Part 2 : Why is American Dollar the Most Powerful Currency in the World ?

Before beginning the part two behind America’s supremacy lets get a recap of the previous article. America was a major world influence given its sharp move of being a merchant for war before the war participant. The American government was also successful in bringing nations together to sign the Bretton Woods Agreement to compare the world’s currency against the dollars. This gave them access to long term loans from the International Monetary Fund and World Bank. Further on the U.S. initiated its major move of investing its capital and focus on one of the most important commodities in the world – Crude Oil.

The American Government also introduced the SWIFT method for trade to make a safe transaction between countries and companies from different countries. Let’s decode the next phase of the American Economy.

Crude Oil and America

During the World Wars the Arabian countries were not aware of the entire situation across the world. They were indulged in their own province. However they did not know that the largest black asset was under their land. The Britishers and Americans were finding oil across the world.

The reason was their advanced technology and capacity to do the same. An American Company during the 1930s and 1940s dug in Saudi Arabia in search of Oil and the luck favored the U.S.A. They found the largest wells of oil in Saudi. At that time the Arabs did not have enough money due to the initiation of the oil extraction phase. 

At that time Italy was constantly dropping bombs on the American facilities to extract oil and this affected the Saudi Arabs. Thus the American government signed an agreement with Saudi Arabia under which they would protect the Arabs against any attacks and in exchange the Arabs would sell the oil only in U.S dollars. In simple terms the American government would forever protect the Saudi country from attacks and also provide military equipment and manpower and in return they would have to trade only in dollars.

This was a proposal from Franklin Roosevelt to the Saudi King. This deal was then accepted and this changed the valuation of dollars forever. This was the time from where the rise of the Middle East began. Also as mentioned above the Americans were so lucky that they found the largest oil well in the world. Hence the future of both these countries changed forever.

SWIFT :- Export and Trade

Due to the agreement all the countries started exporting and importing oil in dollars. Well the question would be how this favoured America ? This is when the next phase of American Economy’s Supremacy. As per the Bretton Woods Agreement whenever the countries would submit U.S. dollars to America they would exchange the same with gold. This somehow backfired on the U.S.A and the reserves of gold decreased in America due to many situations like gold price hike, American crisis, Vietnam situation etc.

The gold reserves reduced by more than 100% with America from 22000 tonnes in 1950 to 10000 tonnes in 1970. So a temporary suspension for exchange of dollars with gold was placed to protect the stability of the American Economy and Dollar Valuation.

Hence every country was now able to compare its currency and use it for trade. The only exception was it cannot be done with gold. Thus the domination of individual country’s currency began. This means how much your currency can buy you goods and services from the world. However, still the buying of crude oil from Arabs was only done in dollars. So the dominance of dollars was still present and hence all the countries kept their foreign reserves in form of dollars. This is when America played a superb move of introducing the SWIFT Network. SWIFT means society for WorldWide Interbank Financial Telecommunication. 

SWIFT Network

The SWIFT network is a very simple yet complex method of trade in the world. Under this method any company in any country can buy goods and services in exchange for dollars. The entire setup for the same lies in 6 parts which includes :

  1. Buyer
  2. Buyer’s Domestic Bank
  3. American Bank 1
  4. American Bank 2
  5. Seller’s Domestic Bank
  6. Seller

Under the SWIFT, let’s assume that a buyer from India wants to buy goods of 1000 Rs. from a Russian Seller. The buyer would transfer the money to an Indian bank and place an order for goods worth 1000 Rs. The Indian Bank would contact its American Bank 1 and ask it to transfer money to the Russian sellers account in American Bank 2. This 1000 Rs. would be then converted to dollars and sent to the American Bank 1 and American Bank 2 respectively. The American Bank 2 will assure the payment is done to the Domestic Bank of the seller. Then the seller’s account would be credited by its Domestic Bank with an equivalent amount of Ruble. This is how the SWIFT network assured the payment system. 

Treasury Bills

The SWIFT Network means that the American bank would have a surplus amount of dollars kept in the other bank’s accounts. This gives another mode of investment named Treasury Bills. The other banks receive interest on this amount through investment into treasury bills. However this is not only a mere investment but also a major power with the American government. Through this they get the right to freeze the assets of any country’s bank and government. This happened recently when Russia invaded Ukraine and the U.S president ordered freezing the assets in the form of sanctions for the Russian actions.

This is why the United States controls the economy of the world. Also Dollars is used as one of the most essential currencies to compare other currencies of the world.

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