By Dr Kalim Siddiqui
The rise of the US dollar to become the globally preferred currency for trade and financial transactions was a carefully orchestrated game of chess. However, certain nations intent on achieving an equitable international monetary system are now attempting to contest the dollar’s hegemony. This is the first part of a two-part series discussing the rise and evolution of the dollar in the global economy.
I. Introduction
This article analyses the role of the United States (US) dollar since 1944, alongside recent de-dollarization trends and prospects in the changing global economy. It also critically examines the geopolitical economy of the international monetary system under advanced capitalism. Economists have long debated the trends, prospects, and significance of de-dollarization. Some argue that de-dollarization represents a significant shift that could challenge the dominance of the US dollar, while others are less optimistic, contending that the dollar will maintain its dominant position due to various factors. These include the depth and liquidity of US financial markets, the network effects of using the dollar in international transactions, and the absence of viable alternatives.
US President Donald Trump has threatened countries that seek to move away from the dollar with the imposition of 100 per cent tariff on their exports to the US. It means that any de-dollarisation attempt will face difficulties. If a country’s export to the US market is reduced due to de-dollarisation, which would lead to shortage of dollars and would adversely affect its trade with other countries. And if the country has to repay foreign debts in dollars to the international financial institutions, then they will not be able to meet their commitments. After Trump’s threat some countries like India and Ethiopia and others have shown less interest in de-dollarisation.
International trade and payments based on the US dollar require countries to earn dollars before purchasing goods or services from neighbouring nations. Under the market exchange rate system, high demand for US dollars drives up its value. This system hinders South-South trade and reinforces US imperial domination over the Global South. The US has imposed unilateral sanctions, which often include freezing the assets of sanctioned countries held in Western financial institutions. This has been evident in cases involving Iran, Cuba, North Korea, and Russia. Additionally, US sanctions compel affected countries to increase bilateral trade. The dollar’s hegemony exemplifies the extensive control exerted by US imperialism (Siddiqui, 2023c). Sanctions and restricted dollar flows can isolate a country from the global financial system, as holding US dollars is perceived as equivalent to holding gold (Desai and Hudson, 2021).
The global economy faces structural imbalances stemming from trade deficits. When a country’s trade deficit rises, it is compelled to make sacrifices, whereas surplus countries remain unaffected and are not required to adjust. A more balanced global economic environment could emerge if surplus countries shared some of these sacrifices, thereby allowing deficit countries to grow their economies and outputs. (Siddiqui, 2019a).
The rapid GDP growth of emerging economies in recent decades and their increasing share of global output have led to demands for a more equitable international monetary system. For instance, the de-dollarization efforts of Brazil, Russia, India, China, and South Africa (BRICS) represent a significant shift away from the hegemonic influence of the US dollar. This shift is seen as crucial for empowering the Global South.
By reducing reliance on the dollar, BRICS members aim to foster a new financial paradigm that enhances their financial sovereignty and promotes a more equitable international economic order. Collectively, these countries seek to reduce their vulnerability to dollar-induced economic shocks and the impact of US monetary policy changes (Siddiqui, 2024a).
The US and other advanced economies deregulated and liberalized their financial sectors, leading to a massive expansion of global finance.
The US dollar facilitates international trade by serving as a standard measure of value for commodities globally. In domestic markets, money facilitates the exchange of commodities by embodying value. The pre-eminence of the US dollar as world money remains a cornerstone of international economic relations, shaping trade dynamics, monetary policies, and global financial stability (Desai and Hudson, 2021).
Since the 1980s, financialization initiated by the US has profoundly reshaped the global economy. The US and other advanced economies deregulated and liberalized their financial sectors, leading to a massive expansion of global finance. However, this process has its limitations and has now reached a critical dead end. A key issue in the world economy is that when a country’s trade deficit rises, it is compelled to make sacrifices, while surplus countries are not similarly required to adjust. In contrast, if surplus countries were to make adjustments, economic growth and output in deficit countries could increase.
The financial and economic crisis that originated in the US in 2008 quickly spread across the globe, severely disrupting Western economies. This crisis precipitated a sharp contraction in economic output, accompanied by significant losses in employment and income. Simultaneously, the US’ longstanding global military interventions—not only in Latin America but also across developing regions in Africa and Asia—reinforced patterns of neo-colonialism. Despite the evident failures of these policies, which encompassed both economic mismanagement and geopolitical overreach, the US ruling elite, including bankers, politicians, and military officials, were not held accountable (Siddiqui, 2023a).
In contrast, the crisis created an opportunity for emerging economies to assert a more prominent role in global financial and economic governance. In 2009, Russia hosted the first BRIC (Brazil, Russia, India, China) Summit to discuss strategies to “overcome the crisis and establish a fairer international system.” The group expanded in 2010 with the inclusion of South Africa, transforming BRIC into BRICS, and solidifying its position as a coalition advocating for greater equity in international decision-making (Siddiqi, 2024a).
The 2024 Kazan Summit of the BRICS countries was historic. Egypt, Iran, Ethiopia, and the United Arab Emirates joined as members, and the group introduced a new category called “partner nations” as a step towards full membership. Thirteen countries were granted “partner” status, including Cuba and Bolivia.
In January 2025, Indonesia became a member of BRICS, viewing this as a strategic step to enhance collaboration and cooperation with other developing countries based on the principles of equality, mutual respect, and sustainable development. With BRICS membership, Indonesian President Prabowo Subianto aims to achieve 8% GDP growth, positioning Indonesia as one of the world’s fastest-growing economies. The country expects this membership to unlock new economic opportunities, attract investment, and strengthen its global trade and economic relations.
With its expanding membership, BRICS Plus now accounts for approximately 24% of global trade and represents 28% of the world’s GDP, making it a critical force in global economic dynamics. Additionally, BRICS Plus has become the primary trade partner for 28% of countries worldwide. Two significant Southeast Asian economies, Malaysia and Thailand, have also applied for BRICS membership (Siddiqui, 2024a).
However, BRICS remains a heterogeneous bloc, making it unlikely to adopt a radical agenda. Many developing countries seek to reduce their trade dependency on the US dollar. For instance, if more nations agree to use local currencies for trade rather than the US dollar, their reliance on the dollar would decrease. However, the total volume of money used in global trade is a small fraction of the amount used in financial transactions. Therefore, even if the dollar’s role in global trade diminishes, its dominance in global financial transactions will likely remain unchanged. As a result, de-dollarization is not expected to occur anytime soon (Siddiqui, 2020).
Historically, major financial shifts have occurred during periods of significant upheaval. For example, the Napoleonic Wars led to inflationary financing, prompting the Bank Charter Act of 1844 to limit the circulation of banknotes based on gold reserves. In the late 19th century, as trade and industrialization expanded in Britain and spread across Western Europe, the British gold standard became internationally accepted. Many countries began pegging their currencies to gold.
In Britain, the gold standard was carefully managed by the Bank of England. The value of gold was regulated through mechanisms such as increasing outflows or lowering interest rates. Additionally, British sterling gained international acceptance due to the financial flows of the British Empire, which enabled this system to function, often with minimal gold reserves. The empire facilitated liquidity by financing investment and trade in white-settler colonies such as Australia, New Zealand, and Canada. Simultaneously, surpluses were forcibly extracted from non-white colonies, particularly in South Asia.
After Britain, countries like Germany, the United States, and Japan successfully industrialized by implementing protectionist policies to support their domestic industries. Over time, they adopted the gold standard to avoid subordination to British dominance. This prepared them to challenge sterling’s primacy and Britain’s monopoly over the global market. Unlike Britain, these late industrializing nations developed distinct financial systems less influenced by minor interest rate fluctuations and hoarded gold to defend their currencies.
II. The Evolution of the Global Financial System: From the Gold Standard to the US Dollar
The British-led international gold standard (1870–1914) automatically adjusted the value of gold relative to world currencies, adjusting as economies evolved. However, the devastation of the World Wars paved the way for the United States to emerge as the new global power. In 1944, the US initiated the Bretton Woods Agreement, establishing the US dollar as the international reserve currency. This marked the transition of global financial leadership from Britain to the United States, which became the world’s leading creditor by extending loans to its Western European allies during the war against Germany.
Germany, obligated to pay war reparations to European allies, used these funds to repay debts to US banks, which, in turn, lent money back to Germany. Meanwhile, the US insisted that Britain and France repay their war debts, which led these countries to demand reparations from Germany.
This system revealed a fundamental flaw: the demand for repayment of unpayable debts—debts incurred for destruction rather than production. Historically, such debts had often been forgiven, as in the case of Austrian debts after the Napoleonic Wars. Economist John Maynard Keynes proposed that the US absorb European exports to facilitate repayment and assist war-torn economies, even advocating for a “bonfire” of paper debts. However, his proposal was rejected by the US in 1930.
As noted by Desai and Hudson (2021:30), “when the war ended in 1945, the United States held about $20 billion in gold, accounting for 59 percent of the world’s gold reserves. These reserves only grew as European countries, facing a dollar shortage, were forced to pay for US imports with gold. Europe lost gold rapidly to the US Treasury, with the US holdings rising by $4.3 billion by 1948. By 1949, the US gold stock reached an all-time high of $24.8 billion, reflecting an inflow of nearly $5 billion since the war’s end. France lost 60 percent of its gold and foreign exchange reserves during 1946-47, while Sweden lost 75 percent.” Over the next two decades, however, this situation would change dramatically.
III. The Rise of the Petrodollar System and Decline of the US Dollar’s Dominance
Since the early 1970s, the US has run consistent current account deficits. US Treasury securities, backed by the country’s dominant economy, military strength, and political influence, became a preferred safe asset for holding surplus reserves in US dollars, rather than demanding gold. This trend was further solidified with the creation of the petrodollar system, whereby Arab oil-producing nations agreed to recycle their oil revenues by depositing them in US banks. Despite these efforts, the long-term decline of the US share in the global economy and the gradual depreciation of the dollar could not be halted (Siddiqui, 2020).
High interest rates in the US attracted significant capital inflows but simultaneously led to a sharp decline in US manufacturing exports.
By the early 1980s, Japan’s trade surplus surged, making it a major holder of US Treasury bills. High interest rates in the US attracted significant capital inflows but simultaneously led to a sharp decline in US manufacturing exports. This situation triggered a debt crisis in several Latin American countries, including Argentina, Brazil, and Mexico, which struggled to repay their debts. These countries’ foreign debt obligations were restructured with the intervention of the International Monetary Fund (IMF), in exchange for implementing “Structural Adjustment Programmes.” (Siddiqui, 1990)
In response to its rising trade deficit with Japan, the US pressured Japan to sign the Plaza Accord in 1985, with support from France, Germany, and the UK. The agreement aimed to devalue the US dollar by appreciating the Japanese yen. And within twelve months, between 1985 and 1986, the yen had appreciated by 46% against the dollar, significantly reducing US trade deficits. The Plaza Accord also encouraged Japanese corporations to invest abroad, solidifying Japan’s role as a dominant player in international capital markets, particularly in East Asia.
IV. Financial Deregulation and the 2008 Financial Crisis
In the 1990s, the US initiated financial deregulation, including the repeal of the Glass-Steagall Act, which increased market freedoms. This deregulation spurred speculative activities and short-term finance, ultimately contributing to the 2008 financial crisis. At the same time, it led to a decline in investments in production and manufacturing, as market participants sought higher returns in financial markets, securities, and real estate. The rise of speculative activities, including the purchase of junk bonds from financially troubled companies, undermined long-term investment and the growth of the real economy (Siddiqui, 2024b).
Over the past four decades, the US economy has undergone significant structural shifts, marked by a declining focus on manufacturing and an increasing reliance on financialization. As Desai and Hudson (2021:21) note, “the US was no longer an ordinary indebted country but the world’s banker, and its deficits were loans to the world, a public service the world should accept gratefully by lifting capital controls and deregulating finance. This attempt to normalize the transformation of the US economy from a super-creditor was never more than a barely adequate fig-leaf.”
V. The US Economic and Military Power and Dollar Hegemony
The hegemony of the US dollar is rooted in the country’s economic, military, and international political power and is sustained through market forces. This hegemony can be divided into two distinct periods: the Bretton Woods era (1946–1971) and the neoliberal era (1980–2024). While the foundation of both periods lies in US power, their underlying economic systems differ significantly.
During the Bretton Woods era, dollar hegemony was based on the United States’ dominance in manufacturing and trade. In contrast, the neoliberal era saw the reconstruction of the US and global economies, positioning the US as the centre of global capitalism and the most attractive destination for capital investment.
After the Second World War, the US dollar’s dominance stemmed from its economic strength in manufacturing and trade. However, beginning in the 1980s, dollar hegemony shifted to rely on neoliberal policies and globalization, solidifying the US as a unipolar world leader—particularly after the collapse of the Soviet Union in 1991. Despite this dominance, the 2008 global financial crisis exposed vulnerabilities in the developed economies. In recent years, the rise of emerging economies has rapidly reshaped the global economic landscape. A transition toward a multipolar world is underway, marked by the decline of Western hegemony and the rise of BRICS member (Brazil, Russia, India, China, and South Africa) alongside East Asian economies.
The 1970s marked a transitional decade of dollar distress, during which its hegemony waned. This period included global economic turbulence, an oil crisis, and a fourfold increase in oil prices. To address this challenge, the US forged a critical deal with Middle Eastern oil-producing nations, establishing the foundation of the “petrodollar” system. The US agreed to provide military assistance and protection to Saudi Arabia and other Gulf regimes in exchange for their commitment to conduct all oil transactions in US dollars. These regimes also pledged to integrate their economies more closely with the US.
At the time, Saudi Arabia and the Gulf countries were the world’s largest oil producers. Their adoption of the US dollar for oil transactions set a precedent that other oil-exporting countries quickly followed, solidifying the oil-dollar system. This agreement not only revitalized the dollar’s dominance but also reinforced the economic and geopolitical ties between the US and oil-producing nations, ensuring the dollar’s central role in global trade.
VI. Dollar Hegemony: Its Evolution and Foundations
The phenomenon of dollar hegemony has endured for seventy-five years, adapting to shifts in its operational basis over time. While power—in its various forms—has always underpinned currency hegemony, the mechanisms through which this power manifests are closely tied to the prevailing economic structure. Dollar hegemony can be understood as a system comprised of four key pillars: US economic power, military power, international political power, and financial dominance.
The phenomenon of dollar hegemony has endured for seventy-five years, adapting to shifts in its operational basis over time.
Economic power derives from the size of the US economy, its productivity, technological advancements, international trade and foreign direct investment, accumulated net wealth, and the global stature of its financial markets. Military power underpins this economic strength. During the era of sterling hegemony before 1914, Britain exercised its dominance through naval supremacy and “gunboat diplomacy.” Similarly, since 1945, the US has been the undisputed Western military hegemon, becoming the unchallenged global military power following the Cold War’s end in 1990 (Siddiqui, 1990).
International political power is reflected in the US’s diplomatic influence and “soft power.” After World War II, the US established the liberal international order, assuming leadership roles in key global institutions such as the North Atlantic Treaty Organization (NATO), the United Nations (UN), the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). This domination of global governance enables the US to structure international rules and policies to benefit its economy. For instance, the WTO’s intellectual property rights (IPR) framework significantly enhances corporate profitability, with the US benefitting disproportionately as the global leader in intellectual property production.
However, the foundational principles of the WTO—rooted in free trade theory—are flawed. They rely on Say’s Law, which erroneously assumes that aggregate demand is never deficient, markets are always balanced, and countries achieve full employment before and after trade. This idealized view fails to reflect real-world dynamics. Historically, such trade policies have been imposed by colonizers on the Global South, forcing these regions into competition and undermining South-South cooperation.
The US corporations also benefit from lower transaction costs, as they conduct business in their own currency, avoiding the expense of hedging against exchange rate risks. However, dollar hegemony tends to appreciate the US exchange rate due to increased global demand for dollars. While this appreciation reduces the competitiveness of US manufacturing, it lowers import costs, benefiting consumers and helping to maintain low inflation.
Perhaps the most notable advantage of dollar hegemony is the “exorbitant privilege” it provides: fiscal flexibility and freedom from external economic constraints. This privilege enables the US to fund overseas military interventions and sustain its geopolitical influence. The dollar hegemony rests on the US’s economic, military, and political power, reinforced by neoliberal economic policies. This system not only shapes global trade but also underscores the interconnectedness of power, policy, and currency in the modern global order.
VII. Perspectives on Dollar Hegemony and Imperialism
To ascend as a world currency, a sovereign currency must fulfil specific requirements from both supply and demand perspectives. From the supply side, the currency must demonstrate stability and be widely accepted as a reliable store of value. From the demand side, the currency must dominate international trade, restricting global transactions to its usage. Once a sovereign currency achieves world currency status, its monetary power extends globally, symbolizing control over the world’s social resources. The US dollar epitomizes this phenomenon. Backed by the United States’ robust economic and military strength, the dollar’s dominance forces global commodity transactions to be settled in US dollars, enabling the US to extract value from labour globally (Siddiqui, 2022a).
Marxist critiques, such as those by David Harvey (2003), provide a framework for understanding the structures of global dominance in the context of capital expansion. Harvey’s concept of “new imperialism” shifts the focus from traditional geographic or military conquest to the mechanisms of global capitalism. He argues that imperialism today is driven by capital’s need to find new markets, resources, and spheres of influence (Siddiqui, 2022a). This form of imperialism embeds economic exploitation and political control within global capitalism, sustaining Western hegemony through the interweaving of economic dominance and political influence (Harvey, 2003).
About the Author
Dr. Kalim Siddiqui is an economist specializing in International Political Economy, Development Economics, Trade and Economic Policy. Since 1989, he has been teaching economics at various universities in Norway and the UK. Dr. Siddiqui’s research interests encompass a wide range of topics, including political economy, international trade, and economic history, South Asia, and emerging economies. He has presented papers at international conferences across numerous countries, reflecting his global engagement in the field. His scholarly pursuits span six broad domains: Political Economy, Development Economics, Economic History, Economic Policy, Globalization, and International Trade. Dr. Siddiqui has made significant contributions to research in areas such as trade policy, globalization, and political economy. His work has been published in chapters of edited books and articles published in peer-reviewed journals. For inquiries, Dr. Siddiqui can be reached at: [email protected]
