The World Exchange in the Post USD World

The Genesis of Money

Money is essentially a mean for value exchange aka trading among individuals, groups, corporations or nations. It is a third party middle man, a medium that we all can believe in regardless of gender, ethnicity, religion, nationality or age. Money does not discriminate. It is one of the human greatest inventions to exponentially foster collaboration in large number. Chimpanzees do not have a monetary system and we do not see chimpanzees exchange bananas either.

Nowadays, not a single human knows exactly how to make a pencil. And for sure, no one or even a nation can make a Boeing without importing manufacturing parts from another nation. However, with the help of money, we can all work together without knowing each other in order to collaboratively create a pencil or a space rocket.

Money has many forms throughout its history from seashells, hand-made stones to copper, silver and gold coin, fiat or paper money and mostly digital in the modern banking system.

From the medieval age, gold becomes a common medium of exchange across different cultures. Gold has certain properties which make it a great medium of exchange or a great form of money. It is wanted and sought after across different cultures and nations. The Chinese wants gold, the Spanish likes gold, the Persian values gold. It is difficult to fake or easy to test the purity level. It does not go bad and can last for thousands of year or essentially forever.

It is easy enough to move and transport at the medieval to pre-modern age requirements. It has limited quantity but available large enough across different geography. The crave of this easy to believe in medium of exchange led to the Spanish colonization of the American continent, as well as the Gold Rush of the California Wild West.

Until the modern day, GOLD still serve as an irreplacable cross-border mean of exchange that staying reliable even in the time of wars and chaos that the Federal Reserves of United States, Central Bank of China, Russia and European Union can settle their post-wars gain and loss with each others.

The Invention of Paper money

Fiat or paper money was first invented in China. Kublai Khan, the Mongolian emperor of China, founder of the Yuan Dynasty created the Jiaochao as the national currency, essentially created the first predominant circulating paper money system. Kublai Khan ensured the paper money credibility by confiscating all gold and silver and forced all traders to accept his paper money or being executed. This early form of paper money was not backed by gold but backed by milliary power.

First time in history, the monetary system or the medium of exchange is fully controlled by the central state. However, paper money with its unlimited potential quantity as well as lighter weight fostered commerces across the Mongol Princes's Empires along the Silk Road from Asia to Europe. However, the forceful introduction of paper money did not gain popularity everywhere. It led to the collapse of trade in Persia during 1294 and only lasted for around 300 years in China and then disappeared after 15 century.

In 1661, The Kingdom of Sweden issued the first paper money in the West but this fiat currency was also a failure because of the rapid inflation it causing and only lasted until 1776 and they have to return back to the commodity currency of gold and silver.

In 1821, the United Kingdom adopted a fiat currency system backed by Gold and for the first time we have a monetary system that achieves both the easy to transact strength of fiat currency as well as the stability value unit of gold. Other Western powers gradually adopted gold-backed fiat currency with Germany in 1871, Sweden in 1873, the United States in 1873 and France in 1874.

To put the monetary system into afterburner mode, in 1931 Britain temporary abandoned the gold-backed fiat monetary system to pay off its World War I expenses and prepare for its World War II effort and other countries gradually got off the gold standard following Britain with the FDR signed the Executive Orders to forcefully borrow golds from American publics in exchange for the Government I Owe You Dollar notes.

After World World II, the United States emerged as the major winner with its massive industrial and military strength as well as limited damage to its critical infrastructure. With the Bretton Woods international monetary agreement of 1944, every currency fixed their exchange rate to US Dollars. The world switched from Gold-backed currencies to US-dollar backed currencies.

US Dollar as the World Reserve Currency

So does everyone believe in US Dollar after Bretton Woods agreements? Not really. By early summer 1944, World War II has decisively turned against Germany. After the successful Crimean Offensive by the Soviet from April 8 to May 12, 1944, the outcome of World War II has been decided. German has been pushed back everywhere across Eastern front and the Soviet Forces were racing toward Berlin. Finally, Britain and US forces entered WWII with the D-Day landing at Normandy, France on June 6, 1944 during Operation Overlord.

Less than a month later only July 1, Allied nations met at the The Bretton Woods conference to draw out a reconstruction plan. The result was the creation of two today modern organizations: the IMF and the World Bank. The World Bank will lend out money to rebuild Europe after World War 2 while the IMF will ensure global financial system can ultilize US Dollar as their global trade currency smoothly.

The original agreement was that the US Dollar would be pegged to Gold at $35 per Troy ounces and every other countries’ currency would be pegged to US Dollars with the IMF as the organization to keep the exchange rate stable. Also all World Bank reconstruction loans would be in US Dollars.

Following the Bretton Woods agreement, the world rapidly recovered from World War II with most Western industrialized nations reached their pre-war GDP by 1960s. We already experienced a very stable financial system with very few banking crises during the Bretton Woods era. Bretton Woods system last from the 1940s - 1970s.

The Great Society Programs by Johnson and the rise of US military spending in Vietnam led to the excessive amount of US dollars in circulation and US dollar value against gold was quickly declining. The United States did not have the money to keep buying more gold to peg keep the conversion rate of the US Dollar per Troy ounces gold at 35$. Inevitably, in 1970 Richard Nixon removed US Dollars from the Gold standard and since then we are having a free-float currency exchange system, a perpetual entropy of the global financial market.

Responding to this OPEC readjusted the oil price to gold instead of the US dollars to adjust to the additional US dollars being flood into the market which is the true reason behind the oil shock of 1973. The European Union was also later then created in 1993 in response to the collapse of the Bretton Woods agreement with the EURO as the region new currency. However, with wars in the Middle East, the COLD War and Russian threats, eventually Oil Price and the EURO monetary policies stil have to be highly synced with the US Dollar money supply instead of Gold.

Since 1995, Chinese export-driven economy with United States consumers as their main buyer pegged the Chinese Yuan to US dollar at fixed rate to keep domestic inflation in check, foster trading with other nations and fund the building of American military instead of building a comparable one domestically.

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