The Four-Stage Evolution of the Dollar Anchor: The Power Code of the Global Financial Landscape

Authors: Li Jiange, Tian Yuan

In the grand structure of the global financial system, the US dollar has long occupied a central position, and the establishment and changes of the "dollar anchor" behind it profoundly influence the direction of the world economy. The dollar anchor is essentially the supporting foundation and source of credit for the value of the dollar, akin to the cornerstone of a financial edifice, establishing the dollar's status in the international monetary system.

Since the beginning of the 20th century, the dollar anchor has gone through four important stages of development, from the early gold-dollar, to the petrodollar, to the U.S. debt dollar, and now it is moving towards the exploration of the digital dollar. Each transformation is accompanied by a major adjustment in the international political and economic landscape, reflecting the strategic intention of the United States to maintain financial hegemony and control the global economic discourse at different times. An in-depth analysis of these four stages will not only help to understand the formation and maintenance mechanism of the US dollar's dominance, but also provide insight into the future reform trend of the global financial system, and provide a key reference for countries to formulate financial strategies and respond to external financial shocks.

1. Gold Dollar: The Brief Glory Under the Bretton Woods System

The two world wars reshaped the global political and economic map, and the United States took advantage of the fact that its homeland was not directly invaded by the war, and its industrial capacity developed rapidly, and its economic power expanded dramatically. On the eve of the end of World War II, the global economic order urgently needed to be rebuilt, and in July 1944, representatives of 44 countries gathered in Bretton Woods, New Hampshire, USA, to convene the United Nations International Monetary and Financial Conference. The conference established the Bretton Woods system, an international monetary system centered on the US dollar. The core of the system is the principle of "double peg": the US dollar is pegged to gold, stipulating that one ounce of gold is fixed at 35 US dollars, and the US government undertakes the obligation to exchange gold at the official price; The currencies of other countries are pegged to the US dollar, and their currencies maintain a fixed exchange rate with the US dollar.

The establishment of this system actually pushed the dollar to the status of an international reserve currency equivalent to gold. At that time, the United States owned about 75% of the world's gold reserves, and its strong gold foundation provided a solid credit endorsement for the dollar, making the dollar widely accepted in international trade and financial transactions. In essence, the Bretton Woods system is an international gold exchange standard, and the dollar has become a bridge connecting the currencies of various countries with gold, and the global monetary system operates around the core of the dollar, opening an era in which the dollar dominates the international financial order.

Under the Bretton Woods system, trade settlements were mostly conducted in US dollars. After earning US dollars, if there is no demand for US goods, the exporting country can choose to convert the US dollar into gold to increase its own gold reserves; The importing country needs to exchange its local currency for US dollars to pay for the import. In this process, the US dollar, as an international means of payment and a reserve currency, has promoted the expansion of international trade and the recovery of the global economy. The United States enjoys "excessive privileges" by exporting dollars to buy global goods and resources.

However, from the very beginning, the system had a fatal flaw, the "Triffin problem". American economist Robert Triffin pointed out that as an international reserve currency issuer, the United States faces two contradictory goals. On the one hand, in order to meet the demand for dollars in countries around the world, the United States needs to export dollars through a balance of payments deficit; On the other hand, in order to maintain the convertibility relationship between the dollar and gold, the United States must maintain a balance of payments surplus to accumulate gold reserves. With the development of the global economy, the demand for the US dollar continues to increase, the US balance of payments deficit continues to widen, and the pressure on the exchange of the US dollar and gold is increasing. By the end of the 60s of the 20th century, the continuous outflow of gold reserves in the United States has been difficult to support the huge demand for dollar exchange, and the gold-dollar system is crumbling.

In the 60s of the 20th century, the United States was mired in the Vietnam War, with a sharp increase in fiscal spending, high domestic inflation, and a sharp deterioration in the balance of payments. Other countries' confidence in the dollar has been frustrated, and they have exchanged dollars for gold, and the loss of US gold reserves has accelerated. On August 15, 1971, the Nixon administration announced the "New Economic Policy," ending the obligation of foreign governments or central banks to exchange dollars for gold in the United States. This landmark event marked the end of the fixed exchange rate system between the dollar and gold, and the Bretton Woods system collapsed. After that, the dollar exchange rate began to float freely, and the gold-dollar system became history. Although the gold-dollar system has only lasted for more than 20 years, it has laid the foundation of the US dollar in the international monetary system, and the subsequent evolution of the US dollar anchor has been carried out under its influence, laying the groundwork for the United States to build financial hegemony.

2. Petrodollar: The Deep Tie Between Geopolitics and Finance

After the decoupling of the US dollar from gold, the international monetary system was briefly in turmoil, and the US dollar urgently needed to find a new value anchor to maintain its international monetary dominance. At this time, oil, as the most important strategic energy source in the world, plays an increasingly prominent key role in the modern industrial system. In the early 70s of the 20th century, the international political situation was changing, and the Middle East, as the world's largest oil-producing region, was experiencing constant geopolitical conflicts. In October 1973, the Fourth Middle East War broke out, and the Organization of Arab Petroleum Exporting Countries (OPEC) took measures such as oil production cuts, embargoes, and price increases to combat Israel and its supporters, triggering the first oil crisis, and international oil prices soared from $3.01 per barrel to about $12 in 1974, and the balance of payments of oil exporting countries showed a huge surplus.

The United States has keenly seized this opportunity and has actively engaged in secret negotiations with Saudi Arabia and other major oil-producing countries in the Middle East. As the world's largest oil exporter, Saudi Arabia has a significant influence in the Organization of the Petroleum Exporting Countries (OPEC). In 1974, the United States reached an agreement with Saudi Arabia, in which Saudi Arabia agreed to use the U.S. dollar as the sole denomination and settlement currency for oil exports, and the United States provided military protection and economic assistance to Saudi Arabia, and promised to buy Saudi government bonds to help it build infrastructure. Subsequently, other OPEC members followed suit, and the petrodollar system took shape.

After the establishment of the petrodollar system, a unique closed-loop operation mechanism has been formed. In order to obtain oil, which is a rigid energy source, countries around the world must first hold the US dollar. This has led to a significant increase in the demand for the US dollar in international trade settlements, consolidating the US dollar's status as an international currency. Oil-exporting countries earn a lot of dollars from exporting oil, and these dollars are known as "petrodollars". Due to the single domestic economic structure of the oil-exporting countries, they cannot absorb such a huge amount of funds, and most of the petrodollars flow back to the US financial market to buy various assets such as US Treasury bonds, stocks, and real estate. The U.S. uses the repatriated petrodollars to continue to import global goods and services, maintain its consumption-driven economic model, and redistribute petrodollars into the global economic system through monetary policy and financial market operations.

For example, oil-exporting countries deposit petrodollars in U.S. banks, which lend those funds to other countries for oil imports or investments, and the money circulates around the world. In the process, the United States not only controlled the pricing and settlement power of the global oil trade, but also absorbed global capital through the financial market, further strengthening its position as a financial center. At the same time, the United States maintains stability in the Middle East through military force and ensures the normal functioning of the petrodollar system. The United States deploys a large number of military forces in the Middle East to exert political influence on Middle Eastern oil-producing countries, and once there are destabilizing factors in the region that threaten the petrodollar system, the United States will quickly intervene, such as launching the Gulf War, to safeguard the core interests of the petrodollar system.

The petrodollar system has had a profound impact on the global economy. On the positive side, it provides a stable supply of energy and financial support for global economic growth. Stable oil trade is settled in US dollars, which promotes the development of international trade, consolidates the status of the US dollar as an international payment and reserve currency, and promotes the integration process of global financial markets. The large amount of petrodollars accumulated by oil-exporting countries, by investing in financial assets such as U.S. Treasury bonds, provides cheap money for the United States, supports the fiscal deficit and economic development of the United States, and also provides some external sources of financing for other countries.

However, the petrodollar system also has a number of negative effects. The price of oil is closely linked to the exchange rate of the US dollar, and the depreciation or appreciation of the US dollar will directly affect the volatility of oil prices and increase the uncertainty of the global economy. When the dollar depreciates, the price of oil in US dollars rises, triggering imported inflation and shocking the economies of other countries; Conversely, a stronger dollar could lead to lower revenues for oil-exporting countries, affecting their economic stability. In addition, the petrodollar system exacerbates global economic imbalances. The United States has been in a trade deficit for a long time, relying on the return of petrodollars to maintain economic functioning, while other countries have to export large quantities of goods in order to obtain dollars, resulting in a growing global trade imbalance. At the same time, the large inflow of petrodollars has made the economies of some oil-exporting countries overly dependent on oil exports, with a single economic structure and weak ability to resist risks.

III. US Treasury Dollar: Credit Support Driven by Debt

Since the beginning of the 21st century, the international political and economic landscape has undergone profound changes. On the one hand, the rapid rise of emerging economies, their contribution to global economic growth, the gradual diversification of the international trade pattern, and the impact on the petrodollar system. On the other hand, the structure of the U.S. economy has changed, the proportion of the financial services industry in the economy is increasing, and the virtual economy is over-inflated. In 2008, the subprime mortgage crisis in the United States erupted, which quickly evolved into a global financial crisis that hit the global economy hard. During the crisis, the U.S. government adopted a large-scale quantitative easing policy to bail out the market, the fiscal deficit climbed sharply, and the size of the national debt ballooned rapidly. The total U.S. national debt exceeded $34 trillion for the first time on December 29, 2023, and if this debt were distributed to the American people, the per capita debt would exceed $100,000.

In this context, U.S. bonds have gradually become a new important support for the dollar. With its strong national credit and the world's most developed financial market, the United States has made U.S. bonds a "safe asset" in the eyes of global investors. In order to maintain and increase the value of foreign exchange reserves, countries around the world have purchased a large number of U.S. bonds, and the U.S. dollar bond system came into being. The U.S. bond dollar system is essentially based on the credit of the U.S. state, and absorbs global funds through the issuance of treasury bonds to maintain the dominance of the U.S. dollar in the international monetary system. Through the monetization of the fiscal deficit, the U.S. government sells Treasury bonds to the Federal Reserve and global investors, and the Fed buys Treasury bonds and puts in base money to increase market liquidity, allowing the dollar to flow continuously to the world.

The U.S. Treasury dollar system operates based on the trust of global investors in the creditworthiness of the U.S. nation. As the world's largest economy, the United States has abundant resources, strong scientific and technological innovation capabilities, and military strength, and is considered to have a strong ability to pay debts. U.S. Treasury bonds are highly liquid and have relatively stable returns, which attract global investors. Central banks use U.S. bonds as an important part of their foreign exchange reserves to maintain the stability of their currencies and their ability to make payments. For example, countries such as China and Japan have long been major foreign holders of U.S. Treasuries.

When the U.S. government runs a fiscal deficit, it raises money through the issuance of Treasury bonds. Treasury bonds are offered globally, and when foreign investors buy U.S. bonds, U.S. dollars flow back to the U.S. The United States uses these funds to stimulate economic growth through domestic infrastructure construction and social welfare spending. At the same time, the Federal Reserve regulates through monetary policy, which affects Treasury yields and market liquidity. When the economy is in a downturn, the Fed buys a large number of Treasury bonds through quantitative easing, which lowers the yield of Treasury bonds, reduces the financing costs of enterprises and governments, and stimulates investment and consumption. When the economy is overheated, it will raise interest rates and other means to raise the yield of government bonds, attract capital back, and curb inflation. In this process, the U.S. dollar circulates around the world through U.S. bonds, maintaining its status as an international currency.

Although the U.S. bond dollar system has maintained the dominance of the U.S. dollar for a certain period of time, it has many hidden dangers and faces severe challenges. First, the size of the U.S. national debt continues to rise, the fiscal deficit continues to widen, and the debt service pressure is becoming increasingly heavy. High debt interest payments have tied up a large amount of fiscal funds, squeezed other public spending space, and weakened the U.S. government's ability to respond to economic crises and social problems. Second, the U.S. national credit has been eroded. In recent years, the arbitrariness of the U.S. government's fiscal policy, such as the debt ceiling dispute, has been frequently staged, raising concerns about whether the U.S. will default. In addition, some unilateralist behavior of the United States in international affairs has also reduced its global credibility and affected investors' confidence in U.S. bonds.

Moreover, the global trend of de-dollarization is gradually emerging. As emerging economies have grown, they have become increasingly dissatisfied with the hegemony of the US dollar and have sought to reduce their dependence on the US dollar. Some countries have begun to promote local currency settlement, strengthen regional currency cooperation, and reduce the proportion of US debt holdings. For example, China has signed currency swap agreements with a number of countries to promote the use of the renminbi in cross-border trade and investment. Russia has sharply reduced its holdings of U.S. bonds and increased its gold reserves. If not resolved, the stability of the U.S. debt dollar system will be seriously threatened, and the dollar's international monetary status will also be shaken.

4. Digital Dollar: The New Battlefield in Future Finance

With the rapid development of digital and blockchain technology, the global currency form is ushering in profound changes, and the wave of digital currency is sweeping. Since 2009, the market has gradually developed a distributed ledger currency network, and a new type of currency has been born, digital stablecoins. Due to the reserve status of the US dollar in the international monetary system, the digital currency of distributed ledger has also formed a dollar-denominated ecology in the process of development. The 1:1 exchange between the digital dollar and the fiat dollar dollar, and the use of U.S. bonds and U.S. dollar-denominated assets as reserves to ensure payment, has virtually reshaped a new type of U.S. dollar application scenario and U.S. debt storage space, reversed the weakness of the U.S. dollar bond in recent years, and injected new value support into the U.S. dollar.

According to the 2024 VISA survey report, the market value of digital dollar stablecoins has grown from billions in 2020 to more than $200 billion in 2024, and the settlement amount in the first half of 2024 alone will exceed 2.6 trillion US dollars, and the number of user addresses will exceed 100 million, radiating to many countries and regions around the world. The digital dollar has the characteristics of anonymity, portability, and cross-physical region restrictions, and has strong expansion potential. At the same time, digital network decentralized finance (DeFi) and RWA tokenization (such as Ondo Finance's tokenization of U.S. bonds and direct sales to non-U.S. retail investors and institutions) have the possibility of migrating traditional financial markets to blockchain networks in the future, and its ecosystem mainly uses digital dollar transactions and settlements, which further expands the depth of the digital dollar system. The new application scenarios of the digital dollar, the support of its reserve assets for the dollar, and its expansion potential based on blockchain technology have created an ecological opportunity for the development of the digital dollar.

In addition, in the real environment, the United States is already facing the real challenges of the US debt ceiling dispute, the widening fiscal deficit and the surge in debt service pressure, and the US dollar objectively needs to seek new value support tools to maintain its international status. In terms of time window, 2024 is the U.S. election, and the number of people who hold and trade digital currencies in the United States is close to 100 million, and they are mainly young people, and the Trump team needs to win over this part of the voters to enhance the campaign chips. As a result, under the combined effect of market ecology, practical pressure and political competition, since Trump was elected president, the United States has reversed the attitude of denying and suppressing digital currencies in the past, including during his first term, to actively supporting and promoting regulatory legislation, and at the same time high-profile announcement to become a world leader in the digital currency industry. The digital dollar anchor strategy was thus established. As U.S. Treasury Secretary Bessant said, "We want to strengthen the dollar's position as an international reserve currency, and we want to achieve this through digital stablecoins."

The current overall construction of the digital dollar system in the United States is to incorporate the digital currency ecology that has grown savagely in the past into the compliance supervision system to ensure that the development of the digital currency industry is in line with the national interests of the United States. This can be roughly understood as building a "contractual relationship" between the US dollar and the digital currency network, which is similar to the contractual relationship of the "petrodollar", that is, the application scenario of solidifying the US dollar. On this basis, we will gradually guide digital assets to become mainstream assets and expand their global application scope. Together, they form the overall construction path of the digital dollar anchor.

The difficulty lies in the fact that the regulatory framework adapted to the traditional monetary and financial systems in the United States and the regulatory framework of the digital ecosystem currently being built will objectively form two sets of parallel systems and rules, the former needs to be stable and rigorous, and the latter needs to be innovative and flexible.

ON MAY 19, THE U.S. PASSED THE U.S. STABLECOIN INNOVATION GUIDANCE AND ESTABLISHMENT ACT OF 2025 (GENIUS ACT), WHICH CLARIFIED THE REGULATORY REQUIREMENTS FOR DIGITAL STABLECOINS FOR THE FIRST TIME. At the same time, the United States is also actively exploring the possibility of digital assets being included in the reserve, and the Trump administration signed a presidential executive order on digital assets on January 23, and at the federal and state levels, as well as at the level of regulatory agencies such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Commodity Futures Trading Commission, to promote a three-dimensional and multi-dimensional regulatory framework and implementation rules for digital assets. These initiatives represent a substantial beginning in the construction of the digital dollar system.

In addition, there are many other considerations for the launch of the digital dollar. At the technical level, how to ensure the security, stability and privacy protection of the digital dollar system is a key issue. Digital currency transactions are easy targets for hackers, and once a security breach occurs, it will lead to serious loss of funds and leakage of user information. At the policy level, the digital dollar could have an impact on the existing monetary policy and financial regulatory system. The issuance of the digital dollar may affect the statistics and regulation of the money supply, and interfere with the interest rate policy. How to effectively supervise the issuance, circulation and use of digital dollars to prevent money laundering, terrorist financing and other illegal activities is also a difficult problem that needs to be solved urgently. At the same time, the international promotion of the digital dollar may trigger geopolitical games, and other countries may fear that the digital dollar will strengthen the financial hegemony of the United States, so they can take corresponding countermeasures and increase tensions in the global financial sector.

Looking back at the four-stage evolution of the dollar anchor, from the gold exchange standard of the gold dollar, to the geopolitical and financial binding of the petrodollar, to the debt credit support of the US debt dollar, and now to the exploration of the digital dollar, every change is a strategic choice of the United States to adapt to the changes in the international political and economic situation and maintain financial hegemony. The evolution of the dollar anchor has not only profoundly changed the global financial landscape and affected the economic development and financial stability of various countries, but also reflected the growth and decline of the global economic balance of power and the changes in international political relations.

At present, the global economy is in a period of deep adjustment, with the rise of emerging economies, frequent geopolitical conflicts, and a surging wave of digital technology revolution, and the international monetary system dominated by the US dollar is facing unprecedented challenges. The inherent contradictions of the U.S. bond dollar system continue to accumulate, and the future of the digital dollar is full of uncertainty. In this context, all countries should have a deep understanding of the evolution of the US dollar anchor, actively adjust their financial strategies, strengthen financial innovation and cooperation, and enhance their financial strength and anti-risk capabilities. For China, it is necessary to accelerate the internationalization of the RMB, improve the financial market system, promote the research and development and application of digital currency, seize opportunities in the reshaping of the global financial landscape, enhance the international financial discourse, and contribute China's strength to global economic and financial stability and development. In the future, the global monetary system may develop in the direction of diversification, and a new monetary order is being born, and the continuous evolution of the dollar anchor will be a key variable in this process, which deserves continuous attention and in-depth study.