America’s Hollow Dollar Empire

A look at the future of De-dollarization...

Written by Jonathan Culbreath.

Edited by RTSG.

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Part I: The Spoils of War

Most empires in history have wielded credit as a tool of subjugation over the various states and colonies of their imperial dominion. As creditors, they would lend money at usurious rates of interest to their subordinate colonies, keeping them in a state of perpetual debt servitude. The modern-day empire of the United States is no exception to this rule.  Often through the medium of U.S.-dominated ‘multilateral’ institutions such as the International Monetary Fund (IMF), the U.S. lords it over countries in Africa or South America, for example, where the IMF provides high-interest loans on very narrow conditions—e.g., that public and natural resources be privatized and sold to American companies, labor wages be cut, and governments be ‘democratized’ overnight. The common result is that these and their inhabitants can no longer only consume their own resources, by buying them from an American company, and only with money that they have borrowed from an institution that follows American diktats. 

But this is not the whole story of U.S. financial imperialism. Michael Hudson, a prolific historian of American financial power and a former Wall Street banker, has told another dimension of this story. Hudson made his name as the author of Super Imperialism, first published in 1972 after the end of the Gold Standard, with a second edition in 2002, and a third edition most recently in 2021—each edition tracking real-time changes in the structure of the international monetary system. One of the central theses of Super Imperialism is that the U.S. has invented an additional and entirely novel role for itself as the world’s largest debtor. Unlike every other debtor nation, it can get away with leaving its debts unpaid, for its debtor status is a tool of power rather than a point of weakness. Indeed, it would not be an exaggeration to say that the U.S. practically forces other nations to provide loans to itself, on pain of leaving their national economies decimated and their populations reduced to poverty. Its ability to wield this form of power over the world is rooted in the centerpiece of its unipolar system: the global hegemony of the dollar. 

America’s unique ability to use its debtor status as a tool of domination has a long prehistory, originating in its more traditional function as top international creditor (a function which it still retains). After World War II, the American national economy was unquestionably the strongest in the world, while most of Europe’s economies had been weakened by war. Consequently, Europe found itself dependent on the U.S. in almost every way: not only did European nations depend upon American exports, but they also owed large war debts to the U.S., which they could not pay without also losing their ability to pay for American exports. It was therefore America’s time to shine as the benevolent leader of the free world. The internationalization of the U.S. dollar, by way of copious government loans and private investment abroad, was to be the symbol of America’s status as a beacon of liberty, the messianic rebuilder of the war-torn West.

The unparalleled economic strength of the United States after the wars meant that the reestablishment of world trade, while it might have appeared to be laissez-faire, would effectively be accomplished by the U.S. itself and on its own terms. In Michael Hudson’s words, “Given the fact that only the United States possessed the foreign exchange necessary to undertake substantial overseas investment, and only the U.S. economy enjoyed the export potential to displace Britain and other European rivals, the ideal of laissez-faire was synonymous with the worldwide extension of U.S. national power.” This meant that the U.S. government could effectively discourage foreign governments from being involved in the planning and regulation of their economies, while in the meantime it effectively planned and regulated not only its own but the economies of its client nations.

As not only the leading industrial power but also the main creditor to the whole world, the U.S. was thus in a position to structure the global economy largely in its own interests—as any monopoly power wants to do, even in a laissez-faire environment. European countries, as well as East Asian countries like Japan, would have little choice but to accept the terms of U.S.-led economic reconstruction, financed by a flood of gold-backed dollars, in order to afford not only their war debts but also their ability to consume American exports and rebuild their own industrial capacity. This arrangement seemed, for the time being, to be an overall benefit to the world economy over which America now presided. 

But things began to change as U.S. leaders realized that as long as the government’s balance of payments remained in surplus, receiving more from foreign economies than it spent into them, the desired reconstruction of the world fully under American control would not be materialized. It turned out that intergovernmental lending and private investments abroad simply could not add up to the desired outcome. Foreign monetary reserves were being dried out as governments around the world paid their debts to the U.S., and their ability to afford imports from America was thus still doomed to remain sub par. So the United States needed to figure out how to spend even more of its dollars abroad—specifically, how to push the balance of payments beyond surplus into deficit. 

This was accomplished when the U.S. waged a series of wars in Asia—namely the Korean and Vietnam Wars. The world was flooded with dollars at an exciting and alarming pace. At first this seemed to bring a needed element of stability to the world economy, allowing foreign governments to refinance their industries and pay back their debts. However, rising levels of deficit spending by the U.S. government, concentrated almost entirely on military spending abroad, eventually prompted an international run on gold in the 1960s. Governments around the world, including the French government headed at the time by President Charles de Gaulle, demanded payment. The U.S. gold supply began to run out, and America was soon approaching the precipice of bankruptcy as the result of its overambitious military spending, which showed no signs of abating. 

The grand solution to this mounting crisis came in 1971, when President Nixon officially decided to untether the dollar from gold, the tangible asset that had for so long backed the dollar. Suddenly, foreign nations with large dollar holdings could no longer turn in those dollars for gold. The only other option was to turn them in for U.S. treasury bonds. This was a neat trick: instead of owing a debt of gold to foreign economies, the U.S. now contrived a position for itself in which it owed them its own printed dollars, the assurance of whose payment was given in an IOU from the government: a U.S. treasury bond. Foreign central banks had no choice but to invest in these treasuries, because failure to absorb the constant influx of dollars would have put their own exports at a price disadvantage compared to U.S. exports. On pain of being priced out of the global market by American monopoly power, foreign governments were thus forced to become creditors to the United States. In this way the U.S. invented a new way to finance its own deficit spending: by borrowing back its own dollars from the governments of the world, who were therefore effectively forced to pay for the U.S.’s military exploits in Asia. In Hudson’s words,

Even as the United States became the world’s largest official debtor, it persuaded Europe, the Near East and East Asia not to use their own creditor positions to create an alternative to America’s regime of special trade and monetary favoritism. The ensuing half-century, 1971-2021, has seen foreign leaders subordinate their countries’ national self-interest to finance an increasingly indebted United States by investing their growth in international reserves in U.S. Treasury IOUs.

For most of the post-War period leading into the 1970s, the U.S. was by far the top industrial power on the globe, with the USSR as a close competitor. The U.S.’s power over the world economy was wielded through multiple avenues at once: as the top creditor to poor economies in the Third World, as top debtor to the countries of Europe and East Asia, and as the greatest industrial superpower on the global market. It was in the 1980s that the third plank of U.S. power underwent a significant shift, and the American economy entered into a phase of marked de-industrialization. 

In the final chapter of the 2021 edition of Super Imperialism, Hudson describes this process as the result, at least in part, of America’s emphasis on increasing foreign investment since the 1960s. In addition to forcing other countries to become its creditors, the U.S. government also sought to fund its deficit expenditures by generating revenue from foreign investment. Higher profit margins resulting from expanded markets, cheapening labor, and domestic financialization entailed larger excesses of wealth that could be used to fund the federal budget deficit, while generating interest for investors. Meanwhile, the balance of trade shifted into deficit, and instead of the world’s greatest exporter, forcing the world to be its customers, the U.S. became the world’s greatest importer, and the rest of the world was forced to rely on American consumption and capital investment. American companies moved their production facilities abroad, particularly to China, in pursuit of cheaper labor; and millions of blue-collar Americans were out of a job. (By a common telling, which Hudson corroborates, these events led to the rise of populism and the election of Donald Trump in 2016.)

Meanwhile, the domestic economy of the United States underwent a radical shift in the direction of financialization, a change which Michael Hudson has also documented in great detail in his 2022 book, The Destiny of Civilization: Financial Capitalism, Industrial Capitalism, Or Socialism. Hudson identifies financialization, along with government deficit spending, as another major cause behind the hollowing out of American industry. As the economy came to be dominated by rentiers and financiers, raising the costs of productive investment, productive industries were sent abroad in search of cheaper labor. American companies became multinational, with their headquarters at home and their factories in China or elsewhere. As Hudson writes: 

Today’s finance capitalism is not following a path leading to industrial dominance by lowering domestic price structures to bring them down to the actual necessary costs of production (that is, value). Just the opposite: private equity’s strategy is to buy out companies on credit, and then sell their assets and load them down with pseudo-costs (including new borrowing) to pay themselves dividends … The U.S. economy is de-industrializing. A rising share of wages and industrial profits is being paid to the financial sector and its allied insurance and real estate sectors, in the form of interest, financial and insurance fees, and privatized property rents.

To be sure, American wealth is still generated in large part by production—but by foreign production, arising from American investments abroad and generating profits in largely American consumer markets at home. Similarly, American consumption largely takes foreign goods as its commodities. The class inequalities of classical industrial capitalism are now spread between distinct countries or blocs across the globe, such that it is possible to argue that China, Russia, Mexico, the OPEC countries, and developing economies around the world now occupy the traditional position of the proletariat, as defined by Karl Marx, while the United States largely occupies the position of the classical bourgeoisie. But within the borders of the U.S. itself, wealth inequalities are not generated by this classical division between classes, defined by their proximity to the means of production; rather, such inequalities are produced by the sheer manipulation and upward redistribution of money flows at the hands of the rentier and financial aristocracy.

At the same time, the dependency of foreign exporter countries upon American consumption and investment constitutes an inversion of the older model, in which countries depended upon America precisely for its exports. Moreover, while the U.S. runs the largest trade deficit in the world, China runs nearly the largest trade surplus in the world—and the U.S. is China’s main customer. As an export-driven economy, China therefore requires a constant influx of foreign currencies, especially the dollar, in order to sustain its economy. Consequently, Chinese companies end up with large quantities of excess dollars, which they then take to a Chinese bank to exchange for their own local currency, the yuan. All dollars flowing through the Chinese economy thus make their way eventually to the Chinese central bank, the People’s Bank of China, which—following the debtor-oriented rulers of U.S. hegemony—typically invests them in U.S. treasuries, as a loan back to the American government. The latter’s balance of payments deficit is thus paid for, and the construction of thousands of military bases around the world is fully financed by debt. 

For decades, China and other countries have had no choice but to lend their dollars back to the U.S., but now for a unique set of reasons. Ever since the U.S. learned to wield its debtor position as a weapon of domination, foreign central banks have had to find ways to spend their excess dollars in order to keep their own export prices low compared to U.S. exports. What is unique about this situation today is that foreign countries must do this even though the U.S. is now in a trade deficit rather than a trade surplus. If they refused to accept dollars for their exports, they would ‘go out of business,’ having sealed themselves off from their main global market. But if they allowed dollars to flow in without limit, they would be priced out of the global market, being outcompeted even by a deindustrialized U.S. So they have no choice but to control the supply of dollars in their own economies by sending dollars back to America as loans to the U.S. government.

The asymmetry of this rigged system is evident from the fact that no other national currency enjoys this privilege: only the dollar has the power to decimate productive economies around the world simply by being oversupplied. It matters little that the productive capacity of the domestic American economy is itself waning: the real economy is diminishingly relevant to a financialized economy. Moreover, the U.S. benefits in every way from this arrangement. Not only can Americans enjoy unlimited consumption of cheap goods from China and reap unlimited profits from Chinese production, but they can also spend unlimited funds on consolidating their military presence around the world, adding the threat of violence to the threat of economic decimation in order to keep foreign nations in subjugation to themselves. 

Part II: The Prospects of De-dollarization

The United States has ensured that it need not pay back its debts to creditor nations around the world for a very long time, and last year’s agreement between Congress and the Biden Administration to suspend the debt ceiling only extended the life of this rigged system indefinitely. Partisan disputes in the U.S. over the exigencies of deficit spending are a distraction from the evident fact that the U.S. cannot give up its debtor status if it is to maintain its global hegemony, for its debt is precisely how it finances the immense sums of spending that go into building that hegemony. And it so happens that the preservation and extension of that hegemony is supported by the entire ruling class of America, regardless of their party affiliation or their moralistic talking points about the national debt. 

Nonetheless, the international dollar system on which America’s hegemonic debtor status rests cannot reasonably be expected to last forever. In a highly financialized economy, it may appear that this can go on to infinity—but the real economy is not so free of limitations. For one thing, the asymmetry of dollar hegemony has been put into sharp relief by the events following Russia’s Special Military Operation in Ukraine, in February, 2022, when Western nations around the world, led of course by the United States, responded to President Vladimir Putin’s invasion by imposing heavy sanctions on Russian oil. This did not work out very much to the advantage of anybody involved, including many European countries among the U.S.’s closest allies and trade partners, and instead contributed to a global rise in energy prices. 

It is increasingly evident to a growing majority of nations around the world that their subjection to the international dollar system has not worked out to their advantage. On the contrary, nations in the West that are characterized by high levels of consumption find themselves the victims of inflationary prices due to sanctions on Russian oil, or as the downstream effect of U.S. monetary policy. For nations that hold large debts to the U.S. or to U.S.-dominated multilateral institutions such as the IMF or the World Bank, the dollar system has made it increasingly difficult for them to pursue their own economic development and modernization. Owing large debts with extremely high interest, combined with the difficulty of obtaining loans without agreeing to restrictive environmental policies, has prevented these countries from investing in their domestic industrial bases, thus contributing to the immiseration of their poorer and working populations. This is undoubtedly fueling rising levels of resentment towards the U.S.-based architects of this usurious system.

Meanwhile, exporting nations that have been allowed some measure of internal development have nonetheless found themselves vulnerable to punitive trade restrictions imposed by the increasingly belligerent and authoritarian government of the United States. One of these countries is Russia, which—despite its precipitous economic decline since the fall of the Soviet Union—has acquired a position of key geo-economic importance due to its production of oil for export. Another such country is China, the single largest exporting nation in the world—and therefore one of the largest creditors of dollars to the U.S. government, holding one of the largest reserves of U.S. treasury bonds in the world (second only to Japan). China’s economy also suffered a round of punitive economic sanctions during the presidency of Donald Trump. President Biden has only extended and hardened his predecessor’s methods, in an ongoing attempt to push China into isolation from the global market. Accordingly, it is no surprise that Chinese leaders are wary of America’s increasingly aggressive approach, and are therefore eager to escape the rigid confines of the dollar empire. 

Happily for China, the Chinese economy has advanced to a position where it is now larger than the U.S., by some measures, and possesses a much stronger industrial capacity. Although for decades China has been dependent upon the U.S. dollar for trade and investment, which kept it unmistakably within the orbit of the American global imperium, the possibility of an international de-linking from the dollar system is quickly coming into sight. This is in large part thanks to China’s rapidly growing self-reliance in areas such as finance, infrastructure, science, and technology. No other modern country can boast such a rapid path to economic independence. At its advanced stage of development, China may even be in a position to benefit from the U.S.’s aggressive attempts to decouple. Although they have shown marked improvement over recent decades, the poor working conditions and brutally long working hours of millions of Chinese workers are the stuff of legend in Western countries. Ironically, now that China as a whole has developed an industrial base that is capable of standing up on its own, a forced decoupling may actually contribute to the improvement of quality of life for Chinese workers. For one thing, they may no longer have to work such long hours, since they will no longer be producing the goods and the profits of the Western world in addition to their own. 

Furthermore, as the West decouples from China it may inadvertently free up many of the latter’s productive resources to be deployed in developmental projects that China itself has now entertained for years, such as the extension of President Xi Jinping’s Belt and Road Initiative across the Eurasian continent and beyond. In a similar way, as many commentators have observed, the sanctions that the U.S. and other Western nations have imposed against Russia are already having the unintended effect of driving Russia and other nations only further into China’s arms, increasing the combined power of the BRICS bloc as a united front against U.S. hegemony. Thus, ironically, the punitive tools that the United States has in its hands in large part thanks to the international dollar hegemony may actually become an abettor of its own undoing. 

Indeed, countries within China’s expanding sphere of influence—such as those who are members of the BRICS bloc, the Shanghai Cooperation Organization, and the Belt and Road Initiative—are already experiencing certain modest gains from their alliance with China and independence from the U.S. The Belt and Road Initiative itself serves a purpose closely related to de-dollarization: to open up new avenues for Chinese investment as alternatives to U.S. government securities, thereby relieving the pressure to continue accepting the dollar as the sole means of building its wealth. From this perspective, China’s strong commitment to economic development and industrial modernization, particularly in the poor world and the ‘Global South,’ signals its desire to extricate itself from the ‘creditor trap’ in which it is forced to lend its excess dollars. Instead, those dollars can and have been spent on a wide-range of infrastructure projects across Asia and Africa, thereby contributing to the development of regional productive capacity and modernization around the world. While this does not immediately solve the problem of dollarization, it certainly contributes to an important preliminary stage to de-dollarization. Independence from the U.S. will require, if anything, concrete forms of regional economic self-sufficiency, such as those provided by more advanced infrastructure and technology. 

However, the ultimate success of such projects will depend on whether countries involved in the Belt and Road Initiative will be able to start using their own currencies or the Chinese yuan instead of the dollar. The development of a stable international alternative to the dollar remains one of the largest challenges facing these countries. To be sure, there have been great strides in this direction in recent months: China, Russia, Brazil, India, Kenya, Saudi Arabia, the ASEAN countries, the United Arab Emirates, and more, have already begun trading in their local currencies, with China decidedly leading the way. Yet a huge amount of progress still remains to be made in order for these measures to stick. The BRICS bloc as a whole, and the collective members of the Shanghai Cooperation Organization, have not yet reached the level of economic self-reliance and productivity that is necessary to back the value of their currencies against the dollar, not to mention withstand the levels of decimation that could be inflicted by U.S. sanctions.

Meanwhile, in Europe, public perception of America is shifting and realigning, though not yet enough to portend an imminent breakaway from American ‘super imperialism.’ Yet as the effects of forced decoupling from Russian oil proceed apace, Europe’s deindustrialization (already underway) will be rapidly accelerated, its dependence on American liquid natural gas exports will be heightened, and its servitude to the whims of the American financial and government elite will only be deepened. It was similar trends that produced the Western populist uprising of the late 2010s. The intensifying of such trends in the years ahead will certainly not alleviate the West’s internal polarizations, and it may even push certain European nations (e.g., Hungary) to seek new economic partnerships abroad, such as in China, free of America’s economic sphere of influence. This will very likely require the eventual attainment of freedom from the U.S. dollar. 

As I explained in Part I of this essay, the U.S.’s debtor position in relation to nations such as China, Japan, and European countries, has contributed to decades of military expansion around the world. The last-measure threat of U.S. military intervention lies ever at the limit of the world’s tense economic pressures, should they intensify to the point of combustion. Unfortunately, it is a danger to which the creditor nations of the world have been forced to contribute by accumulating large reserves of U.S. treasuries, as the only available way for them to absorb their excess capital. 

Ultimately, the only way to bring an end to this rigged system, which serves only the interests of the world’s largest debtor nation, is for creditor and exporter nations to transcend their dependency upon U.S. investment and consumption—to renounce, in short, their dependency upon the dollar. But this will require a renewed commitment to economic development and industrialization, free of the constraints on such development that are likely to be imposed by U.S. foreign policy. The only nation in the world with the capacity that can support such independence is China, whose leaders are well aware of the heavy burden of global development that rests on their shoulders. Countries struggling to maintain their independence from America would do well to factor this into their calculations.