Dollar Hegemony: A Shift in Power
Have you ever pondered the nature of the dollar? What exactly is the dollar? The dollar originally served as a generic term for coins, with its etymology tracing back to a valley called Joachimsthal in Bohemia. Coins minted from high-purity silver extracted from the silver mines of this region were called “Joachimsthaler,” which was later shortened to “Thaler.” These “Thalers” became widely used as an international medium of exchange throughout Europe due to their high silver purity and reliability.
Later, as Spain entered the Age of Exploration, they circulated 8-real silver coins minted in South America and Mexico, known as “Pieces of Eight,” throughout Europe, calling them “Spanish Thalers,” which became known as “Spanish Dollars” in the Anglo-American world. Thus, the current dollar refers to the Spanish 8-real silver coin, with its origins tracing back to Bohemia in the Czech Republic.
The World’s First Reserve Currency
The Spanish dollar was significant because, like the legacy of ancient Athens, silver was recognized as an international medium of exchange by all nations in cultures that used gold and silver for payments. Silver was so universally accepted as an international payment method that it was used throughout Europe, India, China, the Middle East, and even for slave transactions in Africa.
The Spanish dollar became the first currency to create a reserve currency system alongside the Age of Exploration. At the time, China used bronze as currency and remained internationally isolated, but later China also entered the silver-using cultural sphere. As Spain and Portugal established silver as a payment method worldwide during the Age of Exploration, modern hegemonic powers emerged and the era of capitalism began.
This is also called the “Price Revolution,” “Primitive Accumulation,” or “The Advent of Inflation.” As silver coins began to be minted in large quantities, inflation occurred and the commodity economy developed, leading to a shift where those who owned movable assets (capitalists) became stronger than those who owned land (real estate). Hegemonic powers are fundamentally those who mint money, and the rulers of the seas and those who mint money from silver mines became the core of hegemonic power.
The Rise of Britain
However, the era of silver coins came to an end after the Battle of Waterloo. Due to the difficulties of transporting gold and silver coins in intercontinental trade, the concept of “netting” developed, and to minimize this, paper money—convertible currency—began to develop. During the Napoleonic Wars, Britain suspended silver convertibility to raise war funds due to financial shortages of gold and silver.
After the war ended, Britain enacted the Coinage Act in 1816, establishing the gold standard era by stipulating that 7.322 grams of gold would be convertible to 1 pound, with silver playing only a supplementary role. Britain was able to transition to gold convertibility because it had already secured gold from Europe and gold mines in South Africa and Australia during the war.
Thus, the global liquidity supplier shifted from Spain to Britain. During this period, British financiers collected bonds issued by various countries during the Napoleonic Wars and recovered them by converting bonds to gold after the war, concentrating almost all of Europe’s gold in Britain. This is known to have been orchestrated by Nathan Rothschild of the Rothschild family. With the implementation of the Coinage Act in 1816, the Rothschild financial empire began and emerged as a powerful bond market force in the gold standard era.
The Imperialization of Finance
Britain became the center from which money originated in the capitalist system by supplying liquidity to the world through gold mines in South Africa and Australia, dominating global liquidity, bonds, and insurance through gold mines and financial systems.
The gold standard thoroughly represented the interests of financial capitalists, and unlike silver, gold was not mined in large quantities, so it stabilized inflation and the value of bond interest. This thoroughly reflected the Rothschild family’s interests in bond-centered financial perspectives and stabilizing inflation to profit from interest rates above inflation.
The Dual Nature of the Gold Standard: Stability vs. Growth Suppression
However, the bond-centered profit structure was stable due to low volatility, but it hindered economic development such as large-scale development or job creation. Inflation is advantageous for debtors as it has a debt relief effect, and inflation is also positive for those developing industries, but Britain’s financial system at the time suppressed this too much.
America’s Silver Standard Experiment
As the automobile, steel, and oil industries developed in the 19th century, the economic and industrial structure changed dramatically, but Britain failed to anticipate this. The United States and Germany surpassed Britain by developing these sectors. In the late 19th century, there was an attempt in the United States to secure liquidity by returning to the silver standard (the Sherman Silver Purchase Act of the 1890s), but it failed due to lack of trust from other countries.
During this period, the fairy tale “The Wizard of Oz,” which symbolized the silver standard, also appeared. This became an opportunity for the United States to realize that issued currency must circulate worldwide to minimize the impact of domestic inflation.
On the Eve of World War I
As Britain became the financial center of the gold standard, it suppressed the automobile industry and missed opportunities for heavy chemical industrialization, causing the status of hegemonic power to change once again. Moreover, gold from Australia and South Africa alone could not supply sufficient liquidity to the rapidly developing world economy.
With the advent of electricity and elevators creating skyscrapers and automobiles expanding city sizes to form mega-cities, the economic scale surged, but the shortage of global gold mines led to insufficient money supply, causing deflation. This led to the birth of bloc economies and the creation of colonial bloc economies to avoid domestic deficits, creating a vacuum of hegemony that became the prelude to world wars.
Gold Flows to America
Just as gold flowed to Britain after the Battle of Waterloo, the world’s gold flowed to the United States after World War II. At that time, the United States held more than 80% of the world’s gold and had overwhelming industrial production. Keynes proposed to the United States to create a world central bank and issue paper money without gold or silver convertibility, but the United States insisted on gold convertibility based on their massive gold reserves.
Despite Keynes’s warnings, the United States opened the gold standard era, but it lasted less than 30 years. After World War II, enormous oil consumption and increased plastic production caused American gold to flow out to the world again, and as the United States changed from an oil exporter to an importer, the Bretton Woods system did not last long.
The End of Gold Convertibility
In 1960, Churchill’s demand for gold convertibility caused market collapse, and in 1971, President Nixon declared that he would no longer exchange dollars for gold, breaking the “dollar = gold” formula. Thereafter, the dollar became an “inconvertible currency” maintained solely by the credit of the U.S. government. And something to support this trust emerged again: oil. The United States, joining hands with Saudi Arabia, made oil tradeable only in dollars, establishing the “Petrodollar System.” Now the dollar reigns over oil, not silver or gold.
The Dollar Over Oil, and the Yuan’s Challenge
The era we live in is the “Petrodollar” era. Currently, the world’s liquidity is supplied by currency issued based on the credit of the U.S. Federal Reserve’s benchmark interest rate, which is an inconvertible international currency.
A dollar hegemony zone has been formed where only a few international currencies such as the dollar and pound are accepted for settlement in futures exchanges, but today we live in an era where China, which controls 40% of the world’s manufacturing industry and aims for Eurasian hegemony, is talking about building a yuan economic zone through the Belt and Road Initiative.
Up to this point, I don’t think this has been a particularly difficult story, but I’m not sure how readers have received it. Since there are only superficial news reports about U.S.-China hegemony, I have basically explained the relationship between currency and hegemony.