Today, there is increasing talk of the advent of a multipolar world and the imminent decline of the dollar’s hegemony. However, historical experience and the current structure of the global economy suggest otherwise: even if the United States consciously renounces its dominant position, the dollar will remain the world’s main reserve currency for decades to come.
A 2022 Financial Times article by Claire Jones provides an interesting retrospective on how Britain relinquished currency supremacy. Between 1860 and 1914, it’s estimated that 60% of international trade was denominated in pounds sterling. After the First World War, Britain’s economic influence began to decline, but the pound was the main reserve currency until the 1950s. Thus, three decades went by from the loss of global predominance to the eventual collapse of the pound as a global currency. Currency leadership outlives the economic power of the country itself.
Today, the dollar occupies roughly the same position in world trade as the pound did a century ago. However, unlike in the mid-20th century, it currently has no real competitors. The euro remains a means of payment mainly within Europe and neighbouring regions (the Maghreb countries and Turkey). Its role reflects the EU’s share in the global economy rather than global ambitions. The Chinese yuan could theoretically aspire to more, but structural constraints prevent this. Beijing is in no hurry to open up access to its financial markets, and investors are experiencing a shortage of yuan-denominated assets. In addition, confidence in China’s legal system is incomparably lower than in Anglo-Saxon institutions. As Jones writes, people trust New York law and the Federal Reserve System, while the decisions of the Chinese authorities are perceived as opaque and politicised.
Money is not only about economics, but also about law. The influence of the dollar is ensured not only by the scale of the American economy, but also by trust in the institutions behind it. In this sense, the United States remains unique: its financial system combines liquidity, market depth and legal reliability.
Even if the United States chooses a course of isolationism, the dollar will retain its dominance for at least another two or three decades. The situation can only change if extremely rare and devastating ‘black swans’ such as a global nuclear war or a deadly pandemic occur.
