-wide organizations and rules, reconstructing the post war order with regards to its own interests. During the Bretton Woods conference in 1944, international monetary system was designed to underpin the Dollar’s supreme status, superseding the sterling, as the predominant global reserve currency. This was actually a Gold Exchange Standard where the Dollar was pegged to gold at the fixed price of $35 per ounce gold and the currencies of the rest of the world were pegged to the Dollar with fixed exchange rate.
International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) and Bank for International Settlements (BIS) were vehicles for enforcement. Eventually, the Dollar’s uncontested monetary hegemony was secured. A normal state might only obtain revenues from currency issuance domestically in terms of seigniorage revenues and inflation tax. Owing to the Dollar’s special status, the US earned the revenues from all over the world by the issuance of the Dollar to the world! It was a huge sum of money! Nevertheless, this was only a small portion of explicit economic benefits!
In a bid to foster the US’s monetary hegemony and exert economic and politic influence on other countries, especially those war-torn nations in WWII, the US offered various plans of financial aid to its allies, helping them to rebuild their countries from the ruin of wars. The most famous one was the Marshall Plan (officially the European Recovery Program, ERP) adopted in 1948. Western European countries swiftly recovered from war after they received a total of $13 billion of economic assistance from this generous plan. Of course, there was no free lunch. The US aimed at stepping in the affairs of Western Europe by means of financial influence. Also, a recovered and strong Western European could better serve the US’s strategic purpose. With respect to military threats from the Soviet Union and its allies in Eastern Europe, the US integrated the military forces in West Europe countries to form a unified commander system led by the US. As such, the North Atlantic Treaty Organization (NATO) was established in 1949. Since then, the US took control of defense system in Europe which originally dominated by German and France. It was a huge success in geopolitics for the US. In reaction to the formation of NATO, the Warsaw Pact was signed among Eastern Europe countries and the Soviet Union in 1955. A balance of power, controlled by the US and the Soviet Union was formed. We call this as a security framework of Europe.
On the other side of the world, the US was overstretched in the Korea and Vietnam War. Due to deficits and excessive military expenditure, the Fed printed far more money than its gold reserve could afford. When France requested getting back their gold deposit from the US, confidence on the Dollar slumped. Since the US could not free itself from the nightmare of Vietnam War, it could only maintain its military might in the expense of the Dollar’s credibility.
Finally, the Bretton Woods System collapsed, when U.S. President Nixon lifted the peg between the Dollar and gold in 1971. Prior to this, the US got prepared for retraction:
Henry Kissinger met with Chairman Mao, leader of China at that time, in an attempt to develop diplomatic relationship with China and retreat from Vietnam War in an order and descent way, amid the challenge of the Dollar hegemony. The US gave up containing China, helped it to integrate into the international society and cooperated with it to deal with threats from the Soviet Union. In exchange, the China government would not alter the geopolitics environment in Southeast Asia after the retraction. Also, China would not pose threat to the US allies in northeast Asia i.e. South Korea and Japan. As a result, a balance of power, controlled by the US, was formed in Western Asia Pacific. We call this as a security framework of Western Asia Pacific.
In the Middle East, the US signed a secret but vital agreement with Organization of the Petroleum Exporting Countries (OPEC) through the royal family of Saudi Arabia that the sale of crude oil must be denominated exclusively in the Dollar in 1971. Saudi Arabia was requested to use the surplus from the sale of crude oil to invest in debt securities of the US. This was the so-called petrod In exchange, the US provided military security to the Saudi Arabia.
With US’s military support, Israeli won the Yom Kippur War in 1973. After a series of wars with Israeli since its establishment, the Arab states finally realized the fact that their reliance on the Soviet Union’s military support could not defeat Israeli as long as the US was on its side. In their desperate, some Arab states, especially those of the Persian Gulf changed from the Soviet Union’s bloc to that of the US. A balance of power, controlled by the US, formed in the Middle East between Israeli and Arab states. We call this as a security framework of Mideast. The US became the middle man between them, and maximized its interest and strategic needs through playing the game of balance of power.
By controlling the three security frameworks mentioned above, with complementary military presence at the rest of the world, the interests of the US could be safeguarded. Among those, the Dollar hegemony and the US monetary hegemony were utmost importance. After the ‘Nixon Shock’, the US invented the petrodollar and the value of the Dollar was seemingly backed up by crude oil, which was viewed as blood of economy in modern society. Countries would need to earn the Dollar first if they wanted to buy crude oil. In fact, the value of Dollar was backed up by nothing, except the military might of the US.
Therefore, the US hegemony was supported by two pillars i.e. the Dollar and its military might. The Dollar pillar could help obtaining various kinds of resources in bulk quantity and virtually free of charge from all over the world, which could only be theft by wars or colonialism in human history, by simply turning on the printing machine. Based on the Dollar pillar, the monetary hegemony was established and became a vehicle to manipulate the monetary, commodity and stock market, and other financial sectors for strategic needs. It could also be utilized to harvest extra Dollar liquidity caused by excessive printing of the Dollar that circulated around the world to complete the petrodollar recycling process, through making financial turmoil. It was believed that a number of finance cries in modern history were well planned and made by the US. We would talk more about this on the topic of ‘the coming financial crisis’. The military might of the US became the ‘backing’ of the Dollar by intimidation or simply violence for countries refusing or posing threat to the Dollar and monetary hegemony. Since then, the US took off the shackles of gold from the Dollar and had monopoly authority, like the central bank of the world, to print paper money for the whole world. Paper money becomes the most important commodity of the US’s export. A new page of monetary history was turned. The world entered into a new era of fiat money.