James Turk: The Dollar Isn’t What It Used To Be

Excerpted From James Turk’s just-published Money and Liberty: In The Pursuit Of Happiness & The Theory Of Natural Money:

Since the 1944 Bretton Woods conference, the U.S. dollar has been the world’s reserve currency. This term is still used today to describe the international role of the dollar, but it is meaningless to speak of a reserve currency when it is not redeemable in gold. In fact, that is what the term ‘reserve’ means. It is the supply of gold held for safety in a fractional reserve system that is not needed at the moment but is available if required, for example, to settle a payment obligation in money instead of currency. But for now what serves as the international monetary system have twisted the word ‘reserve’ to give it a new definition that fits what exists today.

These word games are intended to delay the end of the U.S. dollar’s role as the world’s reserve currency. While the timing of events is always problematic, monetary history shows that reserve currencies have a limited life. The reserve currency role is lost when the currency eventually becomes too abused and debased by government mismanagement to continue serving internationally, as clearly illustrated in Figure 15.

Government can force currency to circulate domestically through fiat, regulations, and penalty for non-compliance, but those weapons applied domestically do now work internationally, as evidenced by an announcement in the Jakarta Post on 28 June 2021 that should be of concern to the dollar’s managers. ‘Indonesia and China are closer to reducing their reliance on the U.S. dollar as they plan to start using their own currencies for bilateral trade and investment within weeks.’ The head of financial market development of Indonesia’s central bank briefing the news media about the decision said the step was taken ‘so we do not depend 100 percent on the U.S. dollar anymore.’

Forcing a national currency to circulate internationally requires gunboat diplomacy, which the U.S. government has applied in recent decades when countries attempted to challenge the dollar’s supremacy. While gunboat diplomacy can be effective to a certain extent, it has limitations too. Pulitzer Prize-winning journalist, Chris Hedges, recently wrote:

In 2015, the dollar accounted for 90 percent of bilateral transactions between China and Russia, a percentage that has since fallen to about 50 percent. The use of sanctions as a weapon against China and Russia pushes these countries to replace the dollar with their own national currencies.

Countries that are powerful enough to challenge the U.S. government can keep U.S. Gunboats at bay. These countries can freely choose whether to use the reserve currency, and like China and Russia are doing, decrease their reliance on the dollar by developing alternative payment systems. It is the opposite outcome that one would expect from Gresham’s Law. While bad currency drives out good money domestically, internationally there is a choice. The dollar is being driven out of international circulation in recognition that is moved from being a neutral tool in commerce to become a geopolitical weapon.

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