History tells us that no currency remains at the top forever. First, it was the Dutch Guilder, then the British Pound, and now, the world is asking if the U.S. Dollar is next.
A SO-CALLED SELL AMERICA TRADE
the American currency
by the wayslipped to its lowest level against the euro in more than four years
[a slow e](https://youtu.be/apM_rQElrLE?si=7PP1O0xOHn97j4LL&t=26)rosion of confidence in dollar based assets.
So, is Trump finally pushing the world to move away from using the Dollar as their currency of choice? This would be a MASSIVE deal. Even Trump himself has said that:
if you want to go to third world status, lose your reserve currency.
But, is that true? Both Britain and the Netherlands have lost their reserve currency status a while ago. Yet, they are still wealthy countries today. And, while perhaps easily forgotten, we have ACTUALLY been here before, in the 1970s many economists thought the US Dollar was done for and would be replaced by gold or a basket of other currencies. Yet, it came back stronger than ever. Could the same thing happen to the Dollar today? And, if the Dollar does fall, what will replace it?
To answer these questions, we could not just look at the latest data, like we normally do on this channel. Instead, we had no choice but to go back 400 years to track in detail the rise, survival, resurgence and fall of the British Pound, the rise, fall AND resurgence of the US Dollar and FIRST
Ch1 The rise and fall of the Dutch Florin
The year is 1609. The newly established Dutch republic is quickly becoming THE global trading powerhouse, with the city of Amsterdam at its center. As one of the few places where money was protected by the rule of law. Even if your country was literally waging war against the republic, your money would still be safe in Amsterdam As a consequence, silver coins from all over Europe were flooding to the bank that would later become the template for all central banks: the Bank of Amsterdam.
Officially the bank of Amsterdam promised that all deposits there were backed by silver coins in the vault. But, it would later be revealed that this was not fully the case. In fact, the bank was using this silver provided basically for free to provide cheap loans to the biggest corporation of the time, the Dutch East India company and the city of Amsterdam itself.
This meant that the Dutch colonial efforts —managed by the East India Company— and the Dutch government effectively enjoyed something the French would later call ‘exorbitant privilege’. Issuing the reserve currency gave the Dutch 3 massive advantages over much larger rivals such as France and England. First, the Dutch could borrow at a lower interest rate than they otherwise could. For example, Dutch provinces typically had to pay about 2-3%, while the much larger British had to pay around 5-6% and the unreliable French 10-12%. Second, the Dutch could borrow much more than they otherwise could, allowing them to fund a massive Navy that dominated the seas, despite the Dutch Republic being a tiny country. Finally, during massive geopolitical crises money often flowed TO the safe haven of Amsterdam, rather than out of it.
Therefore, while borrowing was often extra expensive for most European states, WHEN THEY NEEDED IT MOST, the Dutch could BORROW at extra low rates in times of crisis. This was crucial during the so-called year of disaster “rampjaar” when the tiny republic was invaded by its two much larger rivals France & England plus two German bishoprics. Despite troops rapidly closing in the bank of Amsterdam, the Dutch provinces could STILL borrow at rates lower than the invaders. This privilege allowed the tiny country to hire German mercenaries AND simultaneously subsidize the Spanish and Austrian Habsburgs to enter the war on their side. Meanwhile King Charles the second of England was so low on money that he was forced to partially default on his debts, leading to a major financial crisis in London.
So, exorbitant privilege quite literally saved the Dutch republic.
However, at some point all of that money did lead to a dark side as well, perhaps we should call this the ‘exorbitant burden’. The crux of it is that money had essentially gotten too easy. This encouraged overborrowing by both the provincial governments and the East India Company. Easy money also contributed to rampant real estate speculation and to overreach by the Bank of Amsterdam, which massively increased its loans to the overstretched Dutch East India company. Finally, most of these financial profits went mostly to an increasingly rich financial elite, increasing inequality.
Economists like Jan de Vries and Ad van der Woude have argued that this exorbitant burden made the Dutch republic increasingly specialize in global banking, which crowded out the trading and crafts that had made the Republic great in the first place. Then, ironically, the Dutch financial elite got rich funding the industrial rise of the very nations that would overtake the republic France, the US and especially England. First, Dutch continued investments to England’s rebellious American colonies led to the fourth Anglo-Dutch war, which ruined the Dutch economy and led to the bankruptcy of the East India Company. This in turn caused a major loss of trust in the Bank of Amsterdam money; making money issued by them worth less than the money they supposedly had in their vault. However, while clearly on the decline, the Dutch financial system managed to cling on, partially because the Dutch had diversified their investments by lending a lot to the French crown. Ironically, this would soon lead to their final demise, as the French king was overthrown in a violent revolution, further weakening the Dutch so much that it was easily conquered by French revolutionary forces in 1795 who saw Dutch wealth as a great way to fund their armies. However, ironically this would mostly benefit their arch rival the British, as from that point on, money was no longer safe in Amsterdam, cementing the status of London as Amsterdam’s successor.
And even after being liberated from the French, the Dutch were in so much debt and London was now so strong, that the Dutch would never regain their exorbitant privilege. They spent well over a century paying back their international debts, leading to a century of economic stagnation. When borrowing, the Dutch paid a premium over the English, and in times of crisis, the Dutch had to tighten their belt as money now flowed to the Great British Empire instead.
But before getting to that story. Let’s first review how similar the experience of the Dutch republic is to the Dollar situation today. First, the US today is also said to have an exorbitant privilege, despite having some of the highest debts in the world and one of the highest government deficits in the world
it can borrow at real interest rates that are close to two percent.
On top of that during big crises, such as during 2007-2008 the Americans can typically borrow MORE and MORE cheaply as money from all around the world flees to the safety of New York city.
But, just as the Dutch republic, many have argued that the US is suffering from ever increasing government overspending, more and more financial bubbles, and increased inequality.
And just like the Dutch elites funded the rise of France and especially Britain, so did China rise mostly thanks to the US Dollar system.
Near the end of their exorbitant privilege the Dutch faced a series of financial crisis and shocks. The first signal of their decline was that they could no longer borrow more during crises such as the 4th Anglo Dutch war or French invasion. This is why when after Trump’s ‘liberation’ day, for the first time in a very long time all types of money flowed out of the US it was such a big deal.
Losing this part of exorbitant privilege was literally the beginning of the end for the Dutch Republic. Just a couple of years later, Amsterdam was occupied by the French. But, of course, there are at least TWO very big differences between the tiny Dutch republic back then and the US today.
The first is obvious, America is not at risk of invasion. But, more importantly for our story, the second difference is that the Dollar today is not tied to a metal like silver based Dutch guilder was. Thirdly, when the Dutch were in trouble, there was a clear alternative. Britain had a far bigger economy and thanks to a recent influx of Dutch bankers who helped establish the Bank of England, which would go on to give the British exorbitant privilege next.
Today, America’s situation looks much less clear cut than that of the Dutch Republic.
So to find out what will happen to the Dollar, we need a more comparable example, which leads us to the
The rise & fall of the British Pound
Let`s go back to 1799. Napoleon had just come to power in France meaning there were now two rising powers vying to become the new global hegemon. France had the biggest army and it was rapidly acquiring land. But, Britain had the biggest Navy, allowing it to dominate global trade. And, while while France occupied the wealthy Dutch republic, by doing so, France had arguably given Britain the biggest price: exorbitant privilege.
Britain could now borrow at 3% while France had to pay 10% or more. Using this privilege, Britain essentially “hired” the armies of Europe to fight France on its behalf by subsidizing Austria, Prussia and Russia. On top of that they used their giant Navy to blockade France and its allies.
But, to do so the British state had to borrow to levels previously unseen, at almost 200% of GDP. This was so much that it caused a run on the Bank of England, meaning that they had to suspend the pound’s convertibility to silver and gold, essentially making the Pound a so-called FIAT currency much like the Dollar is today.
Much to the surprise of everybody, this DID not make the Pound worthless. How can a currency be worth anything if its not backed by a precious metal? The answer is simple: the British pound was backed by the mighty British state. You could always use it to pay taxes in Britain. This in turn meant you could always use it to pay British merchants, who were the most productive in the world.
So, was the Pound during this era exactly like the Dollar? No, not quite, because unlike with the Dollar today, the Bank of England promised that the Pound would once again be ‘as good as gold’ after the war was over. And, they kept that promise. After Napoleon was defeated, Britain was now the unquestioned hegemon, where everyone wanted to store their money. Wnhbhether that was at the Bank of England, at the London Stock Exchange, or in British Banks, interest rates were lower than ever. And while this had facilitated excess and bubbles in the tiny Dutch republic. In 18th century Britain, ultra cheap money fueled the first industrial revolution, making Britain both the unquestioned industrial AND financial superpower.
This is crucial because Britain’s industries guaranteed that gold would always flow to Britain. Therefore, the papers issued by the Bank of England, British state, and banks were never questioned. They were free to lend to the world on an epic scale, providing it with a global currency that they used to trade between them, even if Britain was not involved.
However, as happened to the Netherlands before it, over time, ultra cheap money fueled complacency. Just as Dutch financiers had financed the rise of Britain and France, London now placed a crucial role in financing the rise of US industry and, to a lesser extent, Germany. To make matters worse, the dominant position of British industry began to suffer for two reasons. First, while new inventions like electricity and the assembly line ENABLED a second industrial revolution, it didn’t take off in Britain because it’s steam and water powered industries resisted the change. Second, Germany and the US, didn`t play completely fair. While Britain was committed the globalization that made it so rich, the US and Germany developed their industries behind tariff walls, only to unleash them on the world when they reached such a massive scale that it would be almost impossible to overtake them.
Meanwhile, like the Dutch before them, cheap money allowed the British state to overextend itself, fighting for more and more colonies in for example Africa, that didnt do much for Britains increasing industrial decline. Yet, the power of the British pound helped Britain fight off a new continental challenger: Germany. Britain’s army again could not defeat Germany on its own. But, thanks to its exorbitant privilege it funded both France and Russia to fight on its behalf, while the mighty British navy starved Germany of vital resources, which ultimately led to its financial collapse. Yet, this again meant the British state had to borrow to the hilt, and had to limit convertibility to gold. However this time, unlike after Napoleon, there was now an alternative to the British Pound, the US Dollar.
But, this was honestly quite a surprise for Britain. You see, just before the war, the US Dollar was not seen as a serious alternative to the Pound despite the US’s industrial and economic strength. This all changed in 1913 when the US created the US Federal reserve; it US removed tight restrictions on foreign US bank branches AND allowed them fund foreign trade. These changes meant there was now suddenly a true alternative for the British pound. So, unsurprisingly, as Britain exited the first world war with sky high debt, increasingly people began to doubt that Britain`s pound was actually as good as gold.
This is when Britain made the choice that the Dutch were never able to make, it decided to defend the Pounds reserve currency status by increasing interest rates. These sky high interest rates depressed Britains economy for much of the 1920s. However, it allowed Britain to hang on to the other exorbitant privileges a little longer. And, while the US Dollar actually overtook the Pound in the 1920s. High British interest rates and a loss of trust in the stability of the US during the great depression actually meant that the Pound REGAINED its position before the Second World War.
Thus, unlike the Dutch in 1795, Britain still had some of its exorbitant privilege when it faced yet another existential threat from a rising European power.
Specifically, the dominance of the Pound in its current and former colonies allowed it to borrow trillions from its empire during the war. However, by this time, it`s main financial rival, the US had already lost trust in the Pound. Anything the UK bought from the US had to be paid for in gold till 1941 and, after that, when Britain was effectively broke, Britain paid the US by handing over British military bases and by dismantling of British trade protections.
So, by the end of the war, the British state had essentially maxed out its exorbitant privilege. It had borrowed more than it ever had before, while its main monetary rival now held about 80% of all the gold in the world. So, when 44 nations came together to design the monetary system of the new world at the Bretton Woods conference, Britain had almost no leverage. It joined a system that officially made the Dollar the only reserve currency that would be convertible to gold. Yet, Britain managed to cling on to some exorbitant privilege through the so-called Sterling area which included much of the Australia, New Zealand, as well as much of the Middle East, South Asia, and Africa. Since all of these nations committed to continue to hold most of their reserves in British Pound, Britain’s continued exorbitant privilege allowed it to repay its massive war debts fasts by keeping its interest lower than inflation.
Yet, despite this, much like the Dutch republic had before it, Britain declining currency coincided with a century of relative stagnation, where for example, it kept becoming poorer compared to the US
as well as compared to continental European powers that had for decades been poorer like Germany AND its old rival the Netherlands.
On top of that, Britain faced relatively volatile decades where the value of the Pound took major hits in major currency crises in 1976, the early 1980s, around Brexit and again in 2022 when then prime minister Liz Truss seemed to have forgotten that Britain has long lost it’s exorbitant privilege.
So, what can Britain’s run tell us about the fate of the Dollar today?
The first lesson is that despite the changing times and massive power differences between the British and the Dutch, the three benefits of exorbitant privilege remained the same. Britain could borrow at lower rates, it could borrow more, AND crucially during times of crisis, it could borrow MORE not LESS, allowing it to defeat major threats like France & Germany by subsidizing foreign armies.
But, while Britain’s fate was less dramatic than that of the Dutch, they also first faced major volatility followed by a rapid loss of geopolitical power, a financial meltdown AND a century of relative stagnation, that is arguably still going on today.
What we can learn today from this experience is that the presence of alternatives REALLY matters. The insanely high Napoleonic war debts COULD have stopped the rise of the Pound in its tracks. But, because there were no real alternatives, Britain’s currency, power and economy surged, allowing it prosper and repay its debts. On the other hand, while the Dollar looked non-threatening in 1913, just a few policy changes made it overtake the Pound in 1920. Yet, thanks to major sacrifices; the Pound made a comeback arguably helping Britain survive yet another war. But, still, we now know the Pound was on its way out, ever since 1920… Is this the case for the US Dollar as well?
Hmmm not so fast because the Dollar has been here before, and UNLIKE the Pound, it came back STRONGER THAN EVER.
So, to truly understand what we can expect from the Dollar, we need to one more historical story, the story of
The rise, fall AND rise of the Dollar
This story starts in 1944, when the Dollar became the undisputed king of global finance. But, the Bretton Woods era unfolded in an eerily similar way to the eras of Dutch and British Dominance. The US started out as the undisputed industrial power, which essentially guaranteed that gold always flowed back to the US. The US financial system supplied the world with Dollars through loans and Marshall plan subsidies. This gave the US the exorbitant privilege to build the biggest navy the world had ever seen, to subsidize Allies fighting against rivals, and to fight wars all around the world. Meanwhile its financial elite got more and more powerful while they funded emerging industrial rivals, who were protected behind tariff walls.
Finally, exorbitant privilege led to overspending by the US government, until so much gold had left the US that it was forced to
suspend temporarily the convertibility of the dollar into gold or other Reserve assets
Sounds familiar, right? But, just as there were no clearly superior alternatives to the Pound after Napoleon was defeated, there were no clear alternatives to the US Dollar in the 1970s. Instead, the Reagan administration convinced Allies to re-align their currencies with the Dollar, just as how Britain convinced the world to join its gold standard in the 19th century.
However, this is where the similarities to history end. You see, while Nixon TEMPORARILY SUSPENDED the convertibility to gold in 1971, we now know that this suspension was NOT temporary. And that makes sense. Why would you want to tie your currency to a yellow rock? The British had shown currencies CAN survive without it for short periods of time, and now the Americans would PROVE that the Dollar could NOT JUST survive without being backed by gold, it could THRIVE.
But, make no mistake, just as with the Pound under Napoleon. Today the US Dollar is NOT backed by NOTHING. The Dollar is backed by the US state, which taxes in Dollars, and which forces all US citizens AND companies to accept Dollar. For a foreigner like me, this means I KNOW I can spend my Dollars on anything made in America. And since everyone in the world knows this, I can spend my Dollars on foreign goods and services as well.
Importantly though, abandoning the gold standard completely changed the way a reserve currency works. Instead of LENDING money to the world which would then always flow back to the main financial center, America now SPENDS its money into the global economy. And instead of the world BORROWING FROM the global financial center, the world now LENDS TO America. So, ironically, whereas spending more than you earned USED TO BREAK your reserve currency, economists like Michael Pettis now argue that this is EXACTLY what MAKES the Dollar so dominant today.
Conclusion
You see, while global investors will always choose the currency that is most convenient, foreign governments CAN and DO influence this. For example, when Russia was shut of from Dollars and Euros in 2022, its companies switched to Renminbi in no time. On the flipside, the political union of the Sterling zone prolonged Britain’s exorbitant privilege way longer than it otherwise would have. And today, many developing nations, especially in Asia, have CHOSEN TO set up their economic development model in such a way that they grow by exporting to the US, the only country in the world that makes its currency easily available… THROUGH ITS SPENDING.
This has TWO major implications for what we can expect from the Dollar next. The first is that it will be really much more difficult today than it was back then for ANY currency to DETHROWN the Dollar. Yes, China ALREADY HAS the industrial strength to do it. And, much like the US did in 1913, they COULD really surprise the world by making money much safer and easier to store in Shanghai with just a few rule changes. However, that will PROBABLY NOT be enough. The Dollar is extremely attractive for export oriented economies precisely BECAUSE Americans spend so much, making it the reserve currency relatively safe to build your economic model around.
However, now we are getting to implication 2. Make no mistake. The US CAN still push this system too far. The US’s exorbitant privilege still depends on the WILLINGNESS of foreigners to lend to or invest in the United States. Together, relatively low inflation and the rule of law kept your Dollars safe. Heck, America’s incredible stock markets made holding many Dollar assets very profitable indeed.
But, first Biden undermined the Dollar’s perceived safety by freezing reserves from nations it didn’t like, something the Dutch never dared, and the British only did to nations they were at war with.
Then, second, Trump shocked the world when his administration announced sky high tariffs against Allies, and even discussed to potentially tax foreign reserves in the US as a means to bring the value of the dollar down, which he believes has become an exorbitant burden. This can explain why the US immediately experienced the first signs of losing exorbitant privilege, increased volatility AND losing the ability to borrow MORE THANKS TO a crisis.
If this trend continues, the US will likely see a massive reduction its ability to wage war all over the globe, and given that the status of the Dollar now largely comes from foreigners investing ever more in the US, the end of foreign trust will PROBABLY tank American stock markets and lead to a century of relative stagnation, because —as we have seen— losing your exorbitant privilege does NOT mean you lose your exorbitant burden.
And, to get an idea how much weaker the US may become, consider this: the American economy is just as big as the EU and quite a bit smaller if we just look at all goods & services produced. It’s only thanks to the awesome power of the Dollar that America still has the biggest economy in the world.
Luckily for Trump, history has shown that EVEN IF you lose reserve currency status, it may be recovered, heck given that both the EU and China have far worse demographics, if the US starts playing it safe, the Dollar may even come back stronger than ever.
But, of course, this all depends on what Trump will do next AND whether or not his successor will appreciate the Dollar’s exorbitant privilege again. But, yeah that is my take.
One that is, honestly, a bit less scientific than usual, simply because unlike when it comes to migration, gun violence and war economies, we simply don’t have that much data on reserve currencies, especially not FIAT reserve currencies like the Dollar. Therefore, for this video, I heavily relied on the work of economists that have studied history extensively such as Barry Eichengreen, Jan de Vries, and Michael Pettis.