The reasons that made the dollar a currency of the world reserve ..
Gold is a safe economic haven, and the gold currency was coined for the first time in nearly before 700 years BC, and the non-coined gold was used as a (money) in commercial transactions after examining its weight and purity.
And the gold was used as a monetary unit , after it passed through several stages within the global monetary system, as investors resort to it when the vital commodities and the dollar and real estate markets are strained , and we can say that gold is present in history and civilizations , i rising and collapsing , and its wars and reconstruction, and got its respect as a monetary unit and pricing of all commodities and it maintained its prestige as a common element in the treasures of the ancients, so that the Pharaohs took the gold with them for life after death.
Gold passed within the global monetary system in three phases, namely: the golden rule system, the gold – exchange standard monetary system , the system of uniqueness of dollar and the abolition of the gold standard.
* Gold standard : A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold . three types can be distinguished specie , bullion and exchange The work on it was extended since 1881 until 1930, as the State is doing to coin its currency of gold ( coin with a limited weight of gold ) and cash papers convertible into gold, and through a full cover held by the central bank against issuing of currencies of paper money. However , it’s just that this standard collapsed after the outbreak of the First World War; because of the collapse of the economies of some countries.
The gold –exchange standard monetary system depends on several bases, including: –
* the State keeps a full cover of gold equal of the weight to the exported quantities of banknotes.
* That the central bank stands ready to transform what is offered to it of the Banknotes into gold; to ensure a fixed exchange rate.
In 1931 the gold standard collapsed, so for lack of production or the world ‘s supply, and poor distribution of gold reserves, and restrictions on the movement of international trade in order to protect their products and improve their economic situation , which led to different rates, and here the demolition of the most important pillar to the relationship defined or fixed between the value of the currency as cash and gold as a commodity.
Bretton Woods system agreement in 1944:
The Bretton Woods Agreement is the landmark system for monetary and exchange rate management established in 1944, it was developed at the united nations Monetary and Financial Conference held in Bretton Woods , New Hampshire , from July I to July 22, 1944 under the agreement , currencies were pegged to the price of gold , and the US dollar was seen as a reserve currency linked to the price of gold .
The US government took the initiative to establish an international monetary system as it called on the 44 countries to meet in July 1944 in Bretton Woods and the US to agree on a new international monetary system; in order to secure stability and global economic growth. And the development of general principles for the organization of monetary conditions at the international level and the development of foreign trade, capital movements, without regard to what this may affect negatively on other countries.
Accordingly then international institutions were established including ( the International Monetary Fund and the World Bank , the United Nations and the General Agreement on Tariffs and Trade “Gat”) to support the general political and economic thrust for the agreement.
The terms of the Bretton Woods agreement stipulates that the US dollar is used instead of gold cover for the issuance of what it needs from a national currencies, the US is committed to transform what is offered to it from dollars into gold at the exchange rate of $ 35 per ounce of gold for each to request it of world countries .
And each country of the world has a fixed exchange rate for its currency against the dollar, and is committed to maintain the rate of its exchange to be fixed up and down and in the case of change that it must consult with the IMF on how to adjust the exchange rate in relation to the dollar and the conditions for doing so, and finally the world countries should be committed to subscribe for gold in order to allow the State of the center which is America to maintain that sufficient quantities of the dollar to cover their versions of the coins, and then a new stage was began which is the stage of “floating” , which means leaving the currency exchange rate to be determined freely according to supply and demand mechanism in the market .
Factors that affect the rise or low of gold prices
, there are several factors that help the rise of the price of gold or fall, including:
– demand for gold in the Asian and Chinese markets, as China and India constitute the biggest demand for buying gold because the greater the demand , the increase of price .
– The central bank ‘s policy affect the price of gold if the central bank cut interest rates, the investors have turned to buying gold and vice versa.
– Political unrest as significantly affect the price of gold as practiced by investors as a safe haven in the event of political unrest.
– Direct relationship between oil prices and gold prices in the case of high oil prices, gold prices tend to rise and vice versa.
– There is an inverse relationship between the value of the US dollar with gold, as in the case of a strong dollar , gold prices are falling and vice versa.
The inverse relationship between the dollar and gold, do not apply to gold only, but also on all commercial goods in the world, increase in the price of gold reflects the decline in the value of the dollar, and this inverse relationship between the dollar and gold stems from the fact that gold is one of the most important hedging instruments against the risk that the exchange rate of currencies, where investors and traders in the foreign exchange market to buy gold to cover the risks resulting from the weakness of the dollar.
However , the value of the dollar is determined mainly through cashed in other currencies rate, at a time when declining value of the dollar, it is reduced relatively to other major currencies in the world like the Japanese Yen , for example , and the secret lies on both sides of the relationship, Falling gold offset by a rise in the price of the dollar , a policy practiced by the US administration since the beginning of the seventies since the agreement (Bretton Woods) in 1944 , which founded the link of currency to the Dollar.
This turmoil in the relationship between the value of the dollar and the gold price is basically comes from the trends of speculating on gold in times of crisis; so that the demand for gold at the moment for the purpose of speculation associated to the economic risks in the world , which is the main factor in the demand for gold at the moment
, as well as the gold price has become an indication of confidence in the dollar ,considering that its price is on the opposite line to the dollar; as the higher the price of gold , the confidence in the dollar falls , the higher the level of risk in investing in traditional financial assets and in sovereign debt securities , also encouraged to turn to gold, which its price was doubled about four and a half times in the ten years since 2001.
the most important gold producing countries are :
The first place: occupied by South Africa 272.128 kilograms of gold that it produces about 72% of world production of gold
The second place: China ‘s output reached 247.200 kilograms, according to the statistics of the China Association of gold, preferably Chinese buying jewelry made of pure gold . ” 24 carat , “as the demand for gold bullion has risen by 47% to 366 tons, and aim of the Chinese government plans to increase its reserves of gold, which reached record levels , so that it was the sixth – largest holder of gold after the central banks, while the actual purchases of gold in the markets Asia and in large quantities, especially in India and China has increased the strength of demand for gold.
Third place: Australia , with an output of 247,000 kg and increased production in 2010 & 2011 by 10% to take advantage of record – high levels recorded by the precious metal to retain this country with this position .
With a powerful marketing campaign of this rare metal is targeting to the continuity to raise its price,
a large number of global financial advisors have advised to invest not less than 5% of the total investments in gold in order to diversify risk and rewards.
And the quantitative easing measures by the United States carried out in order to reduce the continuity of the dollar exchange rate, the interest rate cut, led to turn to gold as the keeper of wealth.
The financial crisis , the product of the capitalist system which is run by the United States to serve its interests .
Dr. Abdul Hai Zaloom , an expert on oil affairs show the roots of the financial crisis that shook the world that the American was its center , it ‘s a product of the capitalist system which is run by the United States to serve their interests.
America has gone through several financial crises that its causes are almost similar but were different in the time since the crisis in 1898 to 1929, and also in the sixties and in the eighties and a common factor among them is always solutions outside the US in the form of wars stretching from Spain down to the occupation of the Philippines to World Wars I and II through the Vietnam War and , most recently Gulf War.
The most important stages of the shift in the US economy, which have become the roots of the first crisis they are :
the Bretton Woods agreement , which caused the International Monetary Fund and the World Bank, and the GATT that failed and turned to the World Trade Organization.
This process is the biggest robbery in the history of the world , where every $ 35 equivalent ounce gold bought and sold on this basis, and then the price of an ounce of gold has become to $ 350 , due to the decline of the dollar value of nine times, America took the initiative to lift the dollar link with gold in 1971 , as the US President Nixon announced to stop scalability switch of the dollar into gold and despite a remarkable success which has been made by this system in the first phase in achieving economic growth and the international monetary stability.
And the October war in 1973 between Israel and Arab countries led to economic gains for the United States as it led to the increase in oil prices to 400%, and to achieve the following objectives:
– making the North Sea oil of the economic value, and Britain was turned to the oil -producing country with all means where the balance of payments was improved, which was in a critical condition, and provide a natural oil reserves of NATO forces, which will not be dependent on far beyond oil supply sources at risk.
– Make Alaska oil, high – productivity cost, an economic feasibility, thereby reducing US oil imports, and reflected positively on the US trade deficit, which started from the beginning of the seventies as a result of oil imports.
-It Saves for the United States a new competitive advantage , given that the major industrial competitors, Japan and Germany were more dependent on oil imports.
– Making the dollar as the currency of oil pricing, which creates a compulsory demand for the dollar from oil – importing countries, and making it easier to print more paper dollars without a cover of gold.
– With the issuing of US of more banknotes, these petrodollars will find its way back to the US Treasury in the form of treasury bonds or purchase of weapons , which are out of service.
– The payment of US trade deficit .
The United States in 1971 managed to cancel the commitment by the Bretton Woods Agreement (1944) that the United States printing of dollars by gold Stock has calculated amounted the $ 35 for an ounce , a pledge was committed to itself according to that convention to meet with a fixed exchange price to the dollar , with the rest of the world ‘s currencies, creating stable financial system does not allow the United States to print what it see fit of a dollar coin, which has become a global reserve currency.
After the slough of the United States of their obligations to swap any amount of dollars for gold that its currency to the dollar will become the paper that it will lose its value because it became without a cover so the October 1973 war occured , which resulted in a price increase of 400%. When the whole world were forced to buy oil for just a dollar coin , which creates a demand for compulsory purchase of the dollar from oil – importing countries, and making it easier to print more paper dollars without the cover of gold.
If the dollar has lost Yellow Gold support , it found the best alternative in the black gold (oil), and above the mandatory imposition of the dollar coin pricing for the purchase of oil, creating a never – ending demand for the US currency , a situation that has not changed much over the years.
In 2013 oil prices were a $ 100 a barrel. If the global oil consumption rate of up to 90 million barrels a day, the US Treasury printed about nine billion dollars a paper a day at a cost of 5 cents for paper $ 100, covered basically in oil .
Really the tragic is that the oil – producing countries have not benefited from the fact that the increase in oil prices , but very little in their budgets , which mainly relied on consumption and infrastructure, military and otherwise a mostly went to the coffers of the United States.
The book “Hidden Hand of American Hegemony ” by : David J Spiro, Dar Cornell University Press, noted that: “Capitalism theory claims that the capital markets adapt automatically well, and claims that the massive amounts of money that went to countries oil producers have been converted to the economies of third world countries, and this process has been renamed by the recycling of petro – dollars. But most of those petro – dollars did not go to the poor oil – importing countries, but to the coffers of the United States through secret agreements between big oil countries and the United States to buy those countries secretly the bonds of US Treasuries.
And according to these arrangements OPEC countries bought US debts and that without this support the United States were not able to continue in the large public debt policy, as well as citizens can not continue to live on debt in order to maintain their consuming lifestyle. “This is exactly what has been agreed upon in Albebldrberg conference in May 19 73 in 5 months before the October war.
According to a study by Professor George. CNN. Lodge George C. Lodge, which forms part of the curriculum , who is studying for MBA students in the course of international oil affairs of the College of Business Administration at Harvard University, ensuring oil supplies to the West is not alone , which constitutes a national security demands on the subject of oil, but there is the price of oil as well. The United States has collaborated with some of the producing countries to do the job is likely (Song Power) to increase production to drop the price and what that price is one of the elements of US national security , as in the Harvard study above , it is obvious to know who is the owner of the upper floor and the last in this relationship, the United States.
most of the developing countries found themselves in the face of the large increase in the prices of its oil imports , and increased by 400%, and at a time when it does not have money to pay the oil invoice, and so the world has seen the emergence of what is known as trap of debt, and with it the “new global economy”, basically depends on the speculative and dominate the resources of others. Now, after the oil has been linked to the dollar, the US can print as many banknotes without cover, and banks can lending developing countries in dollar , with a lot of conditions , of course, and the result is that these countries are unable to pay their debts on time, and then international Monetary Fund interferes imposed his own terms for debt restructuring , so these countries to find themselves that they have lost the independence of its economic, political decision , and became a captive of obsession with paying benefits and continuing of the debt cycle forever.
According to the book the globalization of poverty , professor of economics at the University of Canada Michel Hdsevski: ” a total long – term debt on developing countries was in 1970 about $ 62 billion. It increased seven fold reaching $ 480 billion in 1980 and then increased 32 times to 2 trillion dollars in 1996 … and now states have become suffered by the weight of their debts.
The following table shows the increasing long-term debt of developing countries.
This has enabled the World Bank, the International Monetary Fund, the World Trade Organization to force these countries to restructure their economies and accept the conditions that are compatible with the interests of global capital owners, and the world economy has become a director to the process of debt collection, because of the resulting increase in unemployment and a slowdown in economic activity.
”
The expert stressed that in the nineties of the last century , America was coming out of its financial tragic situations by creating wars and crises later followed the same style as the financial crisis experienced by the global economy in 2007 and 2008, led to a great economic boom and a sharp rise in the prices of all natural and industrial raw materials , which also included an all – natural and industrial products, including food.
As harbingers began to emerge when the expansion of consumer behavior of the US citizens and accepted by encouraging of banks to borrow for the purposes of the construction and personal consumption that the real estate loans reached to $ 14 trillion, and increased the country ‘s foreign loans to $ 6 trillion and the debt on the private sector $ 11 trillion.
And the expansion of banks in the use of financial derivatives led to the inflation of US financial system to $ 668 trillion, which is reflected in all countries of the world, and it is clear here that the global financial crisis and its repercussions are still ongoing and will continue for a later period, as the global economy is heading towards recession and the Depression.
This in turn makes governments incapable of implementing development policies, also makes financial institutions and banks stress and may not conducting finance and lending, and this in turn limits the development and construction work, and thus reduced demand for a lot of different materials and products.
In a world that is changing rapidly , but the “old countries remain old ” , the president – elect Trump announced during his campaign that the protection of the United States for Gulf states will not be free of charge and the oil states have to pay the bill of all the military bases on the territory of the Arabian Peninsula fully from the Gulf Cooperation Council if they wanted to remain these bases in its territory. He also said that the ownership of the oil is not for those where its places lies under its territory as it has been found there by geological chance stressing that the oil is for those who discovered and need it, the United States , and he has made it clear that he is also starting for the implementation of that policy to take possession of Iraq ‘s oil, and thus the oil has become the pillar of the protection of dollar and the US financial and economic system and allow the dollar to become a global reserve currency.
Shatha Khalil
Unit Economic Studies
Translated by: Mudhaffar al-Kusairi
Rawabet Research and Strategic Studies Center