Text: Li Jiange, Tian Yuan, FT Chinese
In the grand structure of the global financial system, the US dollar has long occupied a core position, and the setting and changes of the "US dollar anchor" behind it have profoundly affected the direction of the world economy. The US dollar anchor is essentially the support basis and credit source of the US dollar's value, just like the cornerstone of a financial building, which has established the position of the US dollar in the international monetary system.
Since the 20th century, the US dollar anchor has gone through four important development stages, from the early gold dollar, to the petrodollar, to the US debt dollar, and now on the road to exploring the digital dollar. Each transformation is accompanied by major adjustments in the international political and economic landscape, reflecting the United States' strategic intention to maintain financial hegemony and control the global economic discourse power in different periods. In-depth analysis of these four stages will not only help us understand the formation and maintenance mechanism of the dollar's dominance, but also provide insights into the future trend of change in the global financial system, and provide key references for countries to formulate financial strategies and respond to external financial shocks.
1. Gold dollar: the brief glory under the Bretton Woods system
The two world wars reshaped the global political and economic landscape. With the advantage that the United States was not directly affected by the war, its industrial capacity developed rapidly and its economic strength expanded sharply. On the eve of the end of World War II, the global economic order urgently needed to be rebuilt. 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 peg" principle: the US dollar is pegged to gold, stipulating that 1 ounce of gold is fixedly exchanged for 35 US dollars, and the US government undertakes the obligation to exchange gold at the official price; other countries' currencies are pegged to the US dollar, and the currencies of various countries maintain a fixed exchange rate with the US dollar.
The establishment of this system actually pushed the US dollar to the status of an international reserve currency equivalent to gold. At that time, the United States had about 75% of the world's gold reserves. The strong gold reserves provided a solid credit endorsement for the US dollar, making the US dollar widely accepted in international trade and financial transactions. In essence, the Bretton Woods system is an international gold exchange standard . The US dollar has become a bridge connecting the currencies of various countries with gold. The global monetary system revolves around the US dollar as the core, ushering in an era in which the US dollar dominates the international financial order.
Under the Bretton Woods system, trade settlements among countries were mostly conducted in US dollars. After earning US dollars, if the exporting country has no demand for US goods, it can choose to exchange US dollars for gold to increase its gold reserves; the importing country needs to exchange its own currency for US dollars to pay for the imports. In this process, the US dollar, as an international payment method and reserve currency, has promoted the expansion of international trade and the recovery of the global economy. The United States enjoys "excessive privileges" by exporting US dollars and purchasing global goods and resources.
However, the system has had a fatal flaw since its inception, namely the " Triffin Dilemma ". Robert Triffin, an American economist, pointed out that as the issuer of the international reserve currency, the United States faces two conflicting goals. On the one hand, in order to meet the demand for the US dollar in various countries around the world, the United States needs to export the US dollar through the international balance of payments deficit; on the other hand, in order to maintain the exchange relationship between the US dollar and gold, the United States must maintain an international balance of payments surplus to accumulate gold reserves. With the development of the global economy, the demand for the US dollar continues to increase, the US international balance of payments deficit continues to expand, and the pressure on the exchange of the US dollar for gold is increasing. By the end of the 1960s, the continuous outflow of US gold reserves could no longer support the huge demand for US dollar exchange, and the gold-dollar system was shaky.
In the 1960s, the United States was mired in the Vietnam War, with a substantial increase in fiscal expenditures, high domestic inflation, and a sharp deterioration in the balance of payments. Other countries lost confidence in the dollar and exchanged dollars for gold, accelerating the loss of U.S. gold reserves. On August 15, 1971, the Nixon administration announced the implementation of the "New Economic Policy" and stopped fulfilling the obligation of foreign governments or central banks to exchange dollars for gold with the United States. This landmark event announced the end of the fixed exchange rate system between the dollar and gold, and the Bretton Woods system collapsed. Since then, the dollar exchange rate has begun to float freely, and the gold-dollar system has become history. Although the gold-dollar system lasted only more than 20 years, it laid the foundation for the dollar in the international monetary system. The subsequent evolution of the dollar anchor was carried out under its influence, laying the groundwork for the United States to build financial hegemony.
2. Petrodollar: Deep Ties Between Geopolitics and Finance
After the dollar was decoupled from gold, the international monetary system fell into a brief chaos, and the dollar urgently needed to find a new value anchor to maintain its international currency dominance. At this time, oil, as the world's most important strategic energy, has become increasingly important in the modern industrial system. In the early 1970s, the international political situation was changing rapidly, and the Middle East, as the world's largest oil producing region, was plagued by constant geopolitical conflicts. In October 1973, the Fourth Middle East War broke out. In order to combat Israel and its supporters, the Organization of Arab Petroleum Exporting Countries took measures such as oil production cuts, embargoes, and price increases, triggering the first oil crisis. International oil prices soared from US$3.01 per barrel to around US$12 in 1974, and oil exporting countries experienced a huge surplus in their international balance of payments.
The United States keenly grasped this opportunity and actively launched secret negotiations with Saudi Arabia and other major oil-producing countries in the Middle East. As the world's largest oil exporter, Saudi Arabia has a significant influence in the Organization of Petroleum Exporting Countries (OPEC). In 1974, the United States and Saudi Arabia reached an agreement that Saudi Arabia agreed to use the US dollar as the only pricing and settlement currency for oil exports. The United States provided military protection and economic assistance to Saudi Arabia, and promised to buy Saudi government bonds and help it with infrastructure construction. 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 operating mechanism has been formed. In order to obtain oil, a rigid energy source, countries around the world must first hold US dollars. This has greatly increased the demand for the US dollar in international trade settlements and consolidated the international currency status of the US dollar. Oil exporting countries earn a large amount of US dollar income by exporting oil, and these US dollars are called "petrodollars." Due to the single domestic economic structure of oil exporting countries, they cannot absorb such a huge amount of funds. Most of the petrodollars flow back to the US financial market to purchase various assets such as US Treasury bonds, stocks, and real estate. The United States uses the returned petrodollars to continue importing global goods and services, maintain its consumption-driven economic model, and redistribute petrodollars to the global economic system through monetary policy and financial market operations.
For example, oil exporting countries deposit petrodollars in US banks, which then lend the funds to other countries for oil imports or investments, and the funds circulate around the world. In this process, the United States not only controls the pricing and settlement rights of global oil trade, but also absorbs global funds 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 through military force to ensure the normal operation of the petrodollar system. The United States deploys a large number of military forces in the Middle East to exert political influence on Middle Eastern oil-producing countries. Once unstable factors that threaten the petrodollar system appear in the region, the United States will quickly intervene, such as launching the Gulf War, to safeguard 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 a stable energy supply and financial support for global economic growth. Stable oil trade settled in US dollars has promoted the development of international trade, consolidated the status of the US dollar as an international payment and reserve currency, and promoted the integration of the global financial market. The large amount of petrodollars accumulated by oil exporting countries has provided the United States with cheap funds through investment in financial assets such as US Treasury bonds, supporting the US fiscal deficit and economic development, and also providing some external financing sources for other countries.
However, the petrodollar system has also brought many negative effects. The price of oil is closely linked to the exchange rate of the US dollar. The depreciation or appreciation of the US dollar will directly affect the fluctuation of oil prices and increase the uncertainty of the global economy. When the US dollar depreciates, the price of oil denominated in US dollars will rise, triggering imported inflation and bringing shocks to the economies of other countries; conversely, the appreciation of the US dollar may lead to a reduction in the income of oil exporting countries, affecting their economic stability. In addition, the petrodollar system has exacerbated the imbalance of the global economy . The United States has been in a state of trade deficit for a long time and relies on the return of petrodollars to maintain economic operation, while other countries have to export a large number of goods in order to obtain US dollars, resulting in an increasingly serious problem of global trade imbalance. At the same time, the large inflow of petrodollars has made the economies of some oil exporting countries overly dependent on oil exports, with a single economic structure and weak risk resistance.
3. U.S. Treasury Bonds and Dollars: Debt-driven Credit Support
Since the 21st century, the international political and economic landscape has undergone profound changes. On the one hand, emerging economies have risen rapidly, their contribution to global economic growth has continued to increase, the international trade pattern has gradually diversified, and the petrodollar system is facing shocks. On the other hand, the US's own economic structure has changed, the proportion of the financial services industry in the economy has increased, and the virtual economy has over-expanded. In 2008, the US subprime mortgage crisis broke out and quickly evolved into a global financial crisis, which hit the global economy hard. During the crisis, the US government adopted a large-scale quantitative easing policy to save the market, the fiscal deficit rose sharply, and the size of the national debt expanded rapidly. The total US national debt exceeded 34 trillion US dollars for the first time on December 29, 2023. If this debt is shared among the American people, the per capita debt will exceed 100,000 US dollars.
In this context, U.S. debt has gradually become a new important support for the U.S. dollar. With its strong national credit and the world's most developed financial market, the United States has made U.S. debt a "safe asset" in the eyes of global investors. In order to maintain and increase the value of foreign exchange reserves, countries around the world have purchased a large number of U.S. debts, and the U.S. debt-dollar system came into being. The U.S. debt-dollar system is essentially based on the national credit of the United States. It absorbs global funds by issuing treasury bonds and maintains the dominant position of the U.S. dollar in the international monetary system. The U.S. government monetizes its fiscal deficit and sells treasury bonds to the Federal Reserve and global investors. After purchasing treasury bonds, the Federal Reserve injects base currency to increase market liquidity, allowing the U.S. dollar to flow continuously to the world.
The operation of the US Treasury dollar system is based on the trust of global investors in the US national credit. 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 ability. US Treasury bonds have the characteristics of strong liquidity and relatively stable returns, which attract global investors. Central banks of various countries regard US Treasury bonds as an important part of foreign exchange reserves to maintain the stability of their currency exchange rates and international payment capabilities. For example, China, Japan and other countries have long been major foreign holders of US Treasury bonds.
When the US government runs a fiscal deficit, it raises funds by issuing treasury bonds. Treasury bonds are sold globally, and after foreign investors buy U.S. bonds, the U.S. dollar flows back to the United States. The United States uses these funds to build domestic infrastructure, spend on social welfare, and 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 purchase a large number of treasury bonds, lower treasury bond yields, reduce corporate and government financing costs, and stimulate investment and consumption; when the economy is overheated, it uses interest rate hikes and other means to increase treasury bond yields, attract capital backflows, and curb inflation. In this process, the U.S. dollar circulates around the world through U.S. bonds, maintaining its international currency status.
Although the US debt-dollar system has maintained the dominance of the US dollar for a certain period of time, it has many hidden dangers and faces severe challenges. First, the scale of the US national debt continues to rise, the fiscal deficit continues to expand, and the debt repayment pressure is becoming increasingly heavy. High debt interest expenditures occupy a large amount of fiscal funds, compressing the space for other public expenditures, and weakening the US government's ability to respond to economic crises and social problems. Secondly, the US national credit has been eroded. In recent years, the US government's arbitrary fiscal policy, such as the frequent debt ceiling disputes, has caused market concerns about whether the United States will default. In addition, some unilateral actions of the United States 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 develop, 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 proportion 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 significantly reduced its holdings of US debt and increased its gold reserves. These measures have all posed a shock to the US debt-dollar system. If they are not resolved, the stability of the US debt-dollar system will be seriously threatened, and the international currency status of the US dollar 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 form is undergoing profound changes, and the wave of digital currency is sweeping in. Since 2009, the market has gradually developed a currency network of distributed ledgers, and a new type of currency, digital stablecoin, has been born. Due to the reserve status of the US dollar in the international monetary system, distributed ledger digital currencies have also formed an ecosystem denominated in US dollars in the process of development. The digital dollar is exchanged 1:1 with the legal currency US dollar, and US debt and US dollar-denominated assets are used as reserves to ensure repayment. This has virtually reshaped a new application scenario for the US dollar and the storage space for US debt, reversing the weak trend of US debt and US dollar in recent years, and injecting new value support into the US dollar.
According to the 2024 VISA survey report, the market value of digital dollar stablecoins has grown from several billion 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, radiating to many countries and regions in the world. The digital dollar has the characteristics of anonymity, portability, and cross-physical regional restrictions, and has strong expansion potential. At the same time, digital network decentralized finance (DeFi) and RWA tokenization (such as Ondo Finance tokenizing US debt and selling it directly to non-US retail investors and institutions) have the possibility of migrating traditional financial markets to blockchain networks in the future, and its ecosystem mainly uses digital dollars for transactions and settlements, which further expands the depth of the digital dollar system. The new application scenarios of the digital dollar, the support of its reserve assets for the US dollar, and its expansion potential based on blockchain technology have jointly created an ecological opportunity for the development of the digital dollar.
Furthermore, in the real environment, the United States is already facing the challenges of the U.S. debt ceiling dispute, the expansion of the fiscal deficit and the surge in debt repayment pressure. The U.S. dollar objectively needs to seek new value-supporting tools to maintain its international status. In terms of the time window, 2024 is the year of the U.S. presidential election. The number of people holding and trading digital currencies in the United States is close to 100 million, and they are mainly young people. The Trump team needs to win over these voters to enhance their campaign chips. Therefore, under the joint influence of market ecology, real pressure and political competition, since Trump was elected president, the United States has reversed its past attitude of denying and suppressing digital currencies, including his first term, and has turned to actively supporting and promoting regulatory legislation, while announcing in a high profile that it has become the world leader in the digital currency industry. The digital dollar anchor strategy is thus established. As U.S. Treasury Secretary Benson said, "We want to consolidate the dollar's position in the international reserve currency, and we want to achieve this goal through digital stablecoins."
The current overall construction idea of the United States for the digital dollar system is to incorporate the wildly growing digital currency ecosystem in the past into the compliance supervision system to ensure that the development of the digital currency industry is in line with the national interests of the United States. This can be roughly understood as creating a "contractual relationship" between the US dollar and the digital currency network, which is similar to the contractual relationship of the "petrodollar", that is, solidifying the application scenario of the US dollar. On this basis, digital assets are gradually guided to become mainstream assets and expand their global application scope. Together, the above forms the overall construction path of the digital dollar anchor.
The difficulty lies in the fact that the regulatory framework that is compatible with the traditional U.S. 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, while the latter requires innovation and flexibility. It is necessary to ensure the compatibility of this "dual track" structure and avoid arbitrage and conflicts in actual operations, which is extremely challenging for the top-level design and rule enforcement of regulatory innovation.
On May 19, the United States passed the GENIUS ACT, which clarified the regulatory requirements for digital stablecoins for the first time. At the same time, the United States 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. At the same time, at the federal and state levels, as well as at the regulatory agencies such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Commodity Futures Trading Commission, it promoted a three-dimensional and multi-dimensional digital asset regulatory framework and implementation rules. These initiatives represent the substantive beginning of the construction of a digital dollar system.
In addition, the launch of the digital dollar also faces many other considerations. On the technical level, how to ensure the security, stability and privacy protection of the digital dollar system is a key issue. Digital currency transactions have become the target of hacker attacks. Once a security vulnerability occurs, it will lead to serious financial losses and user information leakage. On the policy level, the digital dollar may have an impact on the existing monetary policy and financial regulatory system. The issuance of digital dollars may affect the statistics and regulation of money supply and interfere with interest rate policies. How to effectively supervise the issuance, circulation and use of digital dollars to prevent illegal activities such as money laundering and terrorist financing is also a problem that needs to be solved urgently. At the same time, the international promotion of digital dollars may trigger geopolitical games. Other countries may worry that digital dollars will strengthen the financial hegemony of the United States, and thus take corresponding countermeasures to intensify tensions in the global financial field.
Looking back at the four-stage evolution of the US dollar anchor, from the gold exchange standard of the gold dollar, to the geopolitical and financial binding of the petrodollar, to the debt credit support of the US Treasury dollar, and now on the road to exploring the digital dollar, each transformation is a strategic choice made by the United States to adapt to changes in the international political and economic situation and maintain financial hegemony. The evolution of the US dollar anchor has not only profoundly changed the global financial landscape, affecting the economic development and financial stability of various countries, but also reflects the rise and fall of the global economic power comparison and the changes in international political relations.
At present, the global economy is in a period of deep adjustment. With the rise of emerging economies, frequent geopolitical conflicts, and the 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 debt-dollar system continue to accumulate, and the future of the digital dollar is full of uncertainty. Against this background, countries should have a deep understanding of the evolution of the US dollar anchor, actively adjust their financial strategies, strengthen financial innovation and cooperation, and enhance their own financial strength and risk resistance. For China, it should accelerate the internationalization of the RMB, improve the financial market system, promote the research and development and application of digital currency, seize opportunities in the reshaping of the global financial landscape, enhance international financial discourse power, and contribute China's strength to the stability and development of the global economy and finance. In the future, the global monetary system may develop in a diversified direction, and a new monetary order is being nurtured. The continued evolution of the US dollar anchor will be a key variable in this process, which deserves continued attention and in-depth research.
