The fall of the dollar

Abdullah Al Mamun and Sanni Yaya

Introduction

The fall of the dollar has been predicted for several decades. Scholars, investors, market analysts and so on forecasted the demise of the dollar. For instance, Robert Triffm argued in the nineteen sixties that the dollar would lose its supreme position among all the currencies (Triffm 1960). Similarly, just after a decade, economic historian Charles Kindleberger claims that the power of greenback as an international currency is over (Kindleberger 1976). Continuing in the same vein Canadian billionaire investor Ned Goodman delivered a speech in an investment conference in 2013 that the era of the US Dollar as the world’s reserve currency is over (The Northern Miner 2013). Even today, these dire predictions on the declining date of the dollar continue unabated in both print and electronic media. These prognostications are closely followed by predictions on what would happen in the aftermath (The Balance 2020).

However, scholars and analysts are also very much optimistic about the good future of dollars. For example, Lee argued that the US dollar will remain the world’s main currency of choice (Lee 2019). Besides, Richter reports that the efforts to diminish the dollar’s dominance will not work anytime soon (Richter 2018). Moreover, Best claims that the dollar is the topmost foreign reserve currency in the world (Best 2020).

In this chapter we analyze the status dollar as the most important international currency. It will also explore some of the core characteristics of currency internationalization and will examine the merit of currency competitors, such as the euro and the renminbi (RMB or yuan) against the dollar in the light of some core financial and political factors. Furthermore, it will offer a prospect of Chinese digital currency as a potential actor in the world market in brief.

The dollar centrality: How did that happen?

What was known as the “international gold standard” until the early 1930s was the British “pound sterling” as the international currency. In reality, Great Britain’s printed paper money or simply Bank of England’s credit that served as the international currency. The pound sterling was holding this position was because of the strength of the British Empire’s economic, military and other strengths. British money or pound sterling rose to that prominence in the late 19th century and that hegemony, (i.e., leadership) remained in place until the early 1930s when the central bank of UK was ready to give a definite amount of gold (at a fixed rate) to anyone who would like to cash their sterling’s designated in the paper (Lindert 1969). That was the secret of the gold standard. Pound sterling freely exchangeable against gold gave meaning to the phrase “as good as gold.” As long as pound sterling was in demand as a currency by foreign nations for trade and investment, the rule of pound sterling remained intact, however, the US dollar or greenback had taken the place of sterling gradually over the time.

The greenback started to replace sterling as the leading reserve currency in the mid-1920s. The status of dominant currency once lost for sterling but was not lost forever. In the early 1930s, sterling surpassed the dollar as the leading reserve currency. It makes the fact clear that reserve-currency status depends not only just economic, commercial and financial size but also on the issuer’s political influence. The inter-world war period the witness of the rise of New York as a financial centre, rivalling London. This eventually and made the dollar as an international currency, rivalling sterling. The question exactly when the dollar overtook sterling as the leading currency in which to hold foreign exchange reserves. The answer sheds light on the competitive history for leading financial status between London and New York.

Eichengreen and Flandreau report that the dollar began to surpass the sterling as a leading reserve currency in the 1920s. With the post-world war crisis, the pound sterling lost its hegemony and eventually fell in 1931 during the great depression. It was triggered by the fall of stock prices in 1929 in the New York Stock Exchange. They also argued that the global foreign exchange reserves were on the order of more than two billion dollars which was a significant amount on that time as a reserve currency (Eichengreen and Flandreau, 2008). On the contrary, Trilfin states that sterling occupied the leading position as a reserve currency in the 1920s and 1930s despite a declining trend. He estimated that the sterling’s share as a reserve currency was 80 percent in 1928, and in the next ten years, the share decreased by ten percent (Triifm 1960). Besides, Aliber claims that the sterling was in the position of number one as an international currency until the Second World War (Aliber 2002). Furthermore, Chinn and Frankel argue that the rise of the dollar began after the Second World War and remained in place until 1971 when US president Richard Nixon decided to end the dollar’s gold convertibility in 1971 (Chinn and Frankel 2008). However, despite the termination of the dollar’s gold convertibility, the dollar remains in the race of the most important international currency along with the euro and the renminbi.

 
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