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What if the U.S. Dollar Crashes?

The Rise and Fall of Reserve Currencies

A reserve currency is a currency held in significant quantities by many governments and institutions around the world as a currency for international trade, payments and to support the value of national currencies.

While gold and silver were once the only accepted reserves, the Bretton Woods system of 1944 broadened the list of acceptable reserves to include the US dollar and other currencies.

Let's take a look at the history of reserve currencies over time to better understand the role and future of the world's most important reserve currency: the US dollar.

The First Currencies

The silver Drachma issued by ancient Athens in the 5th Century B.C. was most likely the first currency that was widely circulated. The gold Aureus and silver Denarius coins issued by Rome were next and they were the dominant currencies from 1st Century B.C. to 4th Century A.D.

Inflation caused significant devaluation of Roman-issued currencies, making them less widely acknowledged and paving the way for the Byzantine Empire's gold Solidus coin to become the primary currency in international trade from the 5th to 6th centuries.

The Arabian Dinar replaced the Solidus as a global trade currency between the 7th to 10th Century. The 13th Century saw Florence issued Fiorino become the dominant trade currency until the 15th Century.

Major Reserve Currencies of Recent History

The Portuguese currency was the dominant trade currency for 80 years between 1450 to 1530 until the Portuguese Succession Crisis caused its downfall.

The Iberian Union saw the Spanish currency becoming the dominant trade currency between 1530 to 1641 (111 years) until the fall of the Iberian Union saw it being replaced.

The rise of the Dutch India trade company saw the currency issued by the Netherlands become the international trade currency. it lasted for 78 years. Netherlands was annexed to France and the French franc circulated. Paper bills began replacing coins at this time.

Anglo Dutch wars saw the currency issued by France become the dominant trade currency. That lasted for 95 years.

As Britain became the dominant trading country with the rise of the British East India Company, the British Pound became the dominant world trade currency. British Banks became the leading financiers of trade and opened branches globally. British shipping companies were leaders in their space and British insurers became the main insurers of trade globally. The decline of the British East India company and the start of World War I saw the share of the pound decline in world trade. The reserve status of the pound lasted 105 years.

US Dollar 1920 till date (98 years so far)

Following World War I, the US dollar became the most important trade currency since the US economy was so important in global trade. In 1944, the Bretton Woods system established a currency framework in which the US dollar was designated as the primary reserve currency and was directly linked to the price of gold. As a result, the dollar became connected to a large number of currencies. President Richard Nixon of the United States decoupled the dollar from its peg in the 1970s, paving the way for today's floating currency markets.

As of late 2012, the US Dollar is the dominant reserve currency, accounting for up to 62 percent of all authorized reserves (IMF)

The US Dollar Today

There are a number of factors suggesting that, over time, the US dollar may be at risk of surrendering its position as today’s world’s global reserve currency.

Some of these factors relate to U.S. policy decisions, others to policy decisions and developments elsewhere, but all point in the same direction. The primary reason for the dollar’s continued dominance is mainly lack of viable alternatives.

Economic sanctions and protectionist trade policies are the most visible U.S. policy factors to the dollar's declining prominence (tarries, attacks on globalism).

While US policies have certainly driven some countries away from the dollar, such as Iran, Turkey, and Russia, Chinese and Euro zone officials have been actively working to promote their currencies as reserve and transaction replacements.

More signals of decline..

According to figures from the International Monetary Fund, the dollar's share of foreign reserves plummeted from 73 percent in 2001 to 62 percent at the end of last year. Similarly, central banks purchased more gold in 2018 than at any previous time since the termination of the gold standard in 1971, according to the World Gold Council, continuing a trend of strong net purchases that began following the global financial crisis.

How to Protect Yourself if the Dollar falls

A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable.

Closing Thoughts..

The concern of markets swaying due to monetary causes will not go away in the future years in such a global economy, where countries move commodities and goods at breakneck speeds.

The dollar has been under pressure since the financial crisis of 2008, especially in light of rising state debt. Countries lacking reserve currency status are concerned that their destiny will be determined by macroeconomic and political factors beyond their control.

The desire for a world market that is less dominated by the dollar is not new, but central banks, like investors, prefer to keep a basket of investments rather than a single stock when managing their currency reserves.



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