Nothing is replacing the greenback anytime soon.
The Economist recently published a brilliant Special Report on the fragmenting in the global financial system. It’s as in-depth as they always are over there, with an entire section devoted to the attempts to dethrone the US greenback as the global reserve currency. I’m not questioning their analysis but the answer may be simpler than economists and quants suggest. If you want to expand beyond barter, you need some unit of exchange and for most of history gold did the trick. About the middle of the nineteenth century, when the capital-intensive industrial revolution got chugging along, it became the pound sterling. Then Adolf Hitler came along.
Now it’s the smiling dollar, and that is not likely to change anytime soon for a simple, cross-border heuristic - a pragmatic solution that is not fully optimized, perfected, or rationalized, but "good enough" as an approximation – that the world needs a global currency, the greenback rings all the bells and, crucially, there is no alternative.
With the world was on its back in 1944, the United States was responsible for better than half the global industrial output and in possession of two-thirds of the world’s gold. Washington could, and did, impose a new monetary system pegged to both the dollar and gold called the Bretton Woods system. Within a generation the world had seen “economic miracles” in Europe and Japan, creating economies with reserves exceeding the US in growth and trade. Yet as the world’s banker, the US controlled global liquidity in a network of massive, interdependent capital flows. To get around this the world moved to a floating rate exchange system in which currencies fluctuated in the market against each other, rather than the gold-backed dollar. It was a complete mess when conceived in 1968 and stayed that way until it collapsed in 1972.
What those seeking to dethrone the dollar don’t get is that the dollar was officially dethroned as a global currency in 1973 when Bretton Woods system collapsed. At which point the world made it a de facto global currency because people need a somewhat stable currency to facilitate trade. International trade isn’t any different. Let’s say you are sitting in London and you hear that Liz Truss will get another shot at prime minister; you want to sell your pounds sterling and buy euros. That transaction is easy enough, and you can do it without a dollar in sight. On the other hand, if you sitting in Kharkiv and want to change your hryvnia into Mongolian tögrög, well, nobody on the planet really knows what the exchange rate there is, or what it will be tomorrow. Or why anyone outside of Ulaanbaatar is buying tögrög. Yet a trader can easily sell hryvnia for dollars, and then sell those dollars for… or just leave them in dollars. And all this money – unless you’re Russian - will move through the SWIFT system – which is Belgian, not American. It’s just filled with dollars.
It’s no use carping about the gold standard either: there is a lot more capital in the world than gold to back it. Even if there were enough, most of it is in jewelry, wedding rings and microchips. Just try to collect that – hell hath no fury like a gal relieved of her grandmother’s bling.
Heuristic solutions are characterized by being merely good and not necessarily optimized. Central banks and rival governments don’t like the greenback as a reserve currency for stupid reasons – pride – and practical ones – sometimes the dollar gets a little off-kilter and exports financial crises to emerging economies. Yet the fact remains that in a globalized economy dollar transactions keep you from getting your pants pulled down when dinky currencies go haywire.
Dollar dominance isn’t ideal, not even for America; the US economy and its manufacturing would be in better shape if the dollar was not the go-to. But there isn’t that much that Washington, Beijing or anyone else can do about it because a global currency operates beyond any single power’s policy to do much about it. Crypto might be the future, but it’s all too volatile and – words fail me – weird for mass adoption.
Practical solutions, though, only last as long as they remain practical. Faith in a global standard can shift, just ask the Brits. Right now the safest asset in the world is a US Treasury. If that changes, all bets are off. In the short term, the danger is talk about putting the Fed under the White House’s thumb. The maneuver is unlikely to amount to much, practically, but the mere attempt would send markets reeling. The long term, the danger is debt. It’s also useful to remember that no empire has survived past the point where it spends more on debt service than defense, a point that America has now reached. Although the great Republic will, on occasion, pull off something that is impossible.
Yet the fact remains that there is no alternative. And where there is no choice, there is no problem.