Impact from the dollar hegemony
CHOI HYUN-JOOThe author is a financial news team reporter at the JoongAng Ilbo.
The “dollar hegemony” is linked to gold. In the wake of the Industrial Revolution in the 18th century, currency that can be used more easily than gold was popular. Banks would exchange gold for currency of the same value. The British pound was the key currency for international settlement as the U.K. dominated world trade at the time.
After World War I broke out in 1914, Britain increased its issuance of pounds to fund the war. As the value of pound sterling fell, anxious people went to the bank to exchange their pounds for gold. As the U.K. did not have enough gold to cover the demand, the country abandoned the gold standard. In 1944, 44 major countries reached an international agreement to set the U.S. dollar as the standard currency, as the United States held 80 percent of the world’s gold at the time.
After the Vietnam War broke out in 1960, the United States printed dollars to fund the war that lasted 15 years. As the gold ran out, the United States also abandoned the gold standard in 1971. The dollars became fiat money. In 1974, the United States made an agreement with Saudi Arabia, requiring it to take dollar payment for oil exports in return for ensuring its national security. The U.S. dollar has become the petrodollar accepted as payment for oil exports.
Lately, the United States has been aggressively raising the benchmark rate to control inflation. The rate has increased by 3 percentage points in the past six months. But the United States seems to take few actions to stabilize prices other than raising interest rate. For instance, it still maintains high tariff on imports from China although lowering trade barriers is considered a powerful measure to control inflation.
And yet, the U.S. Federal Reserve forewarned an additional rate hike, even as the world is suffering from its drastic rate increase. The value of the Korean won is already at the third lowest level. As a result, Korea lifts its loan interest rate, sees a contraction in consumption and a decrease in jobs. The country is headed to an economic slowdown.
If the negative effects of the dollar hegemony continue, it will eventually create cracks. As the U.S. dollars make up 70 percent of the global trade settlements, just 1 percent decline in the value of dollars results in enormous depreciation of assets in each country. When the global economy falls into a chaos, the United States also cannot avoid damage. It is time for America to reflect on whether it sets fire on the entire vineyard to eat just a grape.
with the Korea JoongAng Daily
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