The dollar is not just the currency used in the U.S., it is very much the world’s currency. It’s been that way for 80 years – but that could change.
Luis Robayo/AFP via Getty Images
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Luis Robayo/AFP via Getty Images
The dollar is not just the currency used in the U.S., it is very much the world’s currency. It’s been that way for 80 years – but that could change.
Luis Robayo/AFP via Getty Images
You might just think of the dollar as the money in your wallet, the cash you use to buy your morning coffee.
But the dollar is much, much bigger than that.
The dollar is the world’s currency: It dominates global business.
Economists call it the “global reserve currency,” a fancy title the dollar got about 80 years ago that has brought some pretty serious perks to the U.S. economy.
But could the dollar get knocked off the top spot? There are challengers emerging, and history shows that countries whose currency dominated the globe can fall from that top spot pretty fast … even over the course of a few days.
How it started: timing + muscle + lots of gold
The U.S. dollar did not luck its way into the top spot.
It was a carefully engineered plan that unfolded in the mountains of New Hampshire nearly 80 years ago. At the time the British Pound Sterling was the international currency. A title it had held for decades.
The dollar’s rise happened pretty suddenly at the Bretton Woods International Monetary Conference in 1944. Bretton Woods was a gathering of world leaders at the end of World War II. They came together to try and establish an international system for trade and finance, to help bind the world together and increase prosperity for all.
Everyone agreed that in order to ease international trade, there needed to be a common currency, a standard everyone could use.
At the time of the conference, the British economy was in shambles. The costs of fighting a war on its own soil had been enormous. It was clear that the British Pound Sterling could not be the currency everyone counted on.
The Bretton Woods gathering in 1944 cemented the U.S. dollar in as the world’s reserve currency, replacing the British Pound Sterling
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So the British pushed for a new currency that would solely be used for inter-country trades: Economist John Maynard Keynes, who was at Bretton Woods on behalf of the British, proposed the “Bancor” (a mix of the French work for bank, ‘banc’ and the French word for gold ‘or) but also suggested “Orb” and even … “Unicorn.”
But the U.S. dollar left the Bancor, the Orb and the Unicorn in its dust. The U.S. was economically quite strong. It also had lots of gold in its vaults, which made people feel like its wealth was backed up.
It used these advantages to help muscle the dollar in as the official currency of international business at the conference.
The perks of being the world’s currency
Being the world’s reserve currency essentially means the U.S. dollar is at the center of most of the business on Earth.
Example: If you’re a clothing designer in Chile and you order cotton from Egypt for some shirts you plan to make, you will pay for that cotton in U.S. dollars. Not Chilean pesos and not Egyptian pounds.
To be clear, the U.S. isn’t involved in that deal at all, but the U.S. dollar is. When international deals happen, they usually happen in dollars.
This is a big boost to the U.S. in all kinds of way: For example, it means domestic businesses have a home court (home currency) advantage when they do business overseas.
But as the Bretton Woods conference demonstrated, that top spot can slip away pretty fast
“We have an important advantage, which may whittle away slowly if we’re not careful,” says economist Michael Boskin, a former White House advisor.
The challenges to the dollar
There are a couple reasons why the dollar’s status is suddenly being talked about as at risk.
Earlier this year, China, Russia, Saudi Arabia, the United Arab Emirates and even Brazil started making trades in other currencies: The Chinese Yuan and the Russian ruble. This was a very direct challenge to the U.S. dollar’s central position.
A delegation from China led by Chinese President Xi Jinping meet with their Saudi counterparts led by Saudi Crown Prince Mohammed bin Salman at the Great Hall of the People in Beijing on Feb. 22, 2019. Countries like Saudi Arabia and China are looking to chip away at the dollar’s dominance.
How Hwee Young/AFP via Getty Images
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A delegation from China led by Chinese President Xi Jinping meet with their Saudi counterparts led by Saudi Crown Prince Mohammed bin Salman at the Great Hall of the People in Beijing on Feb. 22, 2019. Countries like Saudi Arabia and China are looking to chip away at the dollar’s dominance.
How Hwee Young/AFP via Getty Images
China has long been pushing to have its currency replace the dollar, but it’s getting momentum now for a couple of possible reasons:
First: the debt ceiling. Being the currency everyone counts on to do business means people have to believe that your currency is reliable. That recent debt ceiling drama made the U.S. (and, by extension, the dollar) look potentially risky and unstable.
Using the dollar as an economic weapon
The debt ceiling is not at the heart of the recent spate of non-dollar trades, says Benn Steil, an economist with the Council on Foreign relations.
“The real issue is the U.S. government’s increasing use of the dollar as a tool for financial sanctions,” he says.
The dollar is so powerful, if you can’t use it, you are essentially iced out of being able to do most business anywhere in the world.
The U.S. has used this as a nonviolent way to put pressure on countries: North Korea, Iran and most recently Russia. After the invasion of Ukraine, the U.S. said, ‘No dollar for you!’
Steil says the economic impacts of those sanctions have been massive and other countries have noticed.
“Sanctions are an effective tool, but we have to be careful,” he says. “It’s like over-prescribing an effective antibiotic. It encourages the development of new strains of bacteria that are resistant to the antibiotic.”
If you are a country that has a complicated relationship with the U.S., watching the effect of American financial sanctions on Russia is scary. It’s been enough to push China, Saudi Arabia and others to make deals that get around the dollar, trying to chip away at its power
“This is not nearly as efficient as using the dollar,” Steil says of these deals. “That can lead to a massive fragmentation in the global economy and a much less efficient and less productive global economy.”
It’s still all about the Benjamins… for now
Right now, the dollar has a lot of momentum and is not at any immediate risk of losing its top spot, says economist Michael Boskin.
Still, he says momentum can change fast.
“Other countries in previous times have been the reserve currency and they fritter that away,” he says. “We need to be very careful.”
And right now, with so much global turmoil, China and others have started to see a possible opening to grab that top spot – or at least start to chip away at the U.S. dollar’s dominance.
