After WWII, US was the only country to emerge as a more powerful country. It's not to say that all other countries were devastated, but U.S. came out with an even stronger economy and military force. At the time, we had a gold standard: meaning our currency was tied to gold reserves at $42 and ounce. If you wanted to walk in with some money, you could technically get gold in return. All other countries valued their currency to our currency, because who doesn't like gold.
Inflation and fast economic growth made it so we didn't have enough gold to trade for money, and people became wary of this. in 1971, Nixon "cut" the gold standard, which made our currency floating. It was a dangerous economic move, because without the gold to anchor our currency, there was no way of seeing what would happen to our economy. This was one of the reasons we switched to producing corn and soy, because it was cheaper than buying cane sugar.
At the most basic level, currency is valued when people want it. That means that we have to sell more things than we consume. But Americans consume waaaaaaaay more than we sell, so we found a way through foreign relations. Basically, we started selling and providing weapons to Saudi Arabia and a handful of other Middle Eastern countries. In return, they would sell their oil to every other country in U.S. dollars. It's called petrodollars. This would keep the U.S. dollar strong, and continue to have its high value. In 1975, a bunch of Middle Eastern countries joined together into a sort-of-union, OPEC; and all agreed to sell their oil in dollars for American military protection and weapons.
This is also why the U.S. is involved in a lot of Middle Eastern conflicts, because we have our currency at stake when we fight for oil. Early 2000s, Iraq decided they wanted to sell their oil in Euros as well, and the U.S. just wasn't having it, so we invaded to get them to revert back to dollars. This is a theory, an alleged motivation, known as petro-warfare. This is also why the U.S. has so much military funding, because without it, we wouldn't have anything to trade for keeping our currency valued.
Sources:
Mr. Donnelly
https://en.wikipedia.org/wiki/Iraq_War
https://en.wikipedia.org/wiki/Petrodollar_warfare
Sources:
Mr. Donnelly
https://en.wikipedia.org/wiki/Iraq_War
https://en.wikipedia.org/wiki/Petrodollar_warfare
This was really interesting to me because I've always wondered why the US dollar was so strong. When traveling to other countries, we could often pay in dollars instead of the local currency. With the oil industry grounding the US currency, it also makes more sense on why the US is so involved in the Middle East. However, how long can this system continue? What if the countries in the Middle East prefers protection from a different country?
ReplyDeleteI don't know how long this system can sustainably continue, but unless we find an alternative, we can't change it. Both democrats and republicans pretty much agree on this issue, and it is to continue it. To answer your second question, the reality is that because America is the world's #1 army and producer of weapons, there is no other country the Middle East would prefer protection from. But that's also why we invest in our military so much!
DeleteI think another reason why other countries value their currency at US Dollars is because it is the most stable in the world. That's also why foriegn countries want to loan us money. They know that the US won't suddenly default on its loans, and our economy can weather severe economic crises.
ReplyDeleteI also think that the US is so involved with the Middle East simply because oil is so important to our economy. Not only with regard to the dollar, but also in that trucking, transportation, agriculture equipment, all rely on oil to produce goods and services.