Some politicians act as if the military makes the U.S. the most powerful country in the world, but that is just part of America’s strength.  China reportedly has around 700,000 more active-duty soldiers and Russia’s military is about the same size as ours.  There are other qualities, however, that put this nation in a position of power that I believe are much more important – and I’ll get to that. 

But first, let’s look back to the end of World War II when the United States had become the world’s only true superpower.  Many European and Asian nations were in ruins due to the war, with their cities and manufacturing capabilities destroyed, particularly the defeated nations of Germany and Japan.  China was still a backward third-world country in 1945, struggling with a civil war.  The Soviet Union would become a lesser superpower in time, primarily because of its natural resources, its military and its nuclear weapons.    

Other than the tragic loss of over 400,000 lives, the major negative effect the war had on America was the massive deficit spending required to fund it.  But on the plus side, the U.S. manufacturing capability was in great shape, as was its infrastructure, much of which had been enhanced by President Franklin Roosevelt’s pre-war New Deal.  This nation was enjoying a stable government (which controlled most of the world’s gold), a productive economy and a strong currency, the all-mighty U.S. dollar.  Even before the war ended, these factors led to the critically important Bretton Woods Agreement in July 1944, named for the small resort town in New Hampshire where it was signed by 44 nations.

This agreement formed the structure of a new financial system for the global economy.  It also established the U.S. dollar as the “international reserve currency,” a position that it holds to this day.  My guess is that most members of Congress are not aware of the Bretton Woods Agreement, nor do I believe they understand all the benefits of our dollar’s status.

Why is the U.S. dollar so important?  Well, other countries treat it and dollar denominated securities (U.S. Treasury bonds, for example) almost like gold.   In fact, central banks in nations around the world held around 59% of their reserves (savings) in U.S. dollars or U.S. government debt instruments in 2022, according to the International Monetary Fund. 

High demand for the dollar enables the United States to borrow at much lower rates than other countries and more easily finance deficit spending.  American companies also have an advantage because they can conduct business in dollars without having to pay the costs of converting into other currencies.

Ever wonder why our government can impose sanctions on other nations, like Iran and Russia?  There are numerous ways, but one is because the Bretton Woods Agreement effectively gave the U.S. power over the international financial system.  The U.S. Treasury Department regulates access to and use of the U.S. dollar, which is the currency used for most international transactions, like crude oil, for example.  That is one reason why Russia’s Vladimir Putin and China’s President Xi, among other authoritarian regimes, want to end the global reliance on dollars.  And even some U.S. allies complain about the dollar’s dominant status.

Oh, but whenever there is a global economic crisis or troubling times, frightened foreign investors are eager to invest in the U.S., buying dollars and U.S. Treasuries.  Like sailors in a storm, they rush to the safest harbor.  Even in good times, foreigners own around 40% of U.S. corporate stocks, according to the Tax Policy Center and Federal Reserve data. 

A May article by the nonpartisan Budget Lab at Yale University summarizes why U.S. assets are so attractive.  Of course, it emphasizes the importance of the U.S. credit rating, its dollar, the nation’s large, highly productive economy and the safety and liquidity of U.S. Treasury securities.  But I believe the following two criteria also cited in this article correctly identify what truly forms the heart and soul of U.S. power, the U.S. Constitution and the system of government it established:

Independent institutions:

• The U.S. Federal Reserve (central bank) that underpins the U.S. economy and the financial system is credible and politically independent.

• The U.S. Treasury Department is staffed by professional career civil servants and finance savvy political appointees.

Legal & political stability:

• The American legal system is relatively fair and equitable (the rule of law prevails). 

• The U.S. has conducted over two centuries of mostly unblemished, regular elections. 

• The professional U.S. bureaucracy produces credible and highly respected data, particularly economic.

• The civilian controlled military does not get directly involved in American politics.

I believe the foregoing clarifies that democracy is what makes our nation powerful and that the U.S. dollar’s strength and status depend on it.  I am also confident that these criteria have allowed American capitalism to function as it has for over two centuries.

What I fear, however, is that many voters – including some friends who don’t read my posts – lack a clear understanding of what makes America great and what is at stake in November’s election.  So, in hopes that what I write will reach some of them, my blogs this summer will focus on information that I believe voters should consider before November’s election.  Hopefully, more of them will come to understand that nothing is more important than preserving U.S. democracy.