In the wake of the COVID-19 pandemic, the world has seemed more upside-down than usual from a socioeconomic perspective. We've experienced massive upheavals in nearly every aspect of business, from the way we work to the restructuring of supply chains, and even the breakdown of globalization itself.
Well, as if that wasn't enough, there's another potential change coming on the horizon that could blow everything we've seen so far out of the proverbial water.
Now, the U.S. dollar's global reserve currency status is being attacked in a concerted fashion, which is something that's never happened before.
If you're not familiar with how a currency achieves "reserve" status, it's first and foremost about its use in trade, specifically global trade.
Historically, as powerhouse countries extended their reach globally, selling their domestically made goods, and more importantly, buying foreign goods - whether they were spices, commodities, or finished products - they pushed their own home currency as the common means of exchange.
The "reserve" status moniker is a modern affectation pertaining to foreign countries acquiring reserves of the global leader's currency in order to transact in that currency. The global leader's currency isn't put into general circulation in other countries, but is instead held in bank accounts, mostly in foreign countries' central banks, as part of the reserves they stockpile.
Simply put, once every country is using your country's money to buy the world's most important resources, you're on top. The U.S. dollar has been on top for 103 years now, and it's been great for American economic power and American hegemony.
But there are groups out there who want to see all that end. And history paints a grim picture every time it happens: the toppling of a country's reserve currency status has historically been followed by the country's demise.
So here's what you need to know about how we got here, as well as the political and economic forces that made and have kept the dollar supreme.
A Brief History of Reserve Currencies
There have been six reserve currencies throughout history, with each reigning between 80 to 110 years.
The Portuguese Colonial Empire, the first global trading powerhouse, pushed its trading partners to transact in the real, or "royals," which were mostly coined from gold. The Porto real dominated global trade for 80 years, from 1450 to 1530, when the Portuguese Succession and Iberian Union brought the real's prominence to an end.
Spain was next up. For 110 years, from 1530-1640, Spain's global reach and its silver real, or real de plata, backed and minted in silver, were the envy and global currency. Until that is, the Dutch occupation, Catalan Revolt, fall of the Iberian Union, and Thirty Years' War.
The consolidated global power of the Netherlands, mostly the result of far-reaching trade and land acquisitions conducted by the Dutch East India Company, saw the Dutch guilder rule global currencies for 80 years, from 1640 to 1720. Then the Dutch East India Company ran into solvency issues and the Anglo-Dutch Wars began.
Next up? The French. From 1720 to 1815, a 95-year run, the French livre, later franc, dominated global trade. The French Revolution, followed by the Napoleonic Wars, set the stage for France's demise and the expansion of the British Empire.
For 105 years, from 1815-1920, not only did Britannia rule the seas, the British Empire covered close to 33 million square kilometers. That's about one-quarter of the total land area of the planet. Its currency, the pound sterling, was the coin of the realm.
The ravages of World War I marked the beginning of the end of the British Empire and the pound. And that set the stage for the dollar to rise.
How the United States Achieved Reserve Currency Status
American ascendancy started with a few key facts. First, the U.S. wasn't ravaged by World War I. Second, the nation's total wealth (no pun intended) more than doubled during the Roaring Twenties. Third, the U.S. thrived through World War II and at its end was the strongest, richest, most powerful nation in the world. All this helped ensure the dollar's place as the new global reserve currency.
But two manifest destiny endeavors by the U.S. cemented the dollar as the undisputed, singular, true reserve currency, and attached additional monikers to reserve currency status, "store of value" and "safe haven."
First, just before World War II ended, in August 1944, America's power elite convened a meeting of 44 countries at Mount Washington Hotel in Bretton Woods, New Hampshire. Staking its claim on and in the new world order coming with the end of the War, the American hosts laid out their plan for reconstruction and resurrection of global trade and devastated economies.
That plan, known as the Bretton Woods Agreement, essentially foisted the U.S. dollar to top of the heap, to solo premiership, as the principal global currency linked to gold and linking all other currencies to the dollar. The new monetary system that pegged a U.S. dollar to 1/35th an ounce of gold went into effect in 1945.
Since the dollar was directly pegged to gold, all other currencies could be pegged to the dollar and not fluctuate inordinately, save for country-specific balance of payments and debt-to-GDP issues. This had the desired effect of smoothing out currency exchange rates, easing trade, and (most importantly for American hegemony) cause foreign governments, banks and their central banks to stockpile dollars alongside gold as their primary "reserves."
The biggest benefit of commanding the world's reserve currency is that everybody uses it and needs to own it. That demand for the dollar makes borrowing easy and cheap for the U.S. Treasury, since foreign dollar reserve holders use their dollars to buy Treasuries and buy more dollars to invest in America and American assets.
The second "manifest destiny" event took place in the 1970s. The U.S. was the largest oil consumer on the planet when the Arab Oil Embargo caused oil prices to quadruple. To tie Middle East interests to American interests, specifically Saudi Arabia and Iran - the Middle East's largest producers of oil at the time - Secretary of the Treasury William Simon in 1974 constructed what became known as the petrodollar regime.
The petrodollar regime was an understanding that the U.S. would contract and buy huge amounts of oil from both Saudi Arabia and Iran, paying in dollars, which the Saudis and Iranians would invest in U.S. banks and Treasuries. They would also get discounts on U.S. military equipment, especially fighter jets, that the two countries wanted to possess.
An additional kicker (that's not openly admitted to) was that the Saudis and Iranians could count on the U.S. for military help if they ever needed it.
With oil, the most widely traded and used commodity on the planet, now priced in dollars, it occurred almost naturally that most other commodities would be priced in dollars. That sealed the deal for the dollar as the most prominent trade currency in the world.
And as far as global trade in dollars goes, the amount is staggering. As far as American hegemony and power based on the dollar as the global reserve currency, that's even more staggering.
But it's also a problem.
We're going to be talking about this more over the next couple of weeks, so stay tuned for next week's installment. I'll tell you why so much trade in dollars is a problem, why American hegemony emanating from dollar power is a problem, who's mad as hell about it, who's doing something about it, and what they're doing.
But honestly, you can already see the capital shifts happening already as America moves away from globalization and is starting to rebuild its domestic capacities again. Infrastructure is a dominant theme in government spending, with billions of dollars being allocated to update critical resources like roads, water lines, and the electric grid.
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The post The Reign of the U.S. Dollar May Be Coming to an End - Here's What You Need to Know appeared first on Total Wealth.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.