[OPE-L] US Dollar Hegemony The Soft Underbelly of Empire Rohini Hensman, Marinella Correggia

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Fri Mar 25 2005 - 19:58:12 EST

EPW Commentary
        March 19, 2005

US Dollar Hegemony
The Soft Underbelly of Empire

The costs of sustaining the US's new 'Empire' 
will become apparent to its public only when 
these costs directly accrue to them. This will 
happen, as this article suggests, only when (i) 
other nations stop subsidising the US's imperial 
adventures by colluding in them and (ii) the 
dollar loses its role as the world's reserve 
Rohini Hensman, Marinella Correggia

What we intend to argue below is that if the US's 
ability to undertake imperial conquests like that 
of Iraq depends on its obvious military 
supremacy, this in turn is ultimately based on 
the use of the US dollar as the world's reserve 
currency. It is the dominance of the dollar that 
underpins US financial dominance as a whole as 
well as the apparently limitless spending power 
that allows it to keep hundreds of thousands of 
troops stationed all over the world. Destroy US 
dollar hegemony, and 'Empire' will collapse.

David Ludden's article 'America's Invisible 
Empire'1 sums up the problem of the world's most 
recent empire with remarkable clarity. 
Constituting itself at a time when decolonisation 
was well under way and other empires were 
disintegrating, US imperialism could never openly 
speak its name. Initially, it disguised itself as 
the defender of democracy against communism; when 
the Soviet Union ceased to exist, the pretext 
became the 'war against terror'. National 
security and national interest were invoked as 
the rationale for global dominance.

Ludden's description evokes the image of US 
citizens (and a few others) living in a 'Truman 
Show' world, a bubble of illusion created by 
state deception and media complicity that 
prevents them from being aware of the reality of 
empire although everyone outside can see it only 
too clearly. It sounds quite credible that 'the 
empire will not be undone until its reality and 
costs become visible to Americans' (Ludden: 
4777). However Ludden's claim that 'US taxpayers 
and voters pay the entire cost of the US empire' 
(ibid: 4776) is less credible. If that were true, 
many more Americans would see their empire and 
oppose it; the Democrats would have put up a 
principled anti-war, anti-occupation candidate at 
the recent presidential elections, and the 
overwhelming majority of the US electorate would 
have voted for her or him. But it is the rest of 
the world that has been paying for the US empire: 
that is why it is almost invisible within the US.

As Emmanuel Todd wrote,2 an imperial economy 
depends on drawing wealth from abroad, without 
any reciprocity. The US is now more dependent on 
the rest of the world than the rest of the world 
on the US. This explains their behaviour: not 
only their strategic need to get their hands on 
the world's resources, but also their need for 
hegemony. To counterbalance their economic 
dependence, they must keep themselves - at least 
symbolically - at the centre of the world. They 
must demonstrate their 'omnipotence': that is why 
they wage so many wars against militarily weak 
enemies. At the same time they must appear as 
benefactors - hence their whirlwind tour of the 
countries devastated by the tsunami disaster in 
order to make use of the photo opportunities it 

History of Dollar Hegemony

The core advantage of the US economy, the source 
of its financial dominance, is the peculiar role 
of the US currency. It is because the dollar is 
the world's reserve currency that the US is able 
to maintain its twin deficits (fiscal and trade) 
and depend on the world's generosity. It needs a 
subsidy of at least 1.2 billion dollars per day 
to keep up its level of spending. Its military 
superiority is one reason why it it is unlikely 
ever to face an embargo, but more importantly, it 
can continue to live beyond its means because of 
US dollar hegemony. But for long?

The dollar mechanism has been described 
extensively elsewhere,3 so we will merely 
summarise here. The strength of the US economy 
after second world war enabled the US dollar, 
backed by gold, to become the world's reserve 
currency. When the US abandoned the gold standard 
in 1971, the dollar remained supreme, and its 
position was further boosted in 1974 when the US 
came to an agreement with Saudi Arabia that the 
oil trade would be denominated in dollars.4 Most 
countries in the world import oil, and it made 
sense for them to accumulate dollars in order to 
guard against oil shocks. Third world countries 
had even more reason to hoard dollars so as to 
protect their fragile economies and currencies 
from sudden collapse. With everyone clamouring 
for dollars, all the US had to do was print fiat 
dollars and other countries would accept them in 
payment for their exports. These dollars then 
flowed back into the US to be invested in 
treasury bonds and similar 
instruments, offsetting the outflow.

As a reserve currency fulfils world needs in 
addition to the functions of a domestic currency, 
the favoured country can build up debt for a 
protracted period on a scale that would wreck any 
other country's currency. But this advantage is a 
double-edged sword.5 It allowed the US economy to 
decline unnoticed, its fiscal and trade deficits 
to climb steeply: by 2004 the US trade deficit 
had reached $503 billion, the current account 
deficit $413 billion, the gross national debt 
around $7 trillion. Globalisation destroyed the 
US as a manufacturing nation; the outsourcing of 
services means that even this sector is gradually 
being shifted out of the US.6 Only its 
pre-eminence in the global financial 
services industry remains intact.7 And this is 
underpinned by US dollar hegemony.

As Pierre Lecomte, a French financial analyst and 
supporter of the campaign 'Dette et dollar' (to 
reject the dollar as world currency) says, "while 
the rest of the world must toil hard to earn 
dollars which are needed to buy goods 
internationally, or to pay off foreign debt, the 
US just needs to print dollars".8 And as Frederic 
Clairmont wrote in Le Monde Diplomatique (April 
2003): "Living on credit is the credo of the 
foremost power in the world".

Various campaigns around the world have asked 
people to 'boycott Brand America,'9 but most 
products with American brand-names are not made 
in the US. Therefore refusing to buy such things 
may reduce royalties to America, but will not 
seriously undermine US economic power. On the 
other hand, 'the longest-lived and most widely 
seen American 'brand' in the rest of the world is 
almost certainly not Coca-Cola nor McDonalds, but 
rather the US dollar.'10 Taking this into 
account, the secretariat of the international 
'Boycott Bush campaign,' based at the Mother 
Earth association in Belgium, recently asked 
members if they were ready to open another front, 
'to boycott the dollar'. Most of them have 
responded 'yes'.

Dollar hegemony is what concealed the costs of 
Empire, which were effectively being paid for by 
the rest of the world, from US citizens. Other 
countries were compelled to accept fiat dollars 
because they had no choice. It was the world's 
only reserve currency.

Choosing the Euro

UntilŠthe euro came into being. Even then, the 
choice was only a potential one, as the euro 
initially lost value, making it unattractively 
risky as a reserve currency. The first 
non-European countries that made a move in its 
direction did so for political rather than 
economic reasons. When Saddam Hussein switched to 
the euro in late 2000 and converted Iraq's $10 
billion reserve fund at the UN to euro, some 
analysts commented that this political gesture 
would have a heavy economic cost.11 But against 
all expectations, he actually made a profit when 
the euro staged a recovery.12 Iran is another 
country which in 2002 converted more than half 
its foreign exchange reserves to euros.13 Both 
Iraq and Iran being oil-producing countries, the 
impact of their shifting currency allegiances 
would be significant. By contrast, North Korea's 
official shift to the euro for trade in December 
200214 was negligible from the standpoint of the 
world economy, yet it signified a trend that US 
imperialism had to stop at all costs. Suddenly 
George Bush's diatribe against the 'Axis of 
Evil', which seemed so arbitrary and laughable at 
the time, does not appear quite so funny. Add to 
this picture the fact that Hugo Chavez - against 
whom the US supported a coup in April 2002, and 
who continues to be under attack by the Bush 
regime - has taken a large part of Venezuela's 
oil trade out of the orbit of the US dollar,15 
and the economic compulsions driving US foreign 
policy become clearer. Military might alone does 
not seem to be a sufficient basis for sustaining 
an empire: economic power is crucial. And for the 
declining US economy, US dollar supremacy is 
essential for maintaining its economic clout.

This is no longer unchallenged. Before the Iraq 
war, one Iranian economist and the Moroccan 
magazine, L'Indépendant, suggested that Islamic 
businessmen and countries should drop the dollar 
as their foreign exchange reserve currency, in 
order to weaken the US or at least deter them 
from their aggressive foreign policy. Given the 
deteriorating relations between the US and the 
Arab world, quite a few west Asian oil-exporting 
countries have begun to increase the proportion 
of international settlements made in euros. 
Reportedly, Russia may also follow suit. In 2003, 
a senior Iranian oil representative suggested in 
a speech in Europe that European oil purchases 
might be increasingly traded in euros in future. 
China and Russia have hinted that they may begin 
to hold more of their foreign currency assets in 
euros instead of dollars. An article in China 
Daily on September 28, 2004 by Jiang Ruiping, the 
director of International Economics at the China 
Foreign Affairs University, pointed out that 
China is already losing due to the dollar slide 
and would lose even more if it crashes, and 
recommended moving out of dollars into euros and 
possibly also yen, as well as using its dollar 
reserves to stock up on oil.16 Other countries 
like South Korea and Taiwan also plan to shift 
some of their foreign currency assets out of 

All this has weakened the US dollar, but this 
does not necessarily mean that it will decline to 
the point where it ceases to function as world 
currency. There are contradictory pressures, both 
from the US and from its major creditors. Within 
the US, there could be hopes that a weaker dollar 
would spur exports, but this now seems unlikely, 
given how uncompetitive US industry has 
become.18 More importantly, the US deficits 
shrink as the dollar declines. Federal Reserve 
chairman Alan Greenspan summed up the US dilemma 
in November 2004, in a speech where he seemed to 
accept the inevitability of the dollar decline in 
order to help ease US deficits. This would be a 
boon to the US so long as the dollar retained its 
role as world currency, but it would inflict 
enormous losses on countries that have amassed 
large quantities of dollar reserves. China and 
Japan alone hold about a trillion dollars, and 
while countries like India (and smaller 
economies) may hold much smaller quantities, the 
devaluation of those reserves is already hitting 
them, and would hit them even more if the dollar 
crashes.19 These countries could therefore think 
of selling dollars and moving their reserves to 
some other currency, which in turn would 
jeopardise the status of the dollar as the world 
currency.20 An attempt to counteract this is 
probably what was responsible for rumours in 
January 2005 that the Federal Reserve might hike 
interest rates. For countries exporting to the US 
there is also a dilemma. Japan, for example, 
bought billions of dollars in order to hold down 
the value of the yen and keep its exports 
competitive. In the short term, it may 
benefit from propping up the dollar, even though 
it would lose massively if the dollar crashes. 
Debtor countries would gain from a dollar slide, 
since their debt is denominated in dollars; but 
if they have foreign exchange reserves in 
dollars, these would be  devalued, and they would 
also suffer if they depend on exports to the US 
which the US would no longer be able to afford. 
Thus there are also powerful forces resisting the 
displacement of the dollar as the world's reserve 

This brings us back to the dilemma posed by David 
Ludden. The costs of empire will become apparent 
to the US public only when they have to pay those 
costs, and this will happen only when (a) other 
nations stop subsidising its imperial adventures 
by colluding in them, and (b) the dollar loses 
its role as the world's reserve currency. A 
weakening of the dollar while it retains its role 
as world currency, which is what has been 
happening so far, could actually help US 
imperialism by reducing the value of its fiscal 
and trade deficits; only when there is a 
large-scale shift away from dollar reserves will 
the rest of the world stop paying for the US 
empire. This may not happen in the near future if 
it is left entirely to economic forces, and 
meanwhile the occupation of Iraq and Palestine 
will go on, Iran may be invaded (as Bush has 
threatened repeatedly), and so on and so forth. 
On the other hand, if currency speculators get 
into the act and the dollar goes into free fall, 
it could pull down the world economy with it! 
Avoiding this, too, requires planning and 

Courses of Action

For citizens of the world who are opposed to US 
imperialism, that suggests several possible 
courses of action. The 'world's second 
superpower', world public opinion, made a hugely 
impressive showing prior to the invasion of Iraq, 
yet it failed to stop the invasion itself; 
stronger action is required. But the armed 
struggle taking place in Iraq is killing and 
maiming hundreds of thousands of Iraqis and 
thousands of Americans, most of them from poor 
families; surely this is not desirable. The 
alternative we propose is non-violent 
non-cooperation with the imperial monster. 
For example:

(1) Putting pressure on all other governments not 
to participate in the occupation of Iraq in any 
way, and/or voting out of power governments which 
are colluding in this enterprise and voting in 
alternatives who promise to pull out of Iraq. In 
Britain, for example, if the Liberal Democrats 
are willing to make a commitment to withdraw 
British troops from Iraq, all anti-war activists, 
including those who would normally vote for 
Labour or Left parties, should campaign for them 
in the forthcoming elections. Similarly with 
other governments backing the US like those in 
Italy and Japan. This will leave the burden of 
running their empire fairly and squarely on the 
shoulders of the US administration.

(2) Refusing to use the US dollar except within 
the US itself. Even if this is done on an 
individual basis, it will have the effect of 
undermining the role of the dollar as the world 
currency. Other economic actors, like the 
international fair trade movement, should also 
shift to other currencies for their international 
trade: the movement is increasing, and it would 
be an important gesture symbolically. Both 
academics and activists should stop using dollar 
equivalents to measure incomes in third world 
countries, etc; for the moment, the euro can be 
used as a standard. Mass action of this sort 
played a major role in ending British rule in 
India and thus the British empire. Employed on a 
much wider scale, it can help to undermine the US 

(3) Putting pressure on governments in third 
world countries to shift foreign currency assets 
out of dollars, and to create regional currencies 
to strengthen regional commercial and economic 
ties. This would not only be a gesture of 
solidarity to the beleaguered peoples of Iraq, 
Palestine and others oppressed by the US empire, 
but would also make good economic sense. The 
dollar is sliding, and developing countries which 
hold all or most of their foreign exchange 
reserves in dollars are losing money as it loses 
value. If it crashes, their reserves could be 
wiped out.

(4) Putting pressure on governments in 
oil-producing countries not to denominate their 
oil trade in US dollars. This does not 
necessarily involve a wholesale shift to the 
euro. Venezuela has concluded several barter 
deals with other Latin American countries 
including Cuba, giving them oil in exchange for 
goods and services,21 and this is a pattern other 
oil-producing countries could consider. For 
example, tens of thousands of migrant workers 
from south and south-east Asia work in Gulf 
countries; if their remittances in dinars, 
dirhams, etc, can be used directly for oil 
imports, all parties would benefit. Barter deals 
which do not involve oil could also be concluded 
between developing countries.

(5) Changing world trading patterns. If the 
dollar sinks drastically with world trade 
unchanged, many countries which now rely on 
exports to the US will be affected adversely by 
its inability to import their goods with a 
weakened dollar. A reorientation of trade away 
from the US would therefore be necessary. For 
example, plans to constitute SAFTA as a regional 
bloc free of tariff and immigration barriers 
should be pursued at greater speed, and trade 
with other countries promoted at the same time. 
The European Union and MERCOSUR in Latin America 
provide examples that others could emulate. China 
and Japan, the biggest creditors of the US, 
suffer most from the decline of the dollar, and 
would have to work out alternative trade patterns 
to safeguard their economies.

(6) Campaigning nationally and internationally 
for policies of employment creation, protection 
of workers' rights, shorter working hours, 
enforced payment of minimum wages that are 
adequate to support a decent standard of living, 
and so on. This will redirect resources from 
hugely wasteful military expenditures into social 
consumption (nutrition, health, education, etc) 
and expand mass markets, especially in third 
world countries but even in Japan, Europe and 
North America.

(7) In addition to these economic measures, 
ending US imperialism would require pressing for 
the development and implementation of 
international humanitarian law, international law 
and multilateral treaties (such as the Geneva 
Conventions, Rome Treaty of the International 
Criminal Court, Chemical Weapons Convention, 
Biological Weapons Convention, Comprehensive Test 
Ban Treaty, Land Mine Treaty, ILO Core 
Conventions, CEDAW and the Kyoto Protocol), and 
the strengthening and democratisation of 
multilateral institutions (like the UN, ILO and 
WTO). A recent example of such action was the 
open letter by eminent South Africans (including 
former president Nelson Mandela and Archbishop 
Desmond Tutu) protesting against US attempts to 
oust Kofi Annan, which says, 'Those who call for 
his resignation betray the objectivity his 
position as secretary-general demands, and regard 
the United Nations as a mouthpiece to extol and 
exonerate the politics of the US, right or 
wrong.'22 Also important are actions 'trying' the 
US for violations of international law, as in the 
world tribunal on Iraq which is being carried out 
in various countries by hundreds of movements. Of 
course the effectiveness of international law and 
multilateral institutions is seriously undermined 
by US non-participation and sabotage, yet if 
other countries persist in working for global 
democracy, the US will come under greater 
pressure to comply.

Even if all possible adjustments are made, there 
is no doubt that the decline and fall of the 
dollar as world currency will cause pain, both 
within and outside the US. But the alternative is 
incomparably worse. The world order cannot much 
longer survive having a heavily armed rogue state 
on the rampage in violation of all international 
law and multilateral treaties. The world economy 
cannot afford to depend on the currency of a 
bankrupt nation with a colossal military budget. 
And the earth itself is put at risk by a country 
which devours massive quantities of fossil fuels 
and spews out greenhouse gases at a catastrophic 

US imperialism would not be able to pursue its 
destructive policies without the unlimited supply 
of blank cheques extended to it by the rest of 
the world, so it is the responsibility of the 
rest of the world to withdraw that source of 
funding. The beast has to be killed by attacking 
it at the point where it is most vulnerable. 
Meanwhile, if enough people in the US work to 
ensure that the next elections (2008) install a 
president and representatives who undertake to 
abandon the pursuit of empire and instead seek to 
reintegrate the US into the international 
community as a law-abiding, fiscally-responsible, 
non-polluting member, the result will be a far 
safer and more stable global order, world economy 
and environment.

email: rohinihensman@yahoo.co.uk


1 David Ludden, 'America's Invisible Empire,' 
Economic and Political Weekly, Vol XXXIX, No 44, 
Mumbai, October 30, 2004, pp 4776-77.
  2 Emmanuel Todd, Dopo l'impero - la dissoluzione 
dell'impero americano, Marco Tropea editore 
(Italian translation, 2003).
  3 William Clarke in particular makes an 
impressive case, with a great deal of evidence, 
in his web-based essay 'Revisited: The Real 
Reasons for the Upcoming War with Iraq: A 
Macroeconomic and Geostrategic Analysis of the 
Unspoken Truth' 
January 2004), which is a revised version, with 
addenda, of his original essay of January 2003. 
Many of the references in this article are taken 
from him. See also Henry C K Liu, 'US Dollar 
Hegemony Has Got to Go,' Asia Times, April 11, 
2002 and Rohini Hensman, 'A Strategy to Stop the 
War, Economic and Political Weekly, April 19, 
  4 David E Spiro, The Hidden Hand of American 
Hegemony: Petrodollar Recycling and International 
Markets, Cornell University Press, 1999.
  5 Paul Craig Roberts, 'The Coming Currency 
Shock,' Counterpunch, November 16, 2004, 
www.counterpunch.org/roberts11162004.ht ml.
  6 Paul Craig Roberts, op cit.
  7 Lawrence G Franko, 'US Competitiveness in the 
Global Financial Services Industry,' 
www.financialforum.umb.edu/documents/Franko per 
cent, 20 Fin per cent, 20 Svcs per cent, 20 
Global per cent 20 Comp.pdf, October 2004.
  8 Pierre Lecomte, Comment sortir du piège 
américain? (ed), F X de Guibert, Paris 2003.
  9 Such campaigns are coordinated by the network 
'Boycott Bush', www. boycottbush.org
10 Lawrence G Franko, op cit.
11 See for example Charles Recknagel, 'Iraq: 
Baghdad Moves to Euro,' Radio Free Europe, 
November 1, 2000.
12 Faisal Islam, 'Iraq Nets Handsome Profit by 
Dumping Dollar for Euro,' The Observer, February 
16, 2003.
13 'Forex Fund Shifting to Euro', Iran Financial News, August 25, 2002.
14 Caroline Gluck, 'North Korea Embraces the Euro,' BBC News, December 1, 2002.
15 William Clark, op cit.
16 Gary North, 'Asian Doubts Regarding the 
Dollar', www.LewRockwell.com/north/north308.html, 
October 1, 2004.
17 Phillip Day and Hae Won Choi, 'Asian Central 
Banks Consider Alternatives to Big Dollar 
Holdings', Wall Street Journal, February 5, 2004.
18 Roberto Panizza, 'Movimenti Internazionali di 
Capitali dal Rinascimento ai Nostri Giorni', in 
Gli spazi della globalizzazione, edited by F M 
Parenti, Diabasis, Reggio Emilia, 2004.
19 See, for example, Ila Patnaik, 'Day of the 
Declining Dollar - How should India Be Responding 
to This Trend?', The Indian Express, December 18, 
20 Mike Dolan, 'Dollar Fall Will Come at a Price 
for All,' Reuters, November 21, 2004 
www.reuters.com/news Article.html? type = top 
News and Story ID = 6876686
21 Hazel Henderson, 'Beyond Bush's Unilateralism: 
Another Bipolar World or a New Era of Win-Win?' 
InterPress Service, June 2002.
22 M P Muttiah, 'US Backs Out on Annan', Sunday 
Observer, Colombo, December 12, 2004, p 9.

© Copyright 2001 The Economic and Political Weekly. All rights reserved.

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