The Bretton Woods system institutionalized the US dollar as a global reserve currency, with the US pledging to buy and sell gold from foreign governments and central banks at a fixed price of $35 per ounce of gold. The reserve currency role of the dollar was predicated on the belief that there would not be a rush to exchange dollars for gold, that is, on an expectation of stability in the gold price of dollars, which in turn was based on an expectation of stability (at least over time, barring short-term fluctuations) in the dollar prices of commodities. As long as this expectation lasted, the US could spend as much as it liked, since the rest of the world was ever willing to hold dollars and dollar-denominated assets. When these expectations got undermined because of inflation in the US, following the escalation of the Vietnam War, the Bretton woods system collapsed.

After a transitional period however the dollar regained its supremacy, and though no longer convertible to gold at a fixed price, it resumed its role as de facto world money. This role, reflected in the dollar’s pervasive use as a medium of circulation in world trade, including above all in oil trade, and hence also as a form of wealth-holding, was based on the expectation of a stability in its value vis-à-vis the world of commodities. This naturally conferred a special advantage on the US, since it could borrow from the rest of the world and spend as much as it liked; and for a long time the rest of the world’s reaction to this advantage was “so be it”.

This role of the dollar however got weaponized over time, when the US began taking advantage of the holding of dollars and dollar-denominated assets by the rest of the world, to impose its diktat on the latter. At that point it ceased to be just a reserve currency conferring an economic advantage on the US, but became a dangerously powerful instrument used in a completely cynical manner for arm-twisting.

This happened first in 1979 when President Jimmy Carter impounded, though he stopped short of confiscating, Iranian assets worth $12 billion following the so-called “hostage crisis”. It was clearly an act of international brigandage, which has been repeated umpteen times since then. The fact that the currency of the US is the form in which wealth is held by much of the rest of the world, does not give the US any legal or moral right to impound this wealth whenever it fancies, just as within a country the fact that the currency that circulates is the liability of the central bank does not give the government or the central bank a right to impound anyone’s cash-holdings at will. But taking advantage of the fact that all dollar transactions, no matter where they occur, whether they occur inside the US or outside, have to be routed through what are called “corresponding” American banks, the US has simply arrogated to itself the right to freeze foreign dollar assets and to use this illegitimately-acquired leverage to arm-twist countries into obeying its diktat.

The dollar in short has become explicitly a tool of American imperialism. If the US is at loggerheads with some country, then it simply imposes unilateral sanctions, not backed by the United Nations, against that country, and impounds the dollar holdings of that country through this mechanism of “corresponding banks”. A country that has recently been subjected to this treatment is Russia: nearly $300 billion of its foreign exchange reserves have been impounded by the US and its allies in the European Union, as part of the sanctions imposed on it in the context of the Ukraine war. Likewise Iran’s foreign exchange reserves worth anywhere between $100 to $150 billion have been impounded by the US that has launched a war against it together with Israel, though this sum has been held largely in banks outside the US, including ironically in banks located in India and China.

This shift in the role of the dollar, from being a reserve currency to being an explicit weapon of US imperialism used against any country that dares to defy the US, has added urgency to calls for “de-dollarisation”. This was evident at the recently concluded BRICS summit in New Delhi, where Russia, China and Iran, with different degrees of emphasis on different aspects, prioritised the need for resistance against the regime of unilateral sanctions imposed by the US, and the need for an alternative trade and financial arrangement; the call in this context was for the use of local currency in intra-BRICS trade, whose magnitude was recognized as needing significant expansion.

This was not just a call for a fairer arrangement that would benefit countries of the Global South; it was more explicitly directed against the incubus of unilateral American sanctions imposed on countries that do not toe the American line, and the freezing of the dollar assets of such countries. India, while agreeing generally with the need for expanding trade within BRICS and using local currencies, remained mute, alas, on the question of opposing the freezing of dollar assets. More generally, while India under the NDA government opposes unilateral sanctions not backed by the UN, it does not openly criticise the US for impounding dollar assets of sanctioned countries; the External Affairs Minister has even expressed himself against “de-dollarization”!

One must not of course underestimate the difficulties associated with local currency-use in intra-BRICS trade. If this trade is to be based on the use of multiple currencies, then the avoidance of speculation requires that the currencies should have exchange rates vis-à-vis one another that are more or less stable. For this stability to be maintained over time, however, the rules of adjustment for balance of payments deficits and surpluses have got to be different within BRICS compared to what they are under the existing international arrangement. Internationally at present it is the deficit countries that are forced to adjust by reducing their levels of activity for eliminating trade imbalances; so, the poorest countries in the world are forced to undertake “austerity”. A far more sensible and humane arrangement would be if the surplus countries are made to adjust; if their domestic demand increases, then their trade surplus would fall and, with it, the trade deficit of the deficit countries. Hence if intra-BRICS trade is to expand based on the use of local currencies, then the “rules of the game” must be different from what they currently are internationally. Simply greater use of local currencies will reproduce within BRICS the same contradictions that currently afflict the international trade and payments system.

The bilateral trade agreements that India used to have with the Soviet Union in the decades after Independence, need re-examination for purposes of emulation in this context. That trade was largely carried out by public sector enterprises on both sides, which, if practiced on a significant scale now, can in principle reduce the scope for currency speculation. Besides, since unsettled surpluses and deficits were carried over, this was analogous to automatic supply of credit by the surplus to the deficit country.  And since these surpluses and deficits were eliminated over time through appropriate purchases, the question of the deficit country alone having to practice “austerity” for eliminating its deficit did not arise. The Indo-Soviet trade agreement therefore was not bedevilled by the problems that countries of the Global South face today under the existing international arrangement. The expansion of intra-BRICS trade on the basis of local currencies, could occur today initially through bilateral agreements among member countries along the lines of the Indo-Soviet bilateral trade agreement.

It is instructive that while the expansion of intra-BRICS trade through the use of local currencies, which would play a salutary role by cutting out the role of the dollar as a medium of circulation in such trade, was much mentioned at the BRICS summit, the practical problems associated with it were not discussed. This only shows the long way that BRICS has to go before becoming a significant force in the global arena. In fact given its diverse nature, marked by the presence of pro-imperialist countries within it, whether it will at all go the distance remains a moot point.