Mark Twain is said to have quipped in 1897, ‘The reports of my death have been greatly exaggerated’, after a news agency published his obituary. The recent flurry of statements trumpeting the end of the dollar’s hegemony may be similarly premature: despite certain excited assessments, the current International Monetary System (IMS) is not yet dead. That said, while Twain’s death announcement was indeed a mistake, he was ailing at the time. The same is true of the dollar.
Criticism of the currency’s hold on the global economy is nothing new. When French president Nicolas Sarkozy chaired the G20 in 2010, he used his pulpit to decry a model that left ‘part of the world dependent on US monetary policy’ (1). A half-century earlier, Valéry Giscard d’Estaing, then French finance minister, had inveighed against the ‘excessive advantage’ the US gained from international dollar usage. Imbalances in the IMS were so glaring in 1958, just 15 years after its founding, that Belgian economist Robert Triffin warned of an ‘imminent threat to the once-mighty US dollar’ (2). And by 1976 American economist Charles Kindleberger was in no doubt that ‘the dollar is finished as international money’ (3). Yet to this day it still steers the International Monetary System.
Is this recent round of questioning just the relic of a timeworn tradition where each successive prophecy of radical change is bound to age like milk? Perhaps not. The war in Ukraine has metastasised the list of grievances against the IMS, so when Russian president Vladimir Putin forecasts the ‘beginning of the end’ for the dollar (at the St Petersburg International Economic Forum, 16 June 2023), or when former Brazilian president Dilma Rousseff, current chair of the New Development Bank (NDB, formerly the BRICS Development Bank) (4), pledges to ‘find ways to avoid … being dependent on a single currency’ (5), they do so in a changed context.
As the major victor in the second world war, the US set out to rule the world. One facet of the postwar ‘pax Americana’ was the dollar-centric monetary system codified in the July 1944 Bretton Woods Agreement, which made American banknotes the only currency directly convertible to gold and the basis for all exchange rates. The International Monetary Fund (IMF) (6) and the World Bank, founded to enforce this agreement, were also both based in Washington DC. The US held veto power within the former and had the unofficial (but very real) right to appoint the latter’s president.
Foreign trade deficits
Most indebted countries must work with their partners to obtain the currencies in which their debt was issued. But not the US, which, as French president Charles de Gaulle declared in a press conference on 4 February 1965, ‘pays no price for taking on debt, which it partly reimburses with dollars that it can print at will, rather than with gold that has a true value and must be earned’. This leg-up allows the country to amass foreign trade deficits ‒ in other words, to spend as though money grew on trees.
The situation offered the US three major advantages that outweighed any transatlantic critiques. First, Washington could easily finance its cold war military spending. Second, it was able to artificially boost living standards for a large subset of Americans. And third, US companies could make foreign direct investments (FDI) at little cost, which ensured their worldwide expansion. Fast-forward to the 21st century, and the world’s biggest power now also holds its largest foreign debt ‒ an estimated $24.95tr as of early 2023.
Should harsh decisions be taken against China, a true split of the world into mutually isolated blocs would become a possibilityJames K Galbraith
It soon became apparent that the dollar-dominated IMS (sometimes called the ‘dollar exchange standard’) was imperilled by an inherent contradiction that Triffin had identified in the late 1950s: it had to serve two incompatible ends. On one hand, the system forced the American central bank ‒ the Federal Reserve (‘Fed’) ‒ to maintain a steady dollar output to keep up with international trade growth, which helped the US preserve its advantage. On the other, this caused the US currency in circulation to multiply faster than the gold reserves at Fort Knox, undermining other countries’ confidence that their dollar holdings could be converted into precious metals. The whole system, however, relied on faith in dollar-gold parity. This second IMS requirement meant that the US would need to cut its deficit, even if that meant hobbling foreign trade and triggering a global recession.
When it became clear that Washington had no intention of sacrificing the very mechanism that secured its supremacy, De Gaulle forced it to act: in 1965 he demanded that the dollars France held be converted into gold, offending the White House and earning him the moniker ‘Gaullefinger’ (after the James Bond movie). Judging US gold reserves too small to handle a surge in such demands, President Richard Nixon decided in August 1971 to scrap the IMS as conceived at Bretton Woods: he suspended the dollar’s convertibility to gold, thus ushering in a new era of floating exchange rates. Not only did Washington’s unilateral decision revive ‘currency casinos’ (7), but it also allowed a gradual return of free capital movement ‒ phenomena that the Bretton Woods Agreement had sought to contain because of their devastating impact during the interwar period.
‘That’s how the potential for destabilisation crept back into the system, on a scale not seen since the second world war,’ noted a senior official from Russia’s economic development ministry who spoke with us on condition of anonymity. ‘And it happened while the “key currency” was still a national one, managed in terms of national-level interests.’ ‘The dollar is our currency, but it’s your problem,’ US treasury secretary John Connally reportedly said in 1971 to European diplomats alarmed by Nixon’s move. That fact hasn’t changed. Since March 2022 the Fed has been steadily raising interest rates to address the domestic fallout from surging inflation. This national policy, according to Dilma Rousseff, ‘means a higher probability of reduction in growth and a higher probability of recession’ (8) for the rest of the world.
‘The dollar is ditching us’
These critiques are familiar, but the war in Ukraine brought another IMS flaw to the fore: Washington weaponises the dollar’s double status – as both national currency and key IMS currency – to impose sanctions on countries and private economic entities that it deems hostile.
Coercive measures by the US Treasury date back to long before Russia invaded Ukraine. The list of sanctioned entities and individuals totals 2,206 pages, with 22 countries and over 12,000 names. Christopher Sabatini, of the British thinktank Chatham House, says that over ‘a quarter of the world economy [is] under some form of sanctions.’ According to the Financial Times, reliance on such policies increased over the past decade ‘as successive US presidents have opted for an apparently low-cost, bloodless solution to foreign policy problems’ (9).
Running a key currency offers more than just frictionless debt and levers of financial coercion: it also enables the US to exercise extraterritoriality. Any entity that wishes to use Washington’s currency must play by Washington’s rules. In 2015 French bank BNP Paribas was fined a record $8.9bn for circumventing the US-enforced embargo on Cuba, Sudan and Iran. Most of the bank’s transactions with these three ‘enemy’ states were in dollars and thus passed through a US-based clearing house, making them subject to the country’s laws.
After the outbreak of the Ukraine war, sanctions took a dramatic turn as compared to precedents in Cuba, North Korea, Afghanistan, Iran and Venezuela. Washington and its allies kicked Moscow out of the Swift international payment system and seized $300bn of Russian reserves held in dollars and euros, in what the Russian official quoted earlier called ‘an outright theft’.
According to economists Michel Aglietta, Guo Bai and Camille Macaire, an IMS whose key currency is also the hegemonic country’s national one can only achieve stability if the states subjected to it feel that ‘commercial and financial integration helps more than hurts.’ But ‘the dollar-based international payment system is deliberately leveraged to block private transactions tied to countries that the US government wishes to punish, which just confirms that the dollar is being instrumentalised purely as a means of political dominance (10). Washington’s opponents have no choice but to respond. ‘We aren’t aiming to ditch the dollar,’ Putin said in 2020. ‘The dollar is ditching us’ (11). Paulo Nogueira Batista Jr, executive director of the eight-country Brazilian bloc at the IMF from 2007 to 2015, put it differently: ‘The US has become the dollar’s worst enemy.’
For any country already on bad terms with Washington or fearing a falling-out, the most urgent task would therefore be to ‘dedollarise’. But which currency to choose instead?
A first answer seems self-evident: if using foreign money is the problem, why not use the local one? Several countries have started doing just that for cross-border commerce. In April 2023 India and Malaysia said they would conduct trade in rupees, India’s currency, going forward. A month before, Beijing and Brasília had announced that they would encourage transactions in Brazilian reals and Chinese yuan. France is taking a similar path: a fifth of its exchanges with China now use the yuan (12). Some statements have overtones that imply these decisions are part of an ‘anti-American uprising’. But while commercial dedollarisation does advance geopolitical objectives, it aligns with another, more pragmatic goal: cutting out the middleman. Transaction costs sometimes balloon with multiple conversions ‒ from currency A to dollars, then from dollars to currency B.
‘Sometimes problematic’
Whatever the reasons, the wheels of this broad transformation have been greased by China’s vast global trade network, which it has built as the main trading partner to 61 nations (versus just 30 for the US) (13). But there’s a major snag. ‘Since trade balances are never perfectly even, in this type of exchange one of the two countries inevitably starts accumulating its partner’s currency,’ Nogueira Batista Jr observed. ‘This can sometimes prove problematic, especially when [it] is not easily convertible and its value fluctuates’ – which is true of most currencies. Hence the stalemate this May in Russian-Indian negotiations over conducting commerce in the latter’s banknotes: because the trade balance between the two countries largely favours Russia, Moscow feared drowning in unusable rupees. This is why India now pays for Russian oil with Emirati dirhams (14).
‘For trade transactions to work in national currencies,’ Nogueira Batista Jr continued, ‘countries need to be able to turn them into reserve currencies’: readily available liquid assets that are relatively sheltered from sharp depreciations. As of now, neither the euro nor the yuan, the traditional candidates to replace the dollar, fits the bill: the former because uncertainty over its future – which has been obvious since the 2010 sovereign debt crisis – makes the rest of the world ill at ease; and the latter because Beijing has yet to liberalise its capital account (the Chinese currency is not convertible and remains subject to drastic foreign exchange restrictions). For the yuan to dethrone the dollar ‒ a tipping point that some impatient analysts say is imminent ‒ an unlikely reversal of Chinese monetary policy would have to come first.
Beijing knows that if non-residents started using the yuan, it would have to change its economic template. The greater the foreign demand for a currency, the more its relative value increases, making exports more expensive. This would endanger China’s role as ‘the world’s workshop’. The country’s authorities also saw the aftermath of deregulation in neighbouring countries during the 1997 financial crisis and in Northern economies during that of 2008. A period of domestic market instability in 2015-16, following an attempt to liberalise finance, was considered harmful enough that Beijing ‘reclassified financial risks as a potential threat to national security’, researcher Nathan Sperber told us. And financial concerns are just one motivation behind the government’s capital controls: ‘If wealthy Chinese could freely move their money out of the country, they would be able to safeguard their assets and hence their privileges. Thanks to capital controls, capital ownership remains relative in China. Political leaders have the final say and can take action to punish individuals.’
Any changeover is ‘under duress’
Beijing has made its choice, for the time being, between internationalising its currency and protecting its development model. And, as Sperber makes clear, when any form of dollar-yuan changeover does happen, it is only ‘under duress’: ‘This dedollarisation isn’t so much driven by market players choosing the yuan because it’s a superior reserve or exchange currency. Diplomatic agreements are compelling the internationalisation.’ One indicator of the US currency’s enduring cachet: markets still turn to the dollar as a sound investment during financial instability – even when it’s triggered by US marketplace dysfunction, as with the 2008 subprime mortgage crisis.
Behind the many claims about ‘the end of American financial supremacy’ (15), we find data that paints a more nuanced picture. According to the latest triennial survey by the Bank for International Settlements, the dollar remained the most widely used currency in 2022, and by a long shot: it is involved in 88% of currency transactions (a number nearly unchanged since 1989) versus 31% for the euro, 17% for the yen, 13% for the pound sterling. The Chinese yuan still only represents a modest fraction of these (7%, up from 4% in 2019) (16).
The dollar’s share as a reserve currency dropped from 72% in 2000 to 59% in 2023, but it was mostly supplanted by the currencies of Washington’s geopolitical allies, such as Australian and Canadian dollars, the Korean won and the Swedish krona. Over the same period, the yuan’s proportion grew from 0 to 2.6%. The problem is that it’s highly complicated for a country to hold debt in one currency and reserves in another. And widespread internationalisation of the debt market to yuan isn’t on the cards so long as China’s capital account stays unliberalised.
Facing what looked a lot like a deadlock ‒ given the dollar’s shattered legitimacy as the IMS key currency and the lack of a viable alternative, and considering the limitations of cross-border trade in national currencies ‒ Russia suggested acting at the BRICS level and was soon seconded by Brazil. Moscow’s initial aim was to create not a currency, but a ‘unit of account’: a monetary tool that would make it possible to establish parities between currencies and to set raw materials prices that wouldn’t fluctuate with the dollar. But on 21 August 2023, the eve of the BRICS summit, India’s foreign secretary Vinay Mohan Kwatra voiced New Delhi’s opposition to the plan at a press conference – although he seemed to think its goal was the creation of a ‘common currency’.
‘That’s not at all what it was about!’ our Russian interlocutor complained. ‘Anyone who knows the economy should also know that it’s way too soon to talk about common currency.’ But he wasn’t surprised. ‘At foreign affairs ministries, in Russia or anywhere else, nobody understands monetary matters – even the people at the top.’
The confusion is understandable, as money wears many hats. Besides serving as a unit of account, currencies (including common ones) must play two other essential roles: preserving wealth and acting as a medium of exchange. Developing a common currency for the BRICS would thus have required much more coordination than the Russian plan described. During a conference organised by the Chinese government on the sidelines of the BRICS summit, Nogueira Batista Jr presented possible approaches to the monetary question. As he put it, creating a unit of account would be ‘relatively simple and … could be implemented quickly and without significant costs’; creating a common currency, on the other hand, would ‘require reflection and planning that have not yet begun’. But that would be for another time: the plan was never discussed in Johannesburg.
Misunderstandings can’t explain everything, however. They sometimes serve as a convenient way to kneecap projects without overtly opposing them. Indeed, the BRICS are burdened by geopolitical differences and internal conflicts, especially between China and India, as India wants to keep trading with the US. Progress was already complicated with just the five founding members, who must be aware that welcoming six new partners in January 2024 will do nothing to streamline discussions. And currency is a particularly prickly issue, as previous regional monetary unions attest.
‘Snake in the tunnel’
In Europe, efforts that began with the so-called ‘snake in the tunnel’ agreement of 1972, intended to limit fluctuations between currencies, took until 1999 to culminate in a common currency – with mixed results, to say the least. In 2010 eight Latin American countries launched a Unified System for Regional Compensation (Sistema Unitario de Compensación Regional, SUCRE) as well as a unit of account by the same name. The initiative didn’t gain traction because of insufficient commercial integration between participants. An Asian Monetary Fund (AMF) was proposed in the aftermath of the 2008 financial crisis to regulate exchange rate parities but never came to fruition; discussions around monetary integration have not made much progress since. Recent studies also suggest the potential of central bank digital currencies (CBDC). China, at the leading edge of this effort, is determined to use its e-yuan to circumvent payment systems like Swift. But such a prospect raises concerns about the control this would hand Beijing.
While the dollar-based system seems safe for now, mounting geopolitical tensions could lead to a ‘dollar-free’ zone serving countries the US sees as rivals. China would then, according to Galbraith, ‘act as a bridge between the two systems – the fixed point of multi-polarity’. He adds that, ‘should similar harsh decisions [like the ones against Moscow] be taken with respect to China, then a true split of the world into mutually isolated blocs, akin to the coldest years of the cold war, would become a possibility.’ Such a scenario would still cost Washington dearly, given the sheer volume of US-China trade, while complicating its debt financing.
Will all this spur the White House to heed the current discontent over the dollar? One BRICS faction may even be secretly betting on such a reaction. ‘You know,’ the Russian official told us, ‘if the BRICS efforts led Washington to agree on creating a truly international currency, that would be fine by me!’ ‘That’s exactly what China wants,’ Aglietta confirms.
In fact, this ‘truly international currency’ already exists in the form of IMF’s special drawing rights (SDR). The SDR, similar to the supranational bancor currency that John Maynard Keynes had conceptualised in 1944, appeared in 1969, when the Bretton Woods system was on the verge of collapse. The rights represent a unit of account coordinated by the IMF, which was created to this end, and they check all the right boxes for becoming the world’s much-needed monetary instrument. As early as 2009, Zhou Xiaochuan, governor of the Chinese central bank, suggested that the IMF contained the seeds of a world central bank that could manage international cash flow while ensuring price stability. Of course, such a move would require a reworking of the Fund that would strip the US of veto power, and the country’s elites have no interest in ceding the dollar’s advantage.
That is, its advantage so far. In a 3 October interview with the Financial Times, IMF head Kristalina Georgieva called for a reform of voting rights within the fund to reflect ‘changes in the global economy’, which include the rise of China. Though Washington is opposed to any sudden change, US officials have ‘left the door open’ to supporting this reform, the FT noted (17). As Astrid Viaud and Paul-Arthur Luzu observe, throughout his term (2017-21) Donald Trump consistently decried ‘America’s permanent deficit policy that allows the dollar to dominate’, a ‘strong signal’ that ‘elicited doubts about Washington’s desire to supply the world with dollars’ (18). While political leaders and media have taught the American people to see a ‘strong’ currency as a symbol of their country’s greatness, they would actually be the biggest winners if the dollar were no longer boosted by its international standing. To return to Galbraith, monetary ‘multi-polarity … could be bad for oligarchy but good for democracy, sustainability, and public purpose. From these points of view, it would come not a moment too soon.’ Unfortunately, he says, ‘big changes in the world financial order appear to happen only under extreme circumstances’ (19).
Renaud Lambert & Dominique Plihon
(1) ‘Nicolas Sarkozy s’attaque aux paradis fiscaux et à la suprématie du dollar’ (Nicolas Sarkozy attacks tax havens and the supremacy of the dollar), Le Point, Paris, 13 December 2010.
(2) Quoted in Herman Mark Schwartz, ‘American hegemony: intellectual property rights, dollar centrality and infrastructural power’, Review of International Political Economy, vol 26, no 3, Routledge, Milton Park, 2019.
(3) Charles P Kindleberger, ‘Il dollaro: Leri, Oggi e Domani’ (The dollar yesterday, today, and tomorrow), Banca Nazionale del Lavoro Quarterly Review, vol 38, no 152, Rome, 1985.
(4) Martine Bulard, ‘BRICS seek to rebalance the present global order’, Le Monde diplomatique, English edition, October 2023.
(5) Interview on CGTN, 14 April 2023.
(6) Renaud Lambert, ‘Three little letters the world came to hate: IMF’, Le Monde diplomatique, English edition, August 2022.
(7) James K Galbraith, ‘The dollar system in a multi-polar world’, International Journal of Political Economy, vol 51, no 4, New York, 2022.
(8) Interview on CGTN, op cit.
(9) Quoted in Michael Stott and James Kynge, ‘China capitalises on US sanctions in fight to dethrone dollar’, Financial Times, London, 24 August 2023.
(10) Michel Aglietta, Guo Bai and Camille Macaire, La Course à la suprématie monétaire mondiale: À l’épreuve de la rivalité sino-américaine (The race for global monetary supremacy), Odile Jacob, Paris, 2022.
(11) ‘America’s aggressive use of sanctions endangers the dollar’s reign’, The Economist, London, 18 January 2020.
(12) ‘China wants to make the yuan a central-bank favourite’, The Economist, 7 May 2020.
(13) IMF, Direction of Trade Statistics.
(14) Nidhi Verma and Noah Browning, ‘Insight: India’s oil deals with Russia dent decades-old dollar dominance’, 8 March 2023, reuters.com/.
(15) Tom Benoit, ‘La fin du dollar roi’ (The end of King Dollar), Le Point, Paris, 26 September 2023.
(16) These are from a total of 200% because they represent both sides of currency exchange transactions.
(17) Colby Smith, ‘IMF head backs reforms that could give China more voting power’, Financial Times, 3 October 2023.
(18) Astrid Viaud and Paul-Arthur Luzu, Entre dollar et cryptomonnaies: Le défi des sanctions pour l’Europe, (Between the dollar and cryptocurrencies: The challenge of sanctions for Europe) Arnaud Franel, Paris, 2022.
(19) James K Galbraith, op cit.