Recent developments from the conflict in Ukraine has brought to light a great deal of discussion surrounding the continuation of the American Dollar as an international trade currency. At the current moment of writing, there has been many different news stories of countries seeking alternatives to the dollar such as: the Russian Central Bank set the price of gold at 5,000 rubles per gramme, the partial invoicing of Saudi oil with Yuan, Turkey increasing the use of Rubles in trades with Russia, India reopening Rupee-Rial trade channel along with the construction of a triangle trade mechanism so India may continue trading with Russia and Russian demands of gas payments to be done in Ruble; it appears that the current zeitgeist is of an irreversible de-dollarization of the world. These various emerging reports toll the end of the American hegemony held by the lynchpin that is the dollar dominance as the international trade currency, whilst acknowledging that these are symptoms of the failure of American foreign policies. However, the truth is that this trend cannot be encapsulated into one geopolitical factor, but rather, it is a complex interplay of technological and various economic factors including that have shaped the trajectory of the dollar over the last few decades.
Economic Justification of an International Trade Currency
Historically, international trade had been facilitated by the acceptance of a single currency for the exchange of goods and services between countries. While before the dominant currency was the British Sterling, the Bretton Woods system, established in 1944, had placed the dollar as the international trade currency. The very design of the various financial institutions of the system, such as the International Monetary Fund (IMF) and the World Bank, had the interests of the United States at its forefront, which has clearly been noted in prior studies.
Nevertheless, the creation of the system was not based in merely political interests but followed the principle of resource efficiency that is found in economic literature. Due to the high creation and maintenance costs of currency trading posts (or alternative channels), it becomes more efficient to have a single currency that countries are able to utilize instead of creating a trading pair for each combination of currencies that exist. Therefore, in order for countries with small trade volumes to be able to efficiently trade with other small or even large economies, a highly liquid currency is needed and that is where the American dollar exerts its great influence. It is the single most liquid asset that exists which can be traded by every country that is fully integrated and participates in the global financial system. Simply speaking, it is far cheaper for smaller economies to utilize the American dollar for trade settlement payments than to set up a bilateral trade channel with local currencies even if the financial arrangement ultimately gives significant power to the United States as the sole currency issuer. Soft deviations from the model do exist as we can see with the size and use of the Euro, which has been touted as a potential rival to the dollar hegemony.
The Invisible Decline: Complicated Truth
The dominance of the dollar as the international trade currency has lasted almost a whole century despite the various changes that the world’s financial system underwent: from the discarding of the gold standard in 1971 to the Great Recession in 2008. Despite all of these trying times, the dollar remained as the most efficient and cheapest alternative to conduct international trade. Few, however, were not beholden to the illusion of an everlasting dollar hegemony and even warned of its demise as early as 2006 citing that domestic policies enacted by the Federal Reserve were driving countries away from the dollar system. At the time, this was the opinion of a minority and did not follow the zeitgeist of a great global growth under neoliberal economic policies. It was only in the decade subsequent to the Great Recession that more attention was given to the detrimental effects of the Quantitative Easing policy on the dollar. Both the depreciating effect on the value of the dollar and the artificially low interest rate, created as a direct result of the policy, had significant effects abroad.
In other words, the economic challenges posed by various countries during the last decade, such as the creation of the BRICS bank, are a reaction to poor American economic policy. Currency depreciation as a result of Quantitative Easing did not result in large inflation within the United States due to the dollar status as the international trade currency as it exported its inflation to other countries. The cascading effect from this exportation created a cycle of escape from the dollar as many central banks sought different currencies with a higher yield as well as started to accumulate gold as a method of preventing these inflationary shocks created by American policies. In fact, according to a report by World Gold Council, gold purchase by a diverse group of central banks increased 82% last year pushing the total global purchases of the asset to a new 30-year-high; as well as the IMF noting that in the same year, the amount of dollars utilized as reserve currency has reached a new low of merely 59%.
Twinned Acceleration
The trend had already existed for almost three decades at the very least, however, two factors have accelerated this trend: technological innovation and geopolitical transformations.
Since the start of the 21st century, the growth in digital technologies have irrevocably changed the financial landscape forever. While cryptocurrencies such as Bitcoin have been the most well-known part of this change, a rather significant driver is the rise of electronic platforms that enabled have automated financial markets and liquidity management as well as allowed the creation and growth of real time payment systems. These electronic systems have greatly lowered the costs of setting up trading posts for different currency pairs and lowered transactional savings that existed by using the dollar instead of local currency pairs. Economically speaking, both lower costs and high inflation export from the United States nudged many countries in the developing world to look into other currencies as part of their diversified reserves along with gold.
Geopolitical actions are another driver in this trend, the constant weaponization of the global economic system by the United States has caused a few countries to look towards alternative payment arrangements in order to continue to trade with sanctioned countries. Both Russia and China have already created alternative payment systems ranging from local equivalents of the SWIFT such as the CIPS and the SFPS to a local Russian card transaction system called MIR to substitute both American-owned Visa and Mastercard. This is not to mention the existence of INSTEX that was originally created by one of United States’ allies, the European Union, as a way to bypass sanctions on Iran. In other words, the reckless use of sanctions by the United States has shown to the world that it cannot trust a financial system that expects national interests to be ignored in favor of a global interest, which had been currently closely aligned with American corporate interests.
What Lies Ahead? A New Gold Standard?
It is needless to say that in the past two years, discussions surrounding a possible return to the gold standard have been growing with much speculation around the large gold reserves that both China and Russia have accumulated throughout the years. The latest news of the pegging of the ruble to gold has made the discussions grow louder along with the idea that means an immediate return to the gold standard is imminent and the end of the dollar hegemony is near. This conclusion seems to be very unlikely to materialize itself in the short-term, much like how the dollar will not lose its position of power in the short-term either.
While the idea that the end of the dollar hegemony is largely uncontested, the timeline of when this will finally come to head isn’t. After all, there is no other viable currency that can take the place of the dollar, not even the often-touted Bitcoin, because there is not much liquidity in the market compared to the dollar. In the end, it remains to see what course that the future will take and if dollar will be supplanted by another currency or if the technological advances has relegated the need for a single international trade currency to the past.
[Photo by Pixabay]
The views and opinions expressed in this article are those of the author.
Maria Claudia Nunes serves as a volunteer researcher at the Nucleus of Conjunctural Assessment (NAC), as technology specialist at the Naval War School (EGN) in Brazil, and a Political Science Professor’s Assistant in University of São Paulo. She graduated with a Bachelor’s degree from IBMEC and is currently pursuing an International Relations Master’s degree at University of São Paulo.
