US heg is predicated off of monetary leverage and leadership, but they wont give up their currency’s preeminent status without a fight

Along these lines, since Classical Antiquity, there has always been a strong connection between wealth and military power and therefore, in the most simple and direct way, between economics and national security. Not surprisingly, modern times are not so different. (Friedberg, 1991). Therefore, the trends that rule the behavior of currencies are strikingly similar to those that govern the conduct of national states. They both seek dominance in highly hierarchical and dynamic systems where competition, conflict and confrontation are commonplace. They both gain and lose power and prestige at the expense of one another in zero-sum games (Cohen, 2003). Therefore, “the realpolitik balancing instinct would apply to currency politics as well as geopolitics” (Drezner, 2010). The evident overlapping parallel implies that, paraphrasing Robert Mundell (1993), powerful States have powerful currencies. In fact, history provides many examples that demonstrate that “currency can enhance the power of the state that issues it” (Cohen, 2009). Thus, it would be mistaken to disregard that “Money Rules – now more than ever – but those rules serve political masters [so] students of money in general and political scientists most particularly must return to that basic starting point – money is politics”. (Kirshner, 2003).Indeed, “World history demonstrates that there is a close relationship between monetary systems and war and peace”(Lips, 2004). Furthermore, since the dawn of human civilization, the issuance of currency has invariably carried heavy political connotations related to territorial considerations: “governments have been assumed to enjoy a natural right of monopoly control over the issue and management of money within their borders [and following a model akin to a]Westphalian model of monetary geography […whereby] each state was expected to maintain its own exclusive territorial currency” (Cohen, 2008). Consequently, not unlike nations, currencies rise and fall too. “An examination of the long history of reserve currencies shows the tendency for one currency to dominate, with any change in status often reflecting a shift or rebalancing of economic and political power” (Lee, 2010). Accordingly, “currency internationalization does indeed impact directly on the power position of issuing states” (Cohen, 2009). Hence, there seems to be a persistent symbiotic link between geopolitics and finance that represents an element which is considered by statesmen in order to properly assess national power. Indeed, it is known that nowadays Central Bankers and political leaders actively collect intelligence information on the behavior of currencies and periodically test their relative strength, in order to “adjust their strategies accordingly” (Stroupe, 2005). However, hegemonies, both geopolitical and monetary, are not perpetual: “historical experience demonstrates the speed and pervasiveness of changes in national economic power; since hegemony is transitory, so must be any international monetary system that takes hegemony as its basis” (Eichengreen, 2003), which indicates that “the international monetary system has always rested and depended upon political foundations” (Kirshner, 2003). The following graph, based on data from a study on the evolution of monetary hegemony (Dwyer & Lothian, 2002), shows the historic succession of dominant international currencies from the 5th century B.C. onwards. Not surprisingly, as can be clearly seen, currencies occupy a dominant position when the nation that mints them becomes a great power. However, “since states are no longer able to exercise supreme control over the circulation and use of money within their own frontiers, they must instead do what they can to preserve or promote market share. As a result, the population of the monetary universe is becoming ever more stratified, assuming the appearance of a vast Currency Pyramid — narrow at the top, where the strongest monies dominate; and increasingly broad below, reflecting varying degrees of competitive inferiority” (Cohen, 2003). At this point, it is important to emphasize that ‘reserve currency’ status is the highest position a currency can attain because it is “something which evolves over time through combination of international economic and political power and convenience to the greatest number of users rather than abruptly as the result of conscious decisions by a single country”(Eslake, 2009). Moreover, there are other evident advantages provided that “the issuers of currencies that are widely used by others as reserve assets […] can finance deficits simply by printing more of their own money” (Cohen, 2008). Therefore, there is a “link between the distribution of economic power and the allocation of reserve currencies” (Drezner, 2010). Hence, “the great bulk of reserves is held in the form of highly liquid assets denominated in one of the small handful of moneys at the peak of the Currency Pyramid” (Cohen, 2009). A reserve currency is thus defined by three essential attributes: a) It provides a store of value, i.e. “confidence that the currency will retain its value, so making it a safe place in which to invest official reserves or denominate contracts” (Dobbs, 2009). Confidence is critical because “economies operate on trust as a foundation” (Stroupe, 2006). Thus, “reserve assets serve as a store of value that can be used directly for intervention purposes or else can be more or less quickly converted into a usable intervention medium” (Cohen, 2009). b) It is employed as a “medium of exchange that offers the ability to transact globally in the currency in an easy and low-cost way” (Dobbs, 2009). As such, “a reserve currency facilitates trade and finance by decreasing the number of bilateral exchange markets that need to be created, thus reducing transaction costs” (Carbaugh&Hendrik, 2009). Therefore, it provides a reference to set the bilateral exchange rate quotations (Oxford Analytica, 2008). c) As a unit of account, it is “a widely held and recognized currency that can be used to denominate international contracts […and] to invoice contracts” (Dobbs, 2009) and it is the currency in which many commodities –including fossil fuels, strategic raw materials, precious metals– and financial instruments available in capital markets are priced and traded (Oxford Analytica, 2008). The latter is particularly important because there is a strong link between finance and hydrocarbons market, due to the fact that “black gold has other pseudo-monetary characteristics as an indispensable commodity that practically begs to be controlled. In an increasingly industrialized world, this fungible primary energy source is everywhere in demand [and, as result…] the spectrum of thought on national security and foreign policy [is taken] into the realm of high finance, capital flows and the trump asset of energy resources (Roby, 2010). Hence, this research paper must be understood in the context of the United States dollar’s decades-long role as the ‘first among equals’ in the international monetary system. The following graph, based on data from a paper written by a prominent scholar of International Political Economy (Cohen, 2009) illustrates the current hierarchical pyramid of currencies, classified as “top currency”, “patrician currencies” and “elite currencies”. In geopolitical terms, during the Cold War period, the Dollar hegemony “held the American alliance system and the world economy together… [because] America’s major allies and economic partners were willing to hold dollars for political as well as for economic reasons” (Engdahl, 2006). Therefore, the privileged position of the dollar has been “a key contributor to US global hegemony” (Oxford Analytica, 2008) for it provides advantages derived from the Federal Reserve’s absolute monopoly of the printing of a currency needed by countless national economies to survive (Engdahl, 2003). Thus, thanks to of its wealth, “America has been able to irresistibly influence all the other players on the geopolitical chessboard because it has led the global economy, and historically it could therefore greatly reward or severely punish in ways and to an extent no one else could” (Stroupe, 2006), attaining both political and diplomatic power, as well as formidable power projection capabilities. For this reason, “America’s dominant position as the sole superpower ultimately rests upon two pillars: its overwhelming military superiority and its control of the global economic system by the unique role of the dollar as the World Reserve Currency” (Clark, 2005). According to this reasoning, “it might be considered an elemental interest of the United States to maintain the system which also includes intense diplomatic and limited military operations in order to preserve its abundant financing for as long as possible. After all, there seems to be a strong interdependence among nations. The US is dependent on cheap financing from abroad and is even willing to apply some military power to protect these interests” (Schulz, 2009). Moreover, it cannot be denied that “the dollar’s leading role in foreign exchange transactions also is reinforced by this currency’s widespread use in the invoicing of international trade” (Goldberg, 2011). That is especially true about oil markets, given that “since oil trade was and still is noted, as well as traded in US Dollars, every nation has to purchase huge amounts of this currency for its national reserves in order to maintain its ability to purchase the required energy” (Schulz, 2009). Consequently, monetary dependence of others on the issuing country confers the latter significant geopolitical power(Cohen, 2003). The unavoidable reasoning that arises is that “a full challenge to the domination of the US dollar as the world central-bank reserve currency entails a de facto declaration of war [on American power]” and, as a result, the United States is willing to fight wars to defend its national currency (Engdahl, 2006) because “an end to the dollar’s reserve currency status would impose material constraints on the United States to finance its deficits, and lead to a major loss of prestige and power projection capabilities” (Drezner, 2010). A possibility is that “widespread oil pricing in alternative currencies or perhaps the bartering of oil would then threaten U.S. hegemony by crimping the relative global demand for dollars” (Roby, 2010). Nevertheless, perpetual hierarchic supremacy of the dollar cannot be taken for granted: “Sooner or later, confidence in the dollar is bound to be undermined by America’s chronic payments deficits, which add persistently to the country’s looming foreign debt […] The exorbitant privilege obviously cannot endure forever; America’s spending cannot indefinitely exceed its income. In the absence of significant policy reforms to reverse the deficits, the world’s trust in the dollar is bound […] to be eroded. Dollar accumulations will eventually dry up and could even turn into massive sales” (Cohen, 2008). The feasibility of said scenario has been enhanced by recent events. Indeed, “the [2008 and 2009] financial crisis and its aftermath have triggered uncertainty about the future of the dollar as the world’s reserve currency” (Drezner, 2010) because it “revealed the inherent weaknesses of the current international monetary system that contributed to global financial instability and a weak global economy and [said crisis has also] hampered the long-term prospects of both the US dollar and the euro as reserve currencies. The crisis has compromised both currencies as safe-haven stores of value” (Lee, 2010). The following chart, based on official IMF data (International Monetary Fund, 2013) reflects the composition of foreign exchange reserves held on a global basis by early 2013. As can be seen, nowadays the US dollar still occupies a predominant position which is unmatched by other inhabitants of the world’s current monetary universe. At first, “it appears that the current system of dollar dominance will persist provided that geopolitical tensions do not become too important for policymakers – or not important enough” (Drezner, 2010), yet appearances can deceiving and potential challengers might become increasingly assertive: “several states around the world today are thought to harbor ambitions to amplify their monetary power – including, most prominently, the four BRIC countries (Brazil, Russia, India, and above all China). One way to do this is to promote internationalization of their currency” (Cohen, 2009) by “trying to establish their own financial regimes as the international payment vehicle” (Schulz, 2009). It is telling that, back in 2008, Vice Admiral J. Michael McConnell, then Director of National Intelligence voiced before the United States Congress Intelligence Committee his “concerns about the financial capabilities of Russia, China, and OPEC countries and the potential use of their market access to exert financial leverage to achieve political ends” (McConnell, 2008). The senior American official’s threat assessment is not mistaken: “influence might be increased directly through the use of newly acquired reserve stockpiles to threaten manipulation of the value or stability of a key currency such as the dollar” (Cohen, 2008). The Vice Admiral’s statement, which –needless to say– goes “beyond the conventional world of spycraft” (Shelton, 2008), implies that the US intelligence Nomenklatura has already acknowledged the threat posed by the geopolitical manipulation of financial forces by foreign powers hostile to American interests. It might be interpreted as the confirmation that “the United States may be expected to resist any compromise of the greenback’s historical dominance…” (Cohen, 2008). Indeed, McConnell’s concern is not unsubstantiated at all, taking into account that “[the] US increasingly came to rely on the governments of countries that were neither democracies nor US allies for financing […and since such States] with large quantities of reserves have more strategic freedom of action; they are less likely to be deterred from taking geostrategic risks by the possibility that their actions could precipitate a financial crisis (Setser, 2009). Actually, the unleashing of financial warfare seeks the infliction of economic damage as it “involves malicious acts in markets for stocks, bonds, currencies, commodities and derivatives” (Rickards, 2012). The same author points out that, unlike conventional warfare, it can be waged stealthily enough so as to obscure the identities of the attackers as well as their channels. Thus, it requires a remarkably high degree of sophistication. The aforementioned has engendered, paralleling Cold War terminology, a system akin to a “balance of financial terror” (Summers, 2004) whereby America’s overall stability could potentially be threatened due to the fact that “America’s partners in NATO are no longer the dominant holders of US dollars in reserve as they were during the cold war. The connection between dollar holders and security partners has been severed [and, as a result,] the dollar depends on the kindness of strangers” (Drezner, 2010). At this point, it is vital to underscore that “[regarding monetary concerns] politics will mater greatly [because] States do not typically (accumulate claims on) countries that are, or may be, their geopolitical competitors –if they can help it, that is, or if there is any credible alternative” (Jaeger, 2010). In the light of the above, based on data from the CIA World Factbook (Central Intelligence Agency, 2012) and the World Gold Council (2011), the following chart reveals the largest proprietors of financial assets, including foreign currency reserves, gold and holdings of SDR. The list includes industrial economies, emerging powers, world-class financial centers and oil exporters. Not many of them are staunch US allies, some might eventually reconsider their Foreign Policy vis-à-vis America and only one of them, namely Germany, is a NATO member, for the time being. It must be borne in mind that “for historical reasons gold is still included in the reserve stockpiles of many countries, despite the fact that it is no longer directly employable as a means of exchange. So too are SDRs [and that both of them] must be exchanged for a more utilizable instrument when the need for financing arises” (Cohen, 2009). Indeed, given the fact that the aurous metal “has been used as money to a greater or lesser extent for much of the history of civilization” (Michaud, et al., 2006), it “fulfills the unique function of a global store of value” (Faugère& Van Erlach, 2005). Incidentally, even though the US is not among the top ten holders of financial assets, most the US currency reserves are not denominated in dollars (!) but in gold: Its 8,133.5 tons represent 76.6% of its national currency reserves (World Gold Council, 2011). Even though this paper does not focus on the yellow metal, its significance in terms of monetary politics is deservedly acknowledged because “from the beginning of recorded history some 6,000 years ago, gold made a profound and lasting impression. Gold was, and still is, the ultimate symbol of wealth, power, beauty and prestige. It has been deeply rooted in the consciousness of man ever since” (Lips, 2001) and, as a result, “gold is a political metal” (Lips, 2004). As such, it is “highly susceptible to geopolitical factors [because…] during periods of fiscal or monetary mismanagement, crises of various kinds or fundamental changes in the dominant currency, gold may be a very useful asset for hedging risk” (Michaud, et al., 2006). In other respects, dollar hegemony went unchallenged during six decades because no competitive rival emerged, yet “ample evidence exists to suggest that the distribution of power in international monetary affairs is changing” (Cohen, 2008). Especially, the rise of the People’s Republic of China as an economic superpower has enhanced the possibility that the ‘Middle Kingdom’ could become, in the long run, a financial superpower (Makin, 2011). Naturally, “many PRC scholars and policy makers […] aspire for a world economic and financial order less dominated by the US and in which the PRC can play a more influential role” (Lee, 2010). Accordingly, by proposing alternatives to the US dollar as reserve currency –like Special Drawing Rights–, “China desires to decrease the financial and political power of the United States” (Carbaugh & Hendrik, 2009) and, it has to be taken into account that “If any nation is in a position to use its newly acquired influence in this manner, it is China. At any time, Beijing could undermine America’s money by dumping greenbacks on the world’s currency exchanges or even simply by declining to add dollars to China’s reserves in the future” (Cohen, 2008). Both options are not mutually exclusive and they can be advanced simultaneously. Indeed, the People’s Bank of China could covertly and progressively diversify its massive currency reserves by ceasing to buy American dollars and, simultaneously, stockpiling growing reserves denominated in other currencies and even in precious metals. This deceptive strategy is meant to preserve wealth without precipitating a sudden dollar collapse, along with some political consequences such move would recklessly unleash. Therefore, it is not surprising that the composition of its foreign currency reserves is one of the highest state secrets of the People Republic of China (Stroupe, 2006). Even if “China’s tactics suggest that it is not prepared to challenge the dollar’s hegemonic status at any point in the near future” (Drezner, 2010), it actually looks like, in the long term, Beijing is interested in forging a new monetary system in which the US dollar is no longer the only reserve currency available and overreliance on the American currency is not a necessary evil anymore. Chinese statesmen can accomplish such an ambitious objective through the application of two strategies: a) contributing to the strengthening of Special Drawing Rights (DSR)[1], in order to establish a multilateral reserve currency under which financial power will be, more or less, evenly distributed and b) unilaterally promoting the internationalization of the Renminbi as a growingly solid currency (Chin & Wang, 2010). Interestingly, the international monetary diversification away from the dollar is enthusiastically welcomed by Russia (Drezner, 2010), an utmost resourceful challenger of American geopolitical interests which, as such, would be more than glad to witness the accelerated decline of the US as the international’s system top power. If the economic rise of China is uninterrupted during the next few decades, there will be profound financial and, above all, geopolitical consequences: “If the yuan emerges as a reserve currency potentially rivaling the dollar, China will become more powerful and the US less powerful in international and financial affairs… [In that sense,] the emergence of the yuan as a major reserve currency will reflect the underlying shift in economic and financial power, even if it does, independently, provide tangible benefits to China [but] this is likely to have ramifications for Washington’s political position in the world” (Jaeger, 2010).