International Currency #1: How the Dollar Took Over

How does an international currency get displaced? Does the contender need to do pre-work to take over when the transition point arrives? Way Yuhl looks at how the US dollar took over from the British pound as the international currency. As the colonial superpower, Britain ruled. The pound was the international reserve currency, and British banks handled most global commerce.

“Deals that had nothing to do with Britain ran through British institutions.”

 

The popular belief is that the US dollar replaced the pound due to the second World War, the complete destruction of Europe and Britain, and the beginning of the end of the British empire. True, but that was just the tipping point. In the decades leading to that point, America had been preparing…

 

From the early 1900’s onwards, America progressively overtook Britain as the world’s largest industrial economy. It produced more steel than Britain and Germany combined. But that alone was never going to be enough to become the new international currency. What were the other steps America took?

 

First, the US became the world’s largest lender. That included loans to Britain and France, thanks to the first World War.

“This gave the U.S. leverage because countries that owe you money cannot easily oppose your agenda.”

 

Second, during the same period, the US accumulated more and more gold. Back then, countries had tied their currency to their gold reserves, so:

“By 1944, it held 70% of global reserves. Gold was the one asset no government could print, devalue, or sanction away. Whoever held it set the terms, and America accumulated it while Britain spent its reserves to finance two wars.”

 

Third, American banks expanded internationally. Wall Street became an alternate center for finance along with London. The alternative financial system was being built in parallel, one step at a time.

 

Fourth, patience. Wait for Britain to weaken, something the second World War eventually did.

“The country that had run the global financial system for a century was effectively bankrupt.”

 

Fifth, propose an alternative financial system. After World War II, America did just that with what is called the Bretton Woods with the US dollar as the new reserve currency. The British argued for a neutral new currency, but:

“(They) lost because Britain had no bargaining power, no leverage over the U.S.”

 

Notice how it happened? There was no one big step suddenly. It was also done patiently. One brick at a time. And then the wait, with no idea how long it might take for the moment to arrive.

“It was methodical and well planned, each step reinforcing the next.”

 

In the next blog in the series, we’ll see whether/how China is positioning itself.