INTRODUCTION

We will now look at the reasons why USA played such an important role in the global economy.

We will also see why it dominated.


REASONS FOR USA DOMINANCE


1. It was the dominant global power.
As the Bretton Woods Conference convened, the relative advantages of the U.S. economy were undeniable. The U.S. held a majority of investment capital, manufacturing production and exports.
- half the world's coal
- two-thirds of the oil
- more than half of the electricity.
The U.S. was able to produce great quantities of machinery, including ships, airplanes, vehicles, armaments, machine tools, and chemicals. Reinforcing the initial advantage—and assuring the U.S. unmistakable leadership in the capitalist world—the U.S. held 80% of gold reserves and had not only a powerful army but also the atomic bomb.

2. It was also a major market for world’s economy

The U.S. stood to gain more than any other country from the opening of the entire world to unfettered trade.

The U.S. would have a global market for its exports, and it would have unrestricted access to vital raw materials. In addition, U.S. capitalism could not survive without markets and allies


3. Dominance in Bretton Woods system (1st fully negotiated monetary order to govern and coordinate monetary relations)
Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF). These organizations became operational in 1946 after a sufficient number of countries had ratified the agreement.
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold; and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing strain, the system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold.
Until the early 1970s, the Bretton Woods system was effective in controlling conflict and in achieving the common goals of the leading states that had created it, especially the United States.
Fixing it to gold meant a compromise between freely floating or irrevocably fixed rates.
What emerged was the "pegged rate" currency regime. Members were required to establish a parity of their national currencies in terms of gold (a "peg") and to maintain exchange rates within plus or minus 1% of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money).
In practice, however, since the principal "Reserve currency" would be the U.S. dollar, this meant that other countries would peg their currencies to the U.S. dollar, and—once convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system.
Meanwhile, in order to bolster faith in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce of gold. (Should the US decide to not abide by this, it could have repercussions for the world’s economy.) At this rate, foreign governments and central banks were able to exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to the dollar, itself convertible into gold, and above all, "as good as gold." The U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world's key currency, most international transactions were denominated in dollars.
The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.
Member countries could only change their par value with IMF approval, which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium."
However, by the 1970s, the USA had to change the system. This resulted in what called the NIXON SHOCK.
By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.
In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S.
In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the "Nixon Shock".
The surcharge was dropped in December 1971 as part of a general revaluation of major currencies, which were henceforth allowed 2.25% devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the major currencies were floating—in other words, exchange rates were no longer the principal method used by governments to administer monetary policy.





4. “Dollarisation”

- Many areas used the US dollar in addition to their own currency
- US$ was the most in demand currency
- We have already talked about oil being bought in US$
- Palau, the Federated States of Micronesia, and the Marshall Islands since 1944.
- Two British dependencies also use the U.S. dollar: the British Virgin Islands (1959) and Turks and Caicos Islands (1973).
- Some other countries link their currency to U.S. dollar at a fixed exchange rate. The local currencies of Bermuda, the Bahamas can be freely exchanged at a 1:1 ratio for USD. Argentina used a fixed 1:1 exchange rate between the Argentine peso and the U.S. dollar from 1991 until 2002.
- Several oil-producing Gulf Arab countries, including Saudi Arabia and Kuwait, peg their currencies to the dollar, since the dollar is the currency used in the international oil trade.
Disadvantages of Dollarisation
There are some substantial drawbacks to adopting a foreign currency. When a country gives up the option to print its own money, it loses its ability to directly influence its economy, including its right to administer monetary policy and any form of exchange rate regime.

In a fully dollarized economy, the central bank also loses its role as the lender of last resort for its banking system. While it may still be able to provide short-term emergency funds from held reserves to banks in distress, it would not necessarily be able to provide enough funds to cover the withdrawals in the case of a run on deposits.

Another disadvantage for a country that opts for full dollarization is that its securities must be bought back in USD. If the country does not have a sufficient amount of reserves, it will either have to borrow the money by running a current account deficit or find a means to accumulate a current account surplus.

Finally, because a local currency is a symbol of a sovereign state, the use of foreign currency instead of the local one may damage a nation's sense of pride.

Advantages of Dollarization
Besides reducing risk and protecting against inflation and devaluation, there are some compelling reasons for a country to decide to give up so much control over its economy.

As we mentioned above, full dollarization creates positive investor sentiment, almost extinguishing speculative attacks on the local currency and the exchange rate. The result is a more stable capital market, the end of sudden capital outflows, and a balance of payments that is less prone to crises.

Last but not least, full dollarization can improve the global economy by allowing for easier integration of economies into the world's market.


5. Globalisation of the USA economy






6. Military and Political Might






7. Political will to lead






8. Commitment to liberal and multilateral economic order