The global monetary system has been centered around the US dollar since at least the end of World War II, when the Bretton Woods Agreement of 1944 formalized the rise of the dollar to undisputed dominance. Control over the world’s reserve currency came hand in hand with a boost to the nation’s already enormous geopolitical influence, as well as the ability to manage huge deficits at low cost.
Today, a growing chorus of experts believes that the dollar’s hegemony could be in decline. The declining U.S. share of world trade, the expansion of China’s monetary power, and the anticipated digitization of national currencies may erode the foundation of the current financial order. Therefore, what role could potential digital currencies of central banks and decentralized currencies such as Bitcoin (BTC) play in shaping the new international monetary system?
The exorbitant privilege of America
One of the most common terms to denote the great influence of the United States in international trade is „monetary hegemony,“ which first appeared in Super Imperialism, a 1972 book by economist Michael Hudson. Almost half a century after its publication, many of the ideas articulated in it are still valid.
As of this year, about 60% of all foreign exchange reserves are still allocated to the dollar. In addition, about 40% of world trade is invoiced and settled in dollars, and represents 88% of world foreign exchange trade.
Being in a position to coin the currency that serves as the world’s unit of account comes with a number of advantages, putting the U.S. in an exorbitant position of privilege. On the one hand, because it pays for imported goods with its own national currency, monetary hegemony does not face any restrictions in the balance of payments. This means that it does not risk losing the ability to pay for essential imports or to finance its current account deficit.
As the world’s largest debtor nation, the United States has taken full advantage of the dollar’s position. Because all parties involved in international trade – governments, businesses and banks – always need dollar liquidity, the market has an almost infinite capacity for new dollar-denominated debt. For decades, the United States has spent much more than it could, thanks to this simplified access to cheap international credit.
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In addition, this position of monetary dominance provides enormous geopolitical influence. By denying adversary nations access to the dollar-centered global financial system, the U.S. can inflict comparable damage – or even beyond – military intervention. Economic sanctions have long been a primary instrument for putting pressure on nations deemed „rogue“ by the State Department.
As Obama-era Treasury Secretary Jack Lew once warned, the centrality of the dollar in the global financial system depends on the willingness of other nations to play by its current rules. In order to maintain the monetary status quo, Lew argued that the United States should not abuse economic sanctions to maintain the impression that these measures are only deployed against foreign governments for appropriate reasons and with sufficient justification.
The current administration has paid little attention to these words. President Donald Trump has intensified the use of sanctions and other financial restrictions against states such as Iran and China, which has taken US economic power to a new level. As economist Jeffrey Sachs argued, this has led to the formation of a counter-coalition of disgruntled nations, with China and Russia at the forefront, which have accelerated their efforts to de-dollarize their economies. According to Sachs, this geopolitical shift, combined with the declining share of the U.S. economy in global gross domestic product, could mean the decline of the dollar as the world’s reserve currency.