Just about everybody has some idea that the United States currency, the dollar, plays an outsized role in the global economy. We might not interact with the dollar directly but it still weighs heavily on our financial lives.
One currency dominating the global economy is nothing new, nor did it begin with the United States Dollar (USD). About 500 years ago, the Spanish Empire imposed its coin (called Real) across the realm; the Dutch Guilder unseated it about 100 years later. The British pound took the guilder's place in the late 18th Century, just as the sun rose on our empire.
The sterling's imperial run lasted until 1914, the start of the First World War. For lack of a more dominant currency, the British pound got to keep the title until 1944, when a new empire arose to take its place.
This is the story of that empire's rise and the growing global resistance to it. Unlike resistance to empires past, there'll be no great battles and no gunships sailing the seven seas (we hope!). Instead, history will tell a tale of economic warfare and resistance that includes the following chapters:
- The rise of the United States as a global economic power
- Why and how nations began resisting the single-currency model
- The good and bad points of abandoning a 500-year-old global economic system
- What these upheavals mean for Great Britain and our lives
It's also the story of whether empire is inevitable. Must there be a dominant nation and a global reserve currency? Or has civilisation advanced so far that we can all get along without needing a 'global leader'? Read on to see why the latter might be the way forward.
How the Dollar Became King
Since its 'founding', the United States embraced isolationism. Birthing a nation is traumatic; those founders had much to contend with without inviting outside influences. Indeed, the fledgling nation had to fight off outside influences for much of its early history.
But global events repeatedly pushed this young nation into the spotlight; the Second World War, in particular. The US was the only neutral nation with any measure of economic power. As such it was compelled to help design our collective monetary future.
The war raged on in 1944 as nearly 750 delegates from around the globe descended on the state of New Hampshire. Their mission: to hammer out a postwar global economic order.
The Bretton Woods conference delivered what would become the World Bank and the International Monetary Fund (IMF), among other initiatives. Participants agreed that the US dollar should become the world's global reserve currency, albeit reluctantly. US representatives didn't give them any choice.
Leaders' unease was evident within a few years of the Bretton Woods system implementation. In 1968, trial runs against the US's pledge for gold-backed dollars crashed the London Gold Pool. In 1973, Belgium instituted the SWIFT cross-border payment system as a bulwark against the US-domiciled World Bank and IMF. But nothing could check, rival or unseat the dollar's power; the global economy was wholly dependent on it - then and today.
The dollar's history is vastly different from the story of our British pound despite formerly British citizens creating it. A lot of that has to do with the dollar being a far younger currency than ours.
The era and circumstances it commanded its starring role on the global stage matter, too. There's no use in speculating whether the US dollar would have commandeered economic systems if not for those particular conditions. That topic would make for a lively discussion, though.
The De-Dollarisation Initiative
The evidence shows that the US wasn't being altruistic in its desire to rebuild the global economy around its currency. As far back as 1823, the new nation's fifth president formulated what became known as the Monroe Doctrine.
It states that America will remain neutral to European powers but those leaders had better stay out of the Americas - both north and south. Already, the US was claiming territory for itself; did it have imperial aspirations from the start?
The 1929 Great Depression impacted the whole world even though it was an American economic event. That Depression became the catalyst for the Second World War.
Global distrust in the Bretton Woods system is further proof that the US may not have been aboveboard in its dealings. Records reveal that world delegates resented the US representatives claiming for themselves an outsized share of power. But they had no means of countering the US proposals. Needs were dire, time was running out and policy points had to find consensus.
Global 'dollarization' began in 1948 with the Marshall Plan, despite East-bloc countries and parts of Asia being left out. When the Bretton Woods system was finally implemented, the dollar became the world's reserve currency. Many conference attendees had objected to that condition but the US stood firm on that point.
The final strike against the Bretton Woods system came when the US unilaterally abandoned the gold standard. This event, called the Nixon Shock, came in August 1971 when the US president suspended the currency's convertibility to gold. From then on, every monetary system in the world issued fiat currency - a monetary system with nothing of value to back it.
Today, the US bears heavy criticism for manipulating global financial systems against other nations. But long-brewing resentments coupled with technology show a path towards finally ending this inequitable situation. It might not happen within the next year or two but every nation must prepare for this uncoupling.
The Pros and Cons of De-Dollarisation
Film catalogues are full of titles promising delicious revenge on a cruel master. Such fare includes school comedies where students win the day. And we can't forget about fantasy blockbusters featuring rag-tag teams of misfits who save the universe time and again.
But as strong as anti-dollar sentiment is, cheering for its overthrow should be done cautiously. This currency is deeply embedded into the world's economic system. Also, today's global economy is far more expansive and complex than when the British pound ruled the world.
For instance, commodities like oil, gold and grains are all priced in dollars. Moving away from that rate schedule will throw international markets in disarray. Foreign direct investment is far more prevalent these days, too. International markets and global trade aside, de-dollarisation presents other points to consider:
Advantages
- End the US's 'exorbitant privilege' and control over the global economy
- more economic stability
- stronger national currencies
- increased monetary policy independence
- freedom to diversify risks
Disadvantages
- limited acceptance of global currencies
- (short-term) economic turmoil
- lacking infrastructure
- transition challenges
In principle, reserve currencies are the foundation of international monetary theory. Swapping one currency for another to hold as a reserve might not impact the global economy too much. But nobody is talking about currencies from Russia, China or India - the most likely candidates. All the talk is about jettisoning the dollar with nothing concrete to take its place.
The economy abhors a vacuum as much as nature does. What will happen around the world if/when we abandon the status quo? What will happen to our currency if/when the dollar is unseated? Let's turn our attention to the pound sterling's future for a glimpse of what might come.
What De-Dollarisation Means for British Businesses
We've already experienced some of the turmoil that decoupling from an established economic system causes. Brexit impacted British businesses in many ways, some predicted and others unforeseen. Do you remember all those lorries backed up at the Dover port? Nobody thought drivers' packed lunches would become a cross-border issue.
Guest workers also became a flashpoint. German, Polish and Spanish talent routinely rotated through our ports and warehouses, offices and academic circles. Likewise, British businesses could set up satellite offices with no fuss in European countries. All that changed when Great Britain withdrew from the European Union.
Reducing global dependence on the dollar will have much deeper impacts. The dollar maintains its value because it is so widely used. It's a basic market principle: if something is in high demand, it has more value. Currently, the USD accounts for 83% all of global trade settlements; high demand, indeed!
As more countries abandon their reliance on the dollar, its value will decrease. However, international trade pegs currencies' value to the dollar's. Does that mean that as the dollar's value plummets, so will global currencies'? Nobody knows.
Technology may yet save the day. Already, several countries are trialling digital financial systems and currencies. Our government and Central Bank are a bit behind the curve; we only broached the topic in February of 2023. But things appear to be going full steam ahead with a Britcoin digital currency rumoured to make its appearance as early as 2025.
We can look forward to digital payment systems unseating traditional applications around the world, as well as the growth of central bank digital currencies. With that capability, it's not too far a stretch to believe that a global digital currency would eliminate the need for a reserve currency. We might call this 'world currency unit' the Bancor, to honour John Maynard Keynes' rejected Bretton Woods proposal.
Enjoyed this article? Leave a rating!
Loading...
