Compendium: World Reserve Currencies

Even though the Bretton Woods System is dead, the US Dollar still continues to be the “World Reserve Currency.” Everyone knows the Value of the US Dollar within Exchange Rates and everyone outside the Western world clamors for it during moments of economic turmoil. Just what is the significance behind the term “World Reserve Currency?” Is there a political-economic relationship to that financial concept? And why should anyone be concerned about the US Dollar someday losing that status? 

A World Reserve Currency refers to any Currency that has the status of being the most commonly-traded Currency on Earth. Significant amounts of that Currency is being kept by Central Banks and financial institutions in other nations for investment, trade, and transactions. The status is always conferred onto any Currency whenever it constitutes the majority of all known foreign exchange reserves. The US Dollar is only able to achieve the global prestige it enjoys because of the strategic importance of the US economy as the largest on Earth. American financial markets play a predominant role in the world affairs of the Liberal International Economic Order (LIEO). 

Moreover, the US represents one of the largest economic powers in the world where there is immense economic potential. Depending on how one wishes to interpret it, there are seemingly limitless opportunities for large returns on Kapital and Schuld but very little in the way of Arbeit and Geld. A sizable portion of the Schuld created on Earth in the early 21st century are denominated in US Dollars, giving the US government leverage in running fiscal deficits and accumulating so much Schuld over the past four decades. Most Commodities like copper and crude oil are also denominated in US Dollars. And the US Dollar continues to constitute a decent majority over the foreign exchange reserve of other nations. 

It should be recalled that no World Reserve Currency lasts forever. The Currency that preceded the US Dollar was the British Pound Sterling in the 19th and early 20th centuries. Prior to the Pound Sterling, the Dutch Guilder upheld the status between the 17th and 18th centuries. No other known Currency in the world is going to supplant the US Dollar anytime soon. The closest ones are the Euro and Chinese Renminbi because of the economic powerhouses of the EU and the PRC. But neither the Euro nor the Renminbi is in the best-possible position to become the next World Reserve Currency. 

The EU’s Euro is the second largest Currency for foreign exchange reserves. The EU is a political-economic union of Liberal Capitalist nation-states in Europe. The stability of the EU rests on those nation-states continuing to remain as its member-states. But as the Eurozone Crisis has demonstrated, the Euro cannot be expected to serve as a proper rival to the US Dollar. The same can be said for the growing Euroskepticism and calls for various member-states to abandon the EU in the wake of the 2016 Brexit Referendum. While it remains to be seen as to whether any other member-states are willing to leave the EU, it would be remiss to not realize just how fragile the EU truly is. If the Euro fails to keep the EU together, there is a chance that the EU will disintegrate. Thus, it becomes absolutely necessary for the European Central Bank to keep the Euro stable in order to deter other member-states from leaving and reestablishing their former national currencies.   

The other potential Currency, the PRC’s Renminbi, is still a very small fraction of the foreign exchange reserves outside Mainland China. There has been a lot of hype about the rise of the Renminbi by Liberal Capitalists. Despite the Renminbi being part of the basket of Currencies backing the IMF’s Special Drawing Rights (XDRs), the Currency has seen a slow, steady increase. The increase is nowhere as high when compared to the British Pound Sterling and the Japanese Yen. Those two Currencies have seen small increases among foreign exchange reserves between 2014 and 2021. Even so, the Renminbi, Euro and Yen are nowhere close to breaking the 20% threshold in foreign exchange reserves anytime soon.   

Granted, the fact that no Currency in the world is capable of replacing the US Dollar should never be an excuse to claim that the US Dollar will continue to be the World Reserve Currency forever. No World Reserve Currency lasts forever because the sources of its financial power stem from political-economic power. Thus, barring a major political-economic shift in the current world order, the US Dollar will continue to be the World Reserve Currency. For what is keeping the US Dollar’s hegemony in the world is the willingness of foreign governments and central banks to accept it as part of the Liberal International Economic Order (LIEO).

There are a number of prerequisites for the US Dollar to no longer be the World Reserve Currency. Multiple nations and investors alike must consensually decide that the US Dollar is not worthy of being Kapital. The Federal Reserve has to be creating Schuld faster than what the US economy is capable of sustaining according to its GDP Rate. The Inflation Rate has to be rising higher than the usual 2%; a 20% or 200% increase is more than enough to depreciate the US Dollar. 

If this scenario seems too familiar to any observation of the US economy and the US Dollar, that is there is emerging statistical evidence that verifies those conclusions. The Coronavirus Pandemic has caused the US national debt to exceed the GDP Rate and the share of US Dollars as foreign exchange reserves has been steadily declining over the years. What has yet to occur is for the Inflation Rate to finally start depreciating the Value of the US Dollar. The Federal Reserve cannot afford to let that happen. Assuming the Federal Reserve allows the US Dollar to depreciate beyond 2%, there will be cause for concern; the US Dollar’s hegemony is already at stake. Additionally, the US economy’s GDP Rate also has to be in decline to the extent that the US is no longer the largest economy on Earth. 

Since the Inflation Rate is still under control and the US economy no longer shrinking as was the case in 2020, the US Dollar has been able to retain its primacy as the World Reserve Currency. But this is not to suggest that the US economy’s position will be maintained along with the US Dollar’s position. Pre-Coronavirus projections of the PRC saw the economy of Mainland China eventually surpassing the US economy sometime around 2032-2034. The exact year prior to the Pandemic varies, but the projected date from the IMF prior to the Pandemic was 2032. The Pandemic itself has accelerated that shift, moving the estimated year to around 2026-2028. Another major crisis like the Coronavirus Pandemic has the potential to alter this projection.       

It is possible for the US Dollar to remain as the World Reserve Currency and the US economy to become the second-largest economy. The implications reinforce the proceeding conclusion about the US Dollar retaining its position for the foreseeable future. One thing is certain: unlike the Work-Standard, the US Dollar’s hegemony is not dependent on the US economy.    

Categories: Compendium, Economic History

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