The four-degree transition anchored by the US dollar: the underlying logic of global financial hegemony
Authors: Li Jiange, Tianyuan, FT Chinese
Original title: The Four-Stage Evolution of the Dollar Anchor: The Power Code of the Global Financial Landscape
The US dollar has long occupied a central position in the grand structure of the global financial system, and the setting and transformation of the “dollar anchor” behind it has profoundly influenced the direction of the world economy. The US dollar anchor is essentially the supporting foundation and source of credit for the value of the US dollar. Like the cornerstone of a financial building, it has established the US dollar's position in the international monetary system.
Since the 20th century, the dollar anchor has gone through four important stages of development, from the early gold dollar, to the petroleum dollar, to the US dollar, and now it is moving towards the digital dollar. Every transformation is accompanied by major adjustments in the international political and economic landscape, reflecting America's strategic intention to maintain financial hegemony and control the voice of the global economy over different periods. An in-depth analysis of these four stages not only helps to understand the formation and maintenance mechanism of the US dollar's dominance, but also provides insight into future changes in the global financial system and provides a key reference for countries to formulate financial strategies and deal with external financial shocks.
I. Gold Dollar: A Brief Glory Under the Bretton Woods System
The two world wars reshaped the global political and economic landscape. With the advantage that the country was not directly invaded by the flames of war, America developed rapidly in industrial production capacity and rapidly expanded its economic strength. On the eve of the end of World War II, the global economic order needed to be rebuilt urgently. In July 1944, representatives from 44 countries gathered in Bretton Woods, New Hampshire, USA to hold the United Nations International Monetary and Financial Conference. The conference established an international monetary system centered on the US dollar — the Bretton Woods system. The core of this system is the “double link” principle: the US dollar is linked to gold, stipulating that 1 ounce of gold is fixed at 35 US dollars, and the US government undertakes the obligation to exchange gold at the official price; other countries' currencies are linked to the US dollar, and each country's currency maintains a fixed exchange rate with the US dollar.
The establishment of this system actually promoted the US dollar to the status of an international reserve currency equivalent to gold. At that time, the US had about 75% of the world's gold reserves, and its strong gold base provided a solid credit endorsement for the US dollar, making the US dollar widely accepted in international trade and financial transactions. Essentially, the Bretton Woods system is an international gold exchange system. The US dollar has become a bridge between national currencies and gold. The global monetary system revolves around the core of the US dollar, beginning an era where the US dollar dominates the international financial order.
Under the Bretton Woods system, most countries' trade settlements are carried out in US dollars. After the export country earns US dollars, if there is no demand for US goods, they can choose to exchange the US dollar for gold to increase its gold reserves; the importing country needs to exchange the local currency for the US dollar to pay for the imported goods. In this process, the US dollar, as an international means of payment and reserve currency, contributed to the expansion of international trade and the recovery of the global economy. The United States enjoys “excessive privileges” by exporting dollars to buy global goods and resources.
However, since its inception, the system lurked a fatal flaw, the “Triffin Problem.” American economist Robert Triffin pointed out that as an international reserve currency issuer, the US faces two conflicting goals. On the one hand, in order to meet the world's demand for the US dollar, the US needs to export US dollars through a balance of payments deficit; on the other hand, in order to maintain the exchange relationship between the US dollar and gold, the US must also maintain a balance of payments surplus to accumulate gold reserves. With the development of the global economy, demand for the US dollar continues to increase, the US balance of payments deficit continues to widen, and the pressure to exchange the dollar with gold is increasing. By the end of the 1960s, US gold reserves continued to flow out, making it difficult to support the huge demand for dollar exchange, and the gold-dollar system was about to collapse.
In the 1960s, America was mired in the Vietnam War, and fiscal spending increased dramatically. At the same time, domestic inflation was high, and the balance of payments situation deteriorated dramatically. Other countries' confidence in the US dollar has declined, and the US dollar is being exchanged for gold one after another, and America's gold reserves are being lost at an accelerated pace. On August 15, 1971, the Nixon administration announced the implementation of a “new economic policy” and stopped fulfilling the obligation of foreign governments or central banks to use dollars to exchange gold for the US. This landmark event announced the end of the fixed exchange rate system between the US dollar and gold, and the Bretton Woods system collapsed. Since then, the US dollar exchange rate began to float freely, and the gold-dollar system became history. Although the gold-dollar system has only been maintained for more than 20 years, it has established the fundamental position of the US dollar in the international monetary system. The subsequent evolution of the dollar anchor unfolded under its influence, laying the groundwork for the US to establish financial hegemony.
II. Petrodollar: The Deep Bundle of Geopolitics and Finance
After the dollar was decoupled from gold, the international monetary system fell into brief chaos, and the dollar urgently needed to find new value anchors to maintain its dominant position as an international currency. At this time, as the world's most important strategic energy source, petroleum's key role in modern industrial systems is becoming more and more prominent. In the early 1970s, the international political situation changed. As the world's largest oil producing region, the Middle East region continued to have geopolitical conflicts. In October 1973, the Fourth Middle East War broke out. In order to attack Israel and its supporters, the Organization of Arab Petroleum Exporting Countries adopted measures such as oil production cuts, embargoes, and price increases, triggering the first oil crisis. International oil prices soared from 3.01 US dollars per barrel to around 12 US dollars in 1974, and the balance of payments surpluses of oil exporting countries appeared.
The United States keenly seized this opportunity and actively engaged in secret negotiations with major Middle Eastern oil producers such as Saudi Arabia. As the world's largest oil exporter, Saudi Arabia has significant influence in the Organization of Petroleum Exporting Countries (OPEC). In 1974, the US and Saudi Arabia reached an agreement. Saudi Arabia agreed to use the US dollar as the sole currency for oil exports, while the US provided military protection and economic aid to Saudi Arabia and promised to buy Saudi treasury bonds to help it carry out infrastructure construction, etc. Subsequently, other OPEC member countries followed suit, and the petrodollar system was initially formed.
After the establishment of the petrodollar system, a unique closed-loop operation mechanism was formed. Countries around the world must first hold dollars in order to obtain oil, the energy they just need. This has led to a significant increase in demand for the US dollar in international trade settlements, and has consolidated the US dollar's position as an international currency. Petroleum exporting countries earn large amounts of dollars by exporting oil. These dollars are known as “petroleum dollars.” Due to the single domestic economic structure of oil exporting countries, they are unable to absorb such huge amounts of capital. Most petroleum dollars flow back to the US financial market to buy various assets such as US treasury bonds, stocks, and real estate. The US, on the other hand, uses the backflow of petroleum dollars to continue to import global goods and services, maintain its consumption-driven economic model, and reallocate petroleum dollars into the global economic system through monetary policy and financial market operations.
For example, oil exporting countries deposit petroleum dollars in the Bank of America, and banks then lend these funds to other countries to import oil or make investments, and the funds circulate around the world. In this process, the US not only controlled the pricing and settlement rights for global oil trade, but also absorbed global capital through the financial market, further strengthening its position as a financial center. At the same time, the United States maintains stability in the Middle East region through military power to ensure the normal operation of the oil dollar system. The United States has deployed a large number of military forces in the Middle East to exert political influence on Middle Eastern oil producers. Once unstable factors threatening the oil dollar system appear in the region, the US will quickly intervene, such as launching the Gulf War, etc., to protect the core interests of the petrodollar system.
The petrodollar system has had a profound impact on the global economy. On the positive side, it provides stable energy supply and financial support for global economic growth. Stable oil trade is settled in US dollars, which has promoted the development of international trade. The US dollar's position as an international payment and reserve currency has been consolidated, and the integration process of global financial markets has been promoted. The large amount of petroleum dollars accumulated by oil exporting countries provides the US with cheap capital through investment in financial assets such as US treasury bonds, supports America's fiscal deficit and economic development, and also provides some external financing sources for other countries.
However, the petrodollar system has also brought many negative effects. Oil prices are closely linked to the US dollar exchange rate. The depreciation or appreciation of the US dollar will directly affect oil price fluctuations, increasing uncertainty in the global economy. When the US dollar depreciates, the price of oil denominated in US dollars rises, triggering imported inflation, which has an impact on other countries' economies; conversely, the appreciation of the US dollar may reduce the income of oil exporting countries and affect their economic stability. Furthermore, the petrodollar system has exacerbated global economic imbalances. The US has been in a trade deficit for a long time, relying on the return of oil and dollars to maintain economic operation, while other countries have to export large quantities of goods to obtain US dollars, leading to increasingly serious global trade imbalances. At the same time, large inflows of petroleum dollars have made the economies of some oil-exporting countries overly dependent on oil exports, have a single economic structure, and are less resilient to risks.
3. US Dollar Debt: Credit Support Driven by Debt
Since the 21st century, the international political and economic landscape has profoundly changed. On the one hand, emerging economies are rapidly rising, their contribution rate to global economic growth is constantly increasing, the international trade pattern is gradually diversifying, and the petrodollar system is facing an impact. On the other hand, America's own economic structure has changed, the financial services industry's share in the economy is increasing, and the virtual economy is expanding excessively. In 2008, the US subprime mortgage crisis broke out and rapidly evolved into a global financial crisis, severely damaging the global economy. During the crisis, the US government adopted large-scale quantitative easing policies to bail out the market. The fiscal deficit rose sharply, and the size of treasury bonds rapidly expanded. The total amount of US treasury bonds surpassed 34 trillion US dollars for the first time on December 29, 2023. If this debt were distributed to the American people, the per capita debt would exceed 100,000 US dollars.
In this context, US debt is gradually becoming the new important support for the US dollar. With its strong national credit and the world's most developed financial market, the US has made US bonds a “safe asset” in the eyes of global investors. Countries around the world were able to preserve and increase the value of foreign exchange reserves and buy large amounts of US bonds, and the US dollar debt system came into being. The US dollar debt system is essentially based on US national credit. It uses treasury bonds to absorb global capital and maintain the dominant position of the US dollar in the international monetary system. The US government sold treasury bonds to the Federal Reserve and global investors through the monetization of the fiscal deficit. After the Federal Reserve purchased treasury bonds, it invested in the base currency to increase market liquidity, and the US dollar was able to flow continuously around the world.
The operation of the US dollar debt system is based on the trust of global investors in the credit of the US nation. As the world's largest economy, the United States has abundant resources, strong scientific and technological innovation capabilities, and military strength, and is considered to have strong debt repayment capabilities. US Treasury bonds have characteristics such as strong liquidity and relatively stable returns, which attract global investors. Central banks use US bonds as an important part of foreign exchange reserves to maintain the stability of the local currency exchange rate and international payment capacity. For example, countries such as China and Japan have long been major foreign holders of US treasury bonds.
When the US government has a fiscal deficit, funds are raised by issuing treasury bonds. Treasury bonds are sold globally. After foreign investors buy US bonds, the dollar flows back to the US. The United States uses these funds for domestic infrastructure construction, social welfare expenses, etc., to stimulate economic growth. At the same time, the Federal Reserve affects treasury bond yields and market liquidity through monetary policy regulation. When the economy is sluggish, the Federal Reserve uses quantitative easing policies to buy large amounts of treasury bonds to lower yields on treasury bonds, reduce corporate and government financing costs, and stimulate investment and consumption; when the economy overheats, it increases treasury bond yields, attracts the return of capital, and curbs inflation. In this process, the US dollar circulates around the world through US debt, maintaining the status of the US dollar as an international currency.
Although the US dollar debt system has maintained the dominant position of the US dollar for a certain period of time, it has many hidden dangers and faces serious challenges. First, the size of US Treasury bonds continues to rise, the fiscal deficit continues to expand, and the pressure to repay debt is getting heavier. High debt interest expenses have taken up large amounts of financial resources, reduced the space for other public spending, and weakened the US government's ability to deal with economic crises and social problems. Second, America's national credit has been eroded. In recent years, the US government's arbitrariness in fiscal policy, such as frequent debt-ceiling disputes, has raised concerns in the market about whether the US will default. Furthermore, some of America's unilateralist acts in international affairs have also reduced its global credibility and affected investors' confidence in US debt.
Furthermore, the global trend of de-dollarization is gradually emerging. As emerging economies grow and grow, their dissatisfaction with the hegemony of the US dollar is increasing, and they are seeking to reduce their dependence on the US dollar. Some countries have begun to promote local currency settlement, strengthen regional monetary cooperation, and reduce the share of US debt holdings. For example, China has signed currency swap agreements with many countries to promote the use of RMB in cross-border trade and investment; Russia has drastically reduced its holdings of US debt and increased its gold reserves, etc. All of these measures have had an impact on the US dollar debt system. If not resolved, the stability of the US dollar debt system will be seriously threatened, and the US dollar's status as an international currency will also be shaken.
4. Digital dollar: a new battleground for future financial competition
With the rapid development of digital and blockchain technology, the global currency pattern is undergoing profound changes, and the digital currency wave is sweeping through. Beginning in 2009, the market gradually developed a distributed ledger currency network, and a new type of currency called a digital stablecoin was born. Due to the reserve position of the US dollar in the international monetary system, distributed bookkeeping digital currencies are also developing and forming an ecosystem denominated in US dollars. Digital dollars are exchanged 1:1 with fiat dollars, and US bonds and dollar-denominated assets are used as reserves to ensure payment. This has invisibly reshaped a new type of US dollar application scenario and US debt storage space, reversed the weak position of US debt in recent years, and injected new value support into the US dollar.
According to the 2024 VISA survey report, digital dollar stablecoins grew from a few billion dollars in 2020 to more than 200 billion US dollars in 2024. The settlement amount in the first half of 2024 alone exceeded 2.6 trillion US dollars, and the number of user addresses exceeded 100 million, spreading to many countries and regions around the world. The digital dollar has characteristics such as anonymity, portability, and cross-physical regional restrictions, and has strong potential for expansion. At the same time, digital network decentralized finance (DeFi) and RWA tokenization (such as Ondo Finance tokenizing US bonds and selling them directly to non-US retail investors and institutions) have the possibility of migrating traditional financial markets to blockchain networks in the future, and their ecosystem mainly uses digital dollar transactions and settlements, which further expands the depth of the digital dollar system. The combination of the new application scenarios of the digital dollar, the support of its reserve assets for the US dollar, and its potential for expansion based on blockchain technology has created an ecological opportunity for the development of the digital dollar.
Furthermore, in the real environment, the US is already facing the real challenges of US debt ceiling disputes, widening fiscal deficits, and surging debt repayment pressure. Objectively, the US dollar needs to seek new value support tools to maintain its international status. In terms of time, 2024 coincides with the US election. The number of people holding and trading digital currency in the US is close to 100 million, and it is mainly young people. The Trump team needs to win over this group of voters to increase their campaign chips. As a result, under the combined effects of market ecology, actual pressure, and political competition, since Trump was elected president, the United States has reversed its previous attitude of denying and suppressing digital currencies during his first term, to actively supporting and promoting regulatory legislation, and at the same time making high-profile announcements as a world leader in the digital currency industry. The digital dollar anchor strategy was thus established. As US Treasury Secretary Bezent said, “We need to strengthen the US dollar's position as an international reserve currency, and we need to achieve this goal through digital stablecoins.”
America's current general approach to the construction of the digital dollar system is to incorporate the digital currency ecosystem that grew savagely in the past into the compliance supervision system to ensure that the development of the digital currency industry conforms to America's national interests. This can be roughly understood as building a “contractual relationship” between the US dollar and the digital currency network. This is similar to the “petroleum dollar” contractual relationship, that is, the application scenario of solidifying the US dollar. On this basis, digital assets will gradually be guided to become mainstream assets and the scope of their application around the world will be expanded. Together, the above forms the overall construction path of a digital dollar anchor.
The difficulty lies in the fact that the regulatory framework compatible with the traditional US monetary and financial system and the digital ecosystem regulatory framework currently being constructed will objectively form two parallel systems and rules. The former requires stability and rigor, and the latter requires innovation and flexibility to ensure the compatibility of this “dual track” pattern and avoid arbitrage and conflict in actual operation. This is extremely challenging for top-level design and rule enforcement for regulatory innovation.
The US passed the “2025 US Stablecoin Innovation Guidance and Establishment Act” (GENIUS ACT) on May 19, clarifying the regulatory requirements for digital stablecoins for the first time. At the same time, the US is also actively exploring the possibility of incorporating digital assets into reserves. The Trump administration signed a presidential executive order on digital assets on January 23, and is also promoting a three-dimensional and multi-dimensional digital asset regulatory framework and implementation rules at the federal and state levels, as well as at the level of regulators such as the Securities Regulatory Commission, the Monetary Authority, and the Commodity Futures Trading Commission. These initiatives represent the substantial beginning of the construction of a digital dollar system.
In addition, the launch of a digital dollar also faced many other considerations. At the technical level, how to ensure the security, stability, and privacy protection of the digital dollar system is a key issue. Digital currency transactions are easy targets for hacker attacks. Once a security breach occurs, it will lead to serious loss of funds and disclosure of user information. At the policy level, the digital dollar could have an impact on existing monetary policy and financial supervision systems. The issuance of digital dollars may affect the statistics and regulation of money supply and interfere with interest rate policies. How to effectively monitor the issuance, circulation and use of digital dollars to prevent illegal activities such as money laundering and terrorist financing is also a difficult problem that needs to be solved urgently. At the same time, the international promotion of the digital dollar may trigger a geopolitical game. Other countries may worry that the digital dollar will strengthen America's financial hegemony, thereby taking corresponding countermeasures and increasing tension in the global financial sector.
Looking back at the four-stage evolution of the US dollar anchor, from the gold exchange standard system for gold dollars, to the geopolitical and financial bundling of petroleum dollars, to debt and credit support for US bonds and dollars, now on the path of exploration towards a digital dollar, every transformation is a strategic choice made by the US to adapt to changes in the international political and economic situation and maintain financial hegemony. The evolution of the dollar anchor has not only profoundly changed the global financial landscape, affected the economic development and financial stability of various countries, but also reflected the decline in the global economic power balance and changes in international political relationships.
Currently, the global economy is undergoing a period of deep adjustment. With the rise of emerging economies, frequent geopolitical conflicts, and a surging wave of digital technology revolution, the international monetary system dominated by the US dollar is facing unprecedented challenges. The internal contradictions of the US dollar debt system continue to accumulate, and the future of the digital dollar is full of uncertainty. In this context, countries should have a deep understanding of the evolution of the US dollar anchor, actively adjust financial strategies, strengthen financial innovation and cooperation, and enhance their financial strength and resilience to risks. As far as China is concerned, it should speed up the RMB internationalization process, improve the financial market system, promote digital currency research and development, seize opportunities in reshaping the global financial landscape, enhance its voice in international finance, and contribute China's strength to global economic and financial stability and development. In the future, the global monetary system may develop in the direction of diversification, and a new monetary order is being nurtured, and the continued evolution of the US dollar anchor will be a key variable in this process, and it is worth continuing attention and in-depth research.
