The US dollar retains its primacy as the global reserve currency – but for how long? Photo: AFP / Xie Zhengyi / Imaginechina

Why is the United States concerned that Germany buys its energy from Russia? The US has no objections to Germany buying its computers from China, its motorbikes from Japan, and its cheese from the Netherlands.

The last four US presidents – Bush II, Obama, Trump and Biden – had little in common but they were united in their attempts to block Nord Stream 2, the gas pipeline contructed in the Baltic Sea to carry Russian gas to Germany.

Last month, explosions put Nord Stream 2 out of commission. It was a state-level terrorist attack that seemed un-European. The European Union’s political leaders were muted in their response. They no doubt realized the world had entered a new era.

Black gold

Fossil fuels are the world’s pivotal commodity. The trade in energy represents about 8% of global trade but is indispensable for 90% of global economic output. Even the budding green tech revolution is impossible without it.

Oil is priced and traded in US dollars. If a Spanish company buys oil from Saudi Arabia, the dollar payment goes through a bank in New York. The same applies to most other commodities. If Japan buys Australian wheat, New York banks process the dollar-denominated payment.

The dollar became the world’s de facto reserve currency in 1944. The Bretton Woods Agreement made the gold-backed dollar the anchor for the global monetary system. Fixed at $35 an ounce, dollars could be exchanged for gold on demand.

The Bretton Woods System gave the US virtual control over the “plumbing” of the global financial system. The dollar became the measure of all goods and services traded across borders and it fueled the postwar recovery.

However, Bretton Woods came under pressure in the late 1960s. The US started spending more than it earned. President Lyndon Johnson’s Great Society and the Vietnam War (“guns and butter”) led to growing deficits and raised questions about the US gold reserves.

The French government was the first to be concerned. Along with other European countries, France moved its gold reserves to the US during the Cold War. They feared the Soviet Union would march on Paris and London and make off with their gold.

In early August 1971, France sent a warship to New York to repatriate its bullion. A few days later, on August 15, president Richard Nixon appeared on US national television and announced that the US would no longer redeem dollars for gold. The so-called “gold window” was closed.

Nixon said the measure would be temporary, but the gold window never reopened. By decoupling the dollar from gold and abrogating the Bretton Woods Agreement, the US would issue dollars by fiat. The world would have to trust the US to be a good steward of the world’s reserve currency.

To make sure the dollar would keep its global role, Nixon sent his secretary of state Henry Kissinger to Saudi Arabia to persuade the kingdom to sell its oil only in dollars. In return, the US would protect the Saudi kingdom. This agreement gave the dollar its nickname: the petrodollar.

Scrambling for gold

After Nixon decoupled the dollar and gold, the US body politic lost its financial discipline. The US would never again have a balanced budget after it closed the gold window. The national debt grew steadily, as did its trade deficits.

Politicians running for office promised to spend more money on housing or defense without regard for budgetary constraints. Modern Monetary Theory (MMT) offered support for this notion. Countries that issue their own currency cannot go bankrupt.

Consequently, the budget deficits became chronic and the national debt grew steadily. The government could simply create debt without having to worry about anyone claiming its gold equivalent.

Growth in debt compared to growth in nominal GDP.

The US government took debt creation to a new level in the aftermath of the 2008 financial crisis. Several banks “too big to fail” faced bankruptcy. The US government spent billions to avoid a financial catastrophe. The true size of the “bailout of Wall Street” was obfuscated by a “fog of deceit.”  

Ten years later, the government added trillions more to the national debt to deal with the impact of Covid-19. Between 2008 and 2020, US national debt grew from $9 trillion to nearly $30 trillion. With the dollar decoupled from gold, dollar-denominated debt started to resemble a Ponzi scheme.

As debt grew, paying interest on the national debt became an ever-growing budget item, exceeded only by the defense budget. With chronic budget deficits, the government could only pay off its debt by taking on more debt.  

The inflation killer

It was China’s turn to be concerned. China had been one of the main beneficiaries of the globalism championed by the US government. Starting in the late 1970s and riding the dollar bandwagon, China lifted most of its population out of poverty in a few decades.

China’s export of low-cost goods to the US dampened inflationary pressure, which is the typical effect of creating more money than the expansion of the economy would justify. By 2020, the US was sending nearly a billion dollars a day to China to cover its trade deficit.

US national debt grows by a million dollars every 40 seconds.

To recycle these dollars, China invested more than a trillion dollars in US Treasuries, long seen as a safe investment and valued as collateral. In 2008, China became concerned about the size of the Wall Street bailout and the sustainability of its growing debt. To hedge its bets, China started buying gold, food, and other commodities with tangible and predictable value.

China is tight-lipped about its gold holdings, but observers in the gold trading community believe it now has more gold than the US. If confirmed, that would make China’s gold reserves the largest in the world.

Other countries were concerned about the dollar, and more broadly about the global dollar-based financial system, and went on a gold-buying spree. Central banks around the world repatriated their gold, using the old adage “If you don’t hold it, you don’t own it.”

Escaping the dollar system

In the past 500 years, the West has had six reserve currencies, those of Portugal (1450-1530), Spain (1530-1640), the Netherlands (1640-1720), France (1720-1815), Great Britain (1815-1920), and the United States (1944 to the present). History suggests the dollar is on borrowed time.

China, Thailand, and a number of other countries are testing a new cross-border payment system based on the technology developed for the digital yuan. Russia and China have agreed to use the yuan and the ruble for the trade in Russian energy and Chinese technology.

Most concerning of all for the US is Saudi Arabia, the most influential member of the Organization of the Petroleum Exporting Countries (OPEC). The Saudis are in talks with China about selling oil in yuan. China is Saudi’s main trading partner.

The growing “de-dollarization” in Asia explains why it is crucial for the US to keep Europe in the dollar camp. It is necessary to prevent growing economic ties between Europe and Asia, which explains attempts by the last four US presidents to torpedo Nord Stream 2.   

Russia not only has enormous energy resources, but its imposing geography enables it to serve as a key link among China, India and Europe. A Eurasian economic region of 93 countries and 5.3 billion people, trading among itself, would not need to rely on the dollar.

The war in Ukraine will ultimately end, but the US has gotten its way for now. Europe is largely cut off from Russian energy. The demolition of Nord Stream 2 removed an important bargaining chip for a compromise solution to the conflict.

This is the first article of a two-part series on the global crisis centered on Ukraine.

Jan Krikke is a former Japan correspondent for various media, former managing editor of Asia 2000 in Hong Kong, and author of Creating a Planetary Culture: European Science, Chinese Art, and Indian Transcendence (2023).