Crypto influencer PlanB has posted a thought provoking tweet, showing how the world’s global reserve currencies have generally only remained dominant for 100 years. This has led to speculation that the USD is nearing the end of its reign, since the USD has been dominant for 100 years now. Further, there is speculation that Bitcoin (BTC) will become the next dominant global currency. This article discusses the history of global reserve currencies and the USD’s current status as the global reserve currency.
Apparently the first currency in history that was widely circulated was the silver Drachma issued by Athens in the 5th century B.C. After that, Rome’s currency, the gold Aureus and silver Denarius, became the dominant currency from the 1st century B.C. to the 4th century A.D.
The collapse of the Roman empire led to inflation of the Roman currency, and eventually people stopped accepting it. The Byzantine Empire’s gold Solidus became the dominant currency from the 5th century to the 6th century.
The Byzantine Empire was then beat back by the Islamic conquests, and the Arabian Dinar became the global currency from the 7th century to the 10th century. Then, as Europe rose to power again during the Renaissance, Florence’s Florinar became the dominant currency from the 13th century to the 15th century.
After that the first modern trade/reserve currency arose. Portugal’s currency reigned dominant from 1450 to 1530, at which point the Portoguese succession crisis diminished Portugal’s power. Neighboring Spain then had the dominant currency from 1530 until 1641 when the Iberian Union collapsed.
From 1642 to 1720 the Dutch currency became the dominant global currency due to the proliferation of the Dutch India trade company, but this ended due to the Anglo-Dutch wars. France’s currency then became the dominant global currency from 1720 to 1815.
Once the Napoleonic Wars ended, the United Kingdom Pound became the dominant global currency, due to the British Empire’s territorial dominance globally and the rise of the British East India Company. The UK Pound reigned from 1815 to 1920. Its reign ended due to severe losses during World War 1.
The United States rose to dominance after World War 1 and the USD became the dominant global currency as of 1920. It became even more dominant in 1944 when the Bretton Woods agreement established the USD as the global reserve currency. Essentially, the USD was pegged to gold, and all other global currencies were pegged to the USD following the agreement.
As the world recovered from World War 2, the United States’ share of economic output declined. Also, the Vietnam War and excessive spending in general caused United States debt to grow. Soon enough, the United States did not have enough gold to back the USD and other nations began to redeem their reserves of USD for gold.
In order to prevent the United States’ gold reserves from being drained, which was causing the USD to plummet, the United States depegged the USD from gold. This event was called the Nixon Shock.
The USD’s value plummeted, but then the Petrodollar was born. In 1974 the United States convinced the Organization of Petroleum Exporting Countries (OPEC) to standardize the sale and purchasing of oil in USD in exchange for military assistance.
This caused the USD to become fully dominant in the world, since all oil exporting nations accumulate vast amounts of USD, and they use this USD to buy massive quantities of USD denominated assets. Further, this allows the United States to run huge deficits and to simply finance these deficits with low interest rate USD assets, since oil exporting nations are always buying up USD assets.
In fact, the world depends on the United States running massive deficits, since the deficits lead to the United States flooding the world with low interest rate USD assets, basically bonds, in order to finance the deficit, and this supplies global liquidity.
During this year’s Coronavirus global financial crisis, there has been speculation that the USD will be dethroned due to the trillions of dollars of money printing that the United States is doing to reverse the crisis.
However, the fact of the matter is that the trillions of dollars of money printing is supplying the world with much needed liquidity, and the USD’s value and dominance is only rising. Indeed, other global fiat currencies are crashing as nations, banks, and corporations worldwide rush to buy up as much USD as they can.
Another interesting factor is that the United States becoming the dominant oil producer in recent years could have toppled the Petrodollar system. But now Saudi Arabia has wrecked United States oil production by flooding the world with oil and this actually strengthens the USD. Now oil producing nations like Saudi Arabia will once again receive the majority of USD from oil sales.
To sum up the current situation, the only way the USD would be dethroned is if it began to experience rapid inflation and other nations stopped accepting it and dumped their reserves. In the current financial crisis the USD is only gaining value and becoming more dominant. However, the trillions of USD being printed by the United States is being bought up by the rest of the world as fast as it is printed to correct the liquidity crunch. Saudi Arabia has renewed the strength of the Petrodollar by flooding the world with oil guaranteeing that the majority of USD flows go to Saudi Arabia and OPEC countries rather than United States oil producers.
Thus, people who were expecting the USD to be dethroned because of the financial crisis and the ‘100 year rule’ for global reserve currencies will be disappointed. Zooming out, the global reserve currency is determined by which nation has the most military power and influence in the global financial system, and it is clear the United States completely dominates the world in both ways.
Further, even if the USD collapsed, Bitcoin (BTC) never has a chance at becoming the global reserve currency, since there is no nation behind Bitcoin (BTC). Bitcoin (BTC) could definitely gain a lot of value if the global reserve currency switched from the USD to another currency, since there would be absolute chaos in the currency markets, but ultimately only a national currency can be a global reserve currency.