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bidding process for buying Treasuries and the sales were excluded from the official auction totals. By 1977, Saudi Arabia had accumulated around 20 percent of all Treasuries held overseas. Remarkably, this arrangement remained secret for over four decades until a dogged journalist from Bloomberg News uncovered it through a Freedom of Information Act request in 2016.

Arguably, Saudi Arabia would have received a better return if it had invested in equities or in higher-yielding bonds. However, William Simon's instincts about the attractiveness of the safety and liquidity of US Treasuries had been spot on. What is more, what the Saudi regime received in return was far more valuable than the financial yield on its holdings. Under what would become known as the Carter Doctrine, the 39^th president proclaimed in January 1980:

       Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.

The Carter Doctrine was, in fact, a public renewal of a commitment that Harry Truman had made in a letter to King Ibn Saud in October 1950 that the US ‘is interested in the preservation and territorial integrity of Saudi Arabia’.⁸² America's increased thirst for Middle East oil by the 1970s committed it even more to maintaining security and stability in Saudi Arabia. William Simon's deal provided the financial means for the US to uphold that commitment.

This oil-for-dollars-for-Treasuries agreement was an early example of a type of vendor-financing arrangement that the US has effectively entered into with almost all major surplus countries with which it runs balance of payments deficits. As China emerged as an export juggernaut in the early 2000s, it too would accumulate large balances of US government securities, with holdings of US Treasuries peaking at $1.3 trillion in 2011, or just over nine percent of the US national debt at the time.⁸³

      These vendor-financing relationships have become politically controversial, as they are also seen as a means for large exporters to artificially hold down the value of their own currencies (by selling them to buy large amounts of dollars) in order to maintain their export competitiveness. Meanwhile, blue collar wages in the US have stagnated and manufacturing operations have been relocated to lower-cost countries. Equally, for large holders of dollar-denominated securities, continually growing US deficits have raised fears that the US would devalue their holdings through currency depreciation or higher inflation – or both.

Ironically, however, the huge amount of US Treasuries outstanding has enhanced the perception about their safety. In times of market turbulence, investors flock to US Treasuries because they are the most liquid asset class and are, in fact, safer than holding cash in the bank. In the US, the Federal Deposit Insurance Corporation (FDIC), created in 1933 to protect depositors against bank failures, insures deposit amounts up to $250,000 per depositor per insured bank.⁸⁴ For individuals or institutions with larger holdings, US Treasuries provide greater security because the US government is less likely to default than a bank. International regulations, such as the BIS’s Basel III rules that govern the capital and liquidity requirements of the global banking sector, have further enhanced the demand from major financial institutions by designating US Treasuries as ‘risk free’ for the purpose of calculating banks’ capital needs.

      The massive structural demand for US Treasury securities has given the US government almost unconstrained ability to borrow from international capital markets. As discussed further in Chapter 3, however, this capacity is a double-edged sword. The lack of constraints on public spending has contributed to poor prioritisation and overspending. On the international stage, overextension of US policy has led to conflict, while the scale of US borrowings from other countries has led to an accumulation of implicit and explicit international obligations. The demand for US Treasuries has also helped magnify demand for other private US securities and prop up the value of the dollar. This mispricing of capital has, over time, fundamentally impacted the allocation of resources both between the US and other countries, and within the US itself. As imbalances persisted, financial bubbles would inflate and periodically burst with dramatic social and political consequences.

Boom and Bust

      In 1980, Ronald Reagan successfully campaigned for the White House on a promise of smaller government. That promise proved to be empty, as US government deficits ballooned during his presidency. His enormous defence spending eventually exhausted the Soviet Union's ability to keep up, and it imploded amidst the popular dissatisfaction of its own people over the privations to which they had been subjected in the pursuit of dominance over the US. However, amidst the euphoria of the Wall Street boom of the 1980s and America's victorious emergence from the Cold War in the early 1990s, the US and the dollar appeared increasingly unassailable.

Reagan's free market ideology did not mean that his administration took an entirely hands-off approach to the dollar. His presidency witnessed growing domestic paranoia that Japan was poised to surpass the US economically. Following substantial dollar appreciation against other major currencies between 1980 and 1985, US manufacturers campaigned aggressively for government action to protect their export competitiveness. This led to the Plaza Accord in September 1985, under which the US entered into a joint agreement with France, West Germany, Japan and the United Kingdom (UK) to intervene in currency markets to force a depreciation of the dollar against the yen and the Deutschmark. Between 1985 and 1987, the dollar depreciated by around 50 percent against the yen.⁸⁵

The appreciation in the yen set off a buying spree by Japanese companies overseas. In September 1989, the Sony Corporation bought Columbia Pictures for $3.4 billion in cash, then the largest acquisition in the US by a Japanese company.⁸⁶ Two months later, Mitsubishi paid $846 million for a 51 percent stake in Manhattan's Rockefeller Centre.⁸⁷ In what has been seen as a symbol of the excesses of the time, the Imperial Palace grounds in Tokyo were famously estimated to be worth more than all of California. Popular consternation about Japan ‘buying up America’ reached a crescendo. Then the Japanese bubble burst. Since the end of 1989, Japan has fallen into seemingly perpetual economic stagnation.

      By the early 1990s, with its major economic challenger in decline and its major military and geopolitical rival collapsing, the US was at the zenith of its power. Even as new challenges began to mount up in subsequent decades, however, the dollar has gone from strength to strength.

The framework put in place by Harry White at Bretton Woods put the dollar at the heart of the global monetary system. Policies pursued by successive US administrations after WW2 enabled the widespread adoption of the dollar as the dominant currency for international capital raising and investment. Financial institutions, notably in the City of London, grasped the commercial opportunity that this offered, supported by local governments and regulators. As capital market flows came to far outstrip commercial trade flows and global payments and market infrastructure developed around the dollar-based system, the dollar's position in the global monetary order became more entrenched. By the time that President Nixon severed the dollar's tie to gold, there was no credible alternative to take its place.

      Paradoxically, the very undermining of the dollar's value caused by that decision enabled the US currency's international reach to widen further. This is because it freed the US from residual constraints on its balance of payments deficits, and the volatility it unleashed in financial markets precipitated the development and proliferation of derivatives. The US dollar is now not only the reference currency in which individuals and corporations all over the world conduct commerce and account for their asset holdings, but it has also become

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