Death of a Reserve Currency

"To the victor belong the spoils of the enemy.”
— U.S. Senator from New York, William L. Marcy

Currently – and since the 1920’s – the U.S. dollar has been the world’s reserve currency. In a nutshell, that means international trade is conducted primarily in U.S. dollars. As a result, virtually every nation on earth must maintain a supply of U.S. dollar currency reserves to conduct global business.

The U.S. was not the world’s first reserve currency. It will most certainly not be the last. In fact, you can see signs of its demise all around you… if you care to look.

What that means for U.S. dollar-based investors is important.

The Baton Gets Passed Through Time
There have been several reserve currencies throughout recorded history. For the purposes of this article, we will only go back as far as the mid-fifteenth century…

-    Portugal… 1450 to 1530
-    Spain… 1530 to 1640
-    The Netherlands… 1640 to 1720
-    France… 1720 to 1815
-    Great Britain… 1815 to 1920
-    United States… 1920 to present

Although it wasn’t until 1944 that the U.S. dollar was officially crowned the world’s reserve currency as a result of the Bretton Woods Agreement, the U.S. dollar started to take on the role post World War I. The U.S. supplied the Allies in World War I, and the U.S. settled those debts by accepting gold in payment.

With the U.S. dollar tied to gold through the Federal Reserve Act of 1913 (which created the Federal Reserve), and given the U.S. held the largest gold reserves in the world, you can make the case that the U.S. dollar became the de facto reserve currency as early as 1920.

Historically, it is the world’s dominant military and trading powers – which often go hand in hand – that assume the role of world’s currency reserve.

This is understandable.

A world’s reserve currency must be able to…

-    Pay debts.
-    Weather global economic shocks.
-    Moderate the currency’s value.
-    Pay for imports of goods and services.

And the country standing behind it must be able to enforce the dependability and trustworthiness of the currency.

If the world cannot count on the value and the liquidity of the currency, it ceases to be desirable at the international level.



Why Hand the Baton Off?
There are some risks and some advantages to being the world’s choice for currency reserves.

Holders of the world’s reserve currency experience a greater buying power. They also have a significantly lower risk due to exchange rates between currencies.

Additionally, since the world needs the currency reserves, interest rates tend to be lower for those based in the reserve currency. But this is a double-edged sword because those lower interest rates tend to result in significant asset bubbles.

Typically, the rewards outweigh the risks. For the citizens of the country with the world’s reserve currency, you tend to see a marked increase in the standard of living. This is probably the most desirable of all the benefits of reserve currency status, and it is why countries are extremely reluctant to give up the role.

That being said, to be a dominant financial power, you must first be a dominant military power. Historically, you typically cannot have one without the other. The sovereignty of the nation and the nation’s currency must be protected. Further, international trade must be safe and dependable.

As a result, it is common to look at the world’s reserve currency as the spoils of war that go to the victor – even though Senator William L. Marcy was initially referring to the spoils of the hard-fought political victories of President Andrew Jackson.

If you look back in time, the baton known as world reserve currency status was handed off due to a mismanagement in or lack of faith in the currency. Ultimately, that led to a weakening of the nation in both military power and global influence as a result.

The net result is a lack of confidence in the currency and a flight to more dependable alternatives.

The Demise of the Dollar
Today, the weakening of the dollar is clearly underway. In fact, the decay began years ago… on August 15th, 1971, when then President Nixon broke the tie between the U.S. dollar and gold.

Since then, take a good look at the chart of gold as measured in U.S. dollars.
 

The wheels have fallen off the cart.

The tie to gold was removed because politicians could not balance the budget. They chose to make poor fiscal decisions which earned them popularity and re-election as opposed to strong fiscal policy to keep our currency and our nation strong.

With no more accountability to gold-backing, the U.S. dollar has been mismanaged ever since.

But the extent of the mismanagement has exploded of late due to the mismanagement of the Global Financial Crisis of 2008-2009, the mismanagement of the Covid-19 pandemic, and the mismanagement of the U.S. dollar though weaponization of the currency most recently.

All these things weaken the currency. All these things weaken the nation. All these things weaken the confidence the world has in the U.S. dollar. All these things cause the countries of the world to seek alternatives to the current world reserve currency.

Act… Do Not Panic
I know. I paint a pretty bleak picture here.

I do believe the picture is accurate. However, I do not see the reserve currency status baton being handed off anytime soon. Quite frankly, there is no suitable alternative at this time.

Yet, if we keep on this path, the baton will be passed… and very possibly in our lifetime.

So, what should you do?

Don’t panic but do prepare.

The simplest way to protect your wealth for you and your family is to do what governments around the world are doing to protect their countries and their citizens.

Buy gold.

Central banks around the world are reducing their appetites for U.S. dollars in favor of increased gold reserves.

Do the same. Shed some dollars for gold (and silver)… the world’s only real money… the only money to have stood the test of millennia.

Right now, the U.S. dollar is still strong compared to the other mismanaged currencies around the world. Use that strength to buy more gold than you ought to be able to buy… now, while the prices are still extremely attractive.

Then… relax, knowing you have taken the necessary steps to Keep What’s Yours with the world’s ultimate reserve currency.

We can help. Give us a shout at 800-831-0007 or send us an email to get moving.