IMPACT OF US DOLLARS ON GLOBAL ARENA Essay, Research Paper

Europe after the second world war, had been left decimated for the second time within twenty years. With this unlike the previous war, the United States was now determined to insure their own economic security, as well was ready to aid Europe in any ways that were needed. The US however was not going to help unless they were asked to help by the European nations. The United States did not wish to force upon any other nation, the ideologies of the United States, nor to influence other nations against their will. As a result of American aid, the US dollar and the overwhelming demand for dollars from 1945 through the mid 1970’s shaped the world as we know it today. The ability of America to give financial support not only shaped Europe economically but politically as well. Europe through the 1970’s was constantly affected and shaped by US economic and political policy. Europe had become reduced to less than a first rate power for the first time and now had to look westward for the support that was needed in order to upright their economies

In 1944, the proposed Bretton Woods Agreement, was adopted and implemented. The Bretton Woods Agreement was the first of several economic policies that were introduced in order to help combat the problems that were facing the European economies. Under the Bretton Woods Agreement, the global currency exchange system was returned to the gold standard. now however the US Dollar was the benchmark, no longer was the British pound the world leader. This gold standard was set at 1oz. of gold equaling 35 American dollars, and all other currencies would fluctuate based upon the exchange rate of the US dollar. As well there was the creation of financial institutions such as the World Bank for Economic Recovery and the International Monetary Fund (IMF), both of which were established in order to help out recovering nations with economic and financial problems that arose due to the war.

Following the inception of the Bretton Woods Agreement, the economies of Europe were still facing serious financial problems, one sever problem was the perported “Dollar Gap”. This came about because Europe did not have enough Dollars in order to purchase badly needed American goods and supplies, since there was nothing that could be bought in Europe they had to turn somewhere to get items that were in need to rebuild the infrastructures of Europe. Since most all European currencies were worthless following the second world war, no US companies would trade with European countries because there was no way that the countries could pay for the items. As well the Europeans had no goods or raw materials that were needed by the US because the US’s economy had grown rapidly and dramatically while the other economies had been a war and able to produce only war supplies. Western Europe was now faced with a vexing problem, the situation was worsened because of the separation of Europe into two blocs. Previously Western Europe had been able to get supplies from eastern Europe, however after the Soviet Union annexed the eastern European nations, they west had become cut off from the world financially. Not only did Western Europe not have the funds in order to buy goods from the US, as well the money that they did posses was useless since the Soviet Union banned trade with non-Soviet economies. This spelled trouble on a grand scale for the economies of Western Europe.

Another problem that arose was the fact that countries such as Great Britain, France, Germany and Italy could in no way support their own currencies. Britain could no longer support the pound and had to rely heavily on the US for financial support in order to restore the tumbling pound. The US needed to conceive a plan that would stabilize the economies and currencies of the nations of Western Europe, while avoiding the decline of the US’ economy as an affect of aid to Europe. As a result there was a second set of monetary policies that were implemented; the Marshall Plan and the European Recovery Program. These plans were conceived because the Bretton Woods Plan was not enough, as a stand alone program, to help the European economies to the extent that they needed aid. The Marshall Plan worked because it was able to overcome the “Dollar Gap”. The Plan worked in two ways; there were actual dollar loans that were made to the European countries, as well the US purchased US goods from many manufacturers and gave them to the Europeans so that they could sell these goods in their own markets for the local currencies. The second phase allowed for the European economies to not rely so heavily on the US for badly needed funds. In order to receive this aid the US required these nations to cooperate with a joint European initiative, whereby all nations were required to cooperate with their neighbors. The idea behind this plan was to make the economies of Europe transparent, by telling the member nations what goods they can offer to one another. This would allow Europe the possibility of maximizing potential trade with one another and the fostering of co-operation between countries as to not rely so heavily on the US. This was the beginning of the rehabilitation of Europe.

Response to the US’ plan were mixed, for the most Western Europe had no problems or qualms with allowing the US to intervene in Europe, most in fact were fully energetic about the plan and very optimistic. With this Western Europe seized the opportunity to rebuild Europe again, this was there chance to rebuild a once mighty economy and to try to get back to the front of the pack in the global economic race. The Soviet Union however had problems they felt that such a plan would infringe upon the sovereignty of the Soviet Union by allowing no-European to meddle with European economics. The Soviet Union hastily responded with a series of trade agreements with the Eastern European satellite governments, in order to keep western influences out of the east. Wilza Gora felt that the European Recovery Program was designed to “enslave” Europe and that in now way would any communist nation participate. These policies caused the West and the East to move fundamentally in different directions of economic integration.

As well as the economic aspects the US influenced Western Europe politically as well. During the 1950s, Britain and France controlled the Suez Canal, as well as many other colonies in the Middle East and Africa and were struggling to retain their empirical hold over them. In 1955, the Baghdad Pact was signed, resulting in the loss of British control over Iranian oil reserves. For France, there was a continual bloody struggle for their control over Algeria. The US was opposed to the control of colonies by these two. When Nasser rose to power in Egypt there were serious problems looming on the horizon for both Britain and France. Nasser was, himself very much anti-colonial and wished the Europeans out of the Middle East. Nasser in an effort to drive the British and the French from Egypt signed arms deals with the Soviets. Through his newly equipped military, Nasser decide to nationalize the Suez Canal Company, a company jointly owned by both Britain and France. Britain and France wanted vengeance, even though the Suez Company had been nationalized the British and French did not wan to be cut off from middle eastern oil. Britain and France joined an alliance with Israel, through which Israel would attack Egypt and allow for the British and French to regain control of the canal. Britain and France tried to explain to the US that it was a peace keeping mission that they had been on, but it fell on deaf ears.

In response to Britain and France’s actions the US began applying economic pressures on the two nations, playing the bully the US got what it wanted in this case. The US began by placing an oil embargo on Britain so that they could not receive Texan oil, forcing the British to ration their current supply. The British Pound as well was placed under severe pressure as a result of the Federal Reserve Bank of New York selling Pounds when the British needed more support. Hubert Humphrey decided that Britain would receive no funding until they were out of the middle east entirely, the British promptly did so within a matter of weeks.

As a result of the US’ pressure France and Britain realized that they had become second rate powers in the world, and that they must have American support in any adventures outside of their borders. France and DeGaulle were outraged that they had to stoop so lowly for the aid that was extended to them. DeGaulle reinforced his efforts for European Economic Integration, so that France could again have some influence in Europe, a strong sense of nationalism began to spread in France as a result. DeGaulle was determined to destroy the bi-polar system that had developed in Europe through economic means. Starting in the 1960s, DeGaulle ordered banks to sell off all US Dollars that were held by France in exchange for gold. This eroded the value of the US Dollar since it was on the gold standard, thus hurting the US’ economy.

The “Dollar Gap” eventually became a “Dollar Glut”, this occurred because of accumulations of US Dollars in Europe as a result of increased military spending and US travel to Europe. As a result of too many Dollars in circulation the US economy took a major hit in the early 70s with terrific inflation that almost ruined the US economically. The Europeans as well felt the effects of this since their economies were based upon the US’ economy, and there was no room for shifting. The Europeans were tired of taking on the burden of the US’ inflation and demanded that the US go off of the gold standard in 1971. Accordingly an international monetary exchange system was implemented in 1973, based purely on the floating system were all currencies are judged against one another.

The United States’ Dollar was at one point in time the benchmark to which all other currencies were compared, a time when the US had very strong pull economically and politically in Europe. Through strong enforcement of policies the US manipulated Western Europe and steered them in the “right” direction as well through fiscal policy. The United States’ Dollar proved very effective in persuading other nations to react in the manner that we felt that they should to certain situations.