The Rise and Fall of the Dollar. Part III: The Ambiguous Ascent

The dollar didn't soar but literally clawed its way to the global financial Olympus, repeatedly risking a fall into the abyss. Europeans helped overcome the difficulties of the dollar's ascent to the pinnacle of world financial power.

Three times, the onset of the dollar era was hindered by the actions of American presidents. The first time was in 1836, when, in response to criticism from President Andrew Jackson, the charter of the Second Bank of the United States was not renewed for a second twenty-year term. For nearly eight decades, a decentralized banking system reigned in the American states. Thousands of banks from large and medium-sized cities, and even from small provinces, had the right to issue their own dollars. The "founding fathers" of the Federal Reserve System had to work very hard to return the US to a centralized banking model in 1913. Thanks to this, by 1924 the dollar had overtaken the pound sterling in the structure of world currency reserves and maintained its leadership in the second half of the 1920s.

However, the world's confidence in the stability of the dollar as the new world currency was shaken in 1933 after President Franklin Delano Roosevelt's decision to take the US off the gold standard. The resulting panic led to the immediate return of the pound sterling to its role as the key reserve asset. Even after restoring the gold-dollar standard, the dollar's share in the structure of international reserves of all countries in 1947 was still a modest 13% compared to 87% for the British currency unit.

The third blow to the reputation of the "greenback" was dealt in 1971 by President Richard Nixon, who announced to the world the cancellation of dollar convertibility into gold. As a result of this action, the dollar's share in the total credits provided by the IMF fell to its lowest value—22% in 1980 (compared to 87% in 1960). Oil-exporting countries even considered replacing the dollar in international settlements with SDRs (supranational reserve and settlement asset created by the IMF in 1969).

Paradoxically (or predictably), the main role in establishing the dollar as the world currency was played not by American but by European experiments in organizing the world monetary system. In this sense, much credit goes to the gold standard.

As is well known, the gold standard, first introduced in England in 1774, was suspended as early as 1797 due to the rapid depletion of England's gold reserves after the start of the war with France. If Napoleon I had not lost the Battle of Waterloo, French gold would not have moved from Paris to the vaults of the Bank of England. There would have been no surplus of the yellow metal in England, and the gold standard, as the first form of world money, might have remained the historical legacy of just one single state.

If, after losing the war in 1871, France had not paid Germany reparations in gold, the latter would not have had the opportunity to join the English gold standard. In turn, there would have been no powerful precedent in Europe prompting other European countries to follow suit. 

If Germany, France, and Russia, instead of joining the alien Triple Alliance and Entente, had returned their foreign trade settlements to the base of an alternative monetary standard (for example, silver), no preconditions for subsequent dollar hegemony in the Eastern Hemisphere would have been created. The US simply would not have had a chance during World War I to transform from a world debtor into a world creditor. On the contrary, the center of economic gravity would have shifted to Europe for a long time, with favorable consequences for establishing a Eurocentric world order.

If, if, if... History, as is known, has no subjunctive mood and "teaches nothing, but punishes severely for ignorance of its lessons" (V.O. Klyuchevsky).

Two world wars and the subsequent slow decline of Franco-German influence in world culture, science, economy, and finance are vivid evidence of the harsh punishment for negligent European pupils. Now history is repeating itself. Instead of seizing the favorable moment and, in alliance with Russia, completely abandoning settlements in "toxic" dollars, Europe is indulging the impunity of its transatlantic strategic partner, sliding ever deeper into a prolonged economic depression.

* * *

Thus, the dollar owes its supreme position in the world currency hierarchy more to the inconsistent and reckless actions of Europeans than to the Americans having a clearly crafted plan. It seems Europe is stuck in its mistakes. While, logically, all modern efforts of the Old World should be directed toward developing a young monetary system based on independent international liquidity (the euro), Berlin and Paris continue to support Washington in boycotting Russia, thereby extending the life of the "fading" dollar. The reasons for such seemingly shortsighted behavior by Europeans will be covered in our next article.

Author: Doctor of Economic Sciences, Professor of the Department of World Economy and World Finance at the Financial University under the Government of the Russian Federation Alexey Vladimirovich Kuznetsov.