Hey guys, so I’m back. We’re skipping the cutesy, simple posts of high school to economics. Why? Because I got dragged into the inescapable pit of it. (…) Anyways, moving on.
Our two leading questions are this: “How did America become the most powerful country in the world?” And, “How did the United States make the US Dollar the most powerful currency in the world?”
So the United States wasn’t always a very powerful country. They were very fragile, having won independence that “was a war away from being lost”. From 1783-1898, they were a fledgling power, concerned with expanding its borders from the Atlantic to Pacific Coast to fulfil the belief of Manifest Destiny- that God had ordained for the U.S. to expand its territory and control the whole continent. But over the course of time, things began to change.
|The Idea of Manifest Destiny|
The first factor was a shift from an agrarian economy to an industrialized one during an Industrial Revolution in the late 1800s. This switch led to allowing the U.S. to make the necessary equipment to become a superpower. Within this time period, one major war took place, the Spanish-American War. The Spanish-American War was victorious for Americans against the crumbling Spanish Empire. In this, not only did it make for Puerto Rico and distant islands of Guam and Philippines colonies, but also allowed for America to project its power abroad through a colonial empire. From 1898-1945, America would set its sights on Asia and the Caribbean, cement its alliance with Britain and France through World Wars, and eventually, lead to America having the largest economy in the world and become the largest industrial producer.
So now let’s dig deeper. After World War II, the United States came out, unquestionably, as a superpower. Seen in both WWI and WWII, America acted as war merchants first, and then war participants. While the other countries and empires were dedicating their resources and manpower towards the war, America used its capital and manpower to instead, become the “major supplier of cotton, wheat, brass, rubber, automobile and machinery, and thousands of other goods”. This resulted in America facing one of the greatest economic booms in the world. This was seen in WWII as well, with the only participation seen when Pearl Harbor was bombed. From making so much money out of these two wars, America came out having 75% of the world’s monetary gold after WWII. Other countries were not only economically devastated, but also in ruins from the war, leaving America unscathed. Not only that, at the end of WWII after the atom bomb dropped on Hiroshima and Nagasaki, it was undoubted the United States was indeed on another level. Emerging from the war, both America and the Soviet Union were seen as superpowers, both with very different ideas for the future.
After WWII, America set up a network of bases across the planet to allow itself to project it’s power worldwide. The Soviet Union, who wanted to spread communism, would quickly challenge this superpower. In retaliation, America would station soldiers in Japan and Europe to prevent the spread. This period of geopolitical tension between the two nations is known as the Cold War. They had open yet restricted fighting. There was no direct war, as both had access to nuclear weapons. Thus called the ‘Cold War’.
So now that we’ve established that, let’s talk about how the US Dollar became so powerful.
After WWII, 44 countries met in “Bretton Woods’ in July 1944 with the principal goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth.” (investopedia.com) As a result, they made the Breton Woods Agreement. Once implemented, its provisions called for the U.S. dollar to be pegged to the value of gold, and for all other currencies in the system to be pegged to the US dollar’s value. This agreement led to minimized international currency exchange rate volatility which helped international trade relations, more stability in foreign currency exchange, and currency stabilization for trade of goods and services as well as financing.
This would help in situations where two countries look towards trading with each other, even if they didn’t trust each other. Think School provides an example as such, where Indonesia and Pakistan trade with each other. If Pakistan gives Indonesia 1 million dollars, Indonesia could easily trade that in with the U.S. for the equal amount of gold. However, if this was done in Pakistani Rupees, and let’s say 10,000 PKR= 1 gm gold, Pakistan could print more money and change it to 20,000 PKR= 1 gm gold. This could lead to a collapse in Indonesia’s value of trade. In order to prevent this, the transaction could be done in US dollars, making for the U.S. to guarantee the amount of dollars in gold.
This Agreement sealed the importance of the U.S. Dollar, and gave the Dollar its first wave of dominance.
So that was a brief explanation as to how America became a superpower. It took time, patience, and the use of some clever tactics. The result of this being the position and level to which it is at today. So, thanks for reading, and have a great day.