In this article, Pooja Arora discusses the de-Dollarization trend in the Global South. After returning to the emergence of the Dollar as a globally dominant currency, Arora concludes that the Dollar is unlikely to lose its global centrality in the near future. The more likely scenario is a more splintered global economy, based on several types of strong currencies simultaneously with the Dollar being one of them.

Introduction

In the 21st century, there has been a notable shift towards de-Dollarization, with emerging economies actively promoting the global use of their own currencies. India’s Reserve Bank recently advocated for the internationalization of the Rupee.[1] President Xi Jinping of China has enthusiastically embraced the internationalization of the Yuan,[2] President Putin announced intentions to use national currencies in transactions with unfriendly nations.[3] This trend stems from growing discontent among emerging economies, who have faced sanctions from US and allies, for being perceived as transgressors by the Global North.

The drive towards de-Dollarisation today is linked to geostrategic competition between competing visions of global order by US and China and a need to de-risk from the Dollar by emerging economies like India as will be explained in the third section. The central argument of this article is that even though de-Dollarization as an idea has emerged with gusto presently, replacing the Dollar as the dominant international currency may not be possible because its status is derived and reinforced by the dominant position of the US in the world economy, Bretton Woods negotiations after the Second World War, and its prominent status even after the demise of the Bretton Woods system. This article argues that at best, a splintered system of various internationally traded currencies may be established but the Dollar will not lose its dominant status anytime soon.

This first section of this article describes the evolution of the international monetary system. The second section of this article elucidates various attempts made by different nations today to reduce their reliance on the Dollar, driven by their dissatisfaction with the functioning of the liberal order. In conclusion, it contends that despite the numerous challenges facing the Dollar’s dominance, envisioning a world where it relinquishes this status entirely is implausible.

The Evolution of International Monetary Systems

This section delves into the history of the international monetary systems showing that the Dollar was not always the dominant currency. A historical analysis shows that nothing is permanent in the domain of money. Starting with the acceptance of the gold standard in the pre-1914 era, it proves that the status of a dominant trading currency is influenced by many factors including, but not limited to political acceptance, ease of convertibility and usage, and technology. In the present context of the trends towards de-Dollarisation and the central argument of this article, it means that Dollar’s status as the only dominant international currency cannot be taken for granted.

During the nineteenth century, the transition from traditional coinage (gold, silver, copper, and other alloys) to bimetallism, utilizing both gold and silver as exchange mediums, marked a significant development in Europe’s fixed rate system. This evolution culminated in the pre-1914 Gold Standard.[4] This standard was not rigid; nations tailored their approach to suit domestic strategic priorities. The Gold Standard’s emergence was not the result of a formal agreement among governments, diplomats, or economists (unlike Bretton Woods institutions). Instead, it arose from the convenience it offered to trading nations. As more countries embraced it, the network effect of convenience accelerated adoption.[5] With advances like steam-powered minting to combat counterfeiting,[6] the Gold Standard became prevalent, even in countries like the United States and Latin American nations with strong ties to powerful silver mining lobbies. In the final decade of the nineteenth century, the Gold Standard expanded to Asia through adoption by Russia and Japan, while India, previously on the silver standard, pegged its Rupee to the Pound, indirectly linked to gold.[7]

During the inter-war period (1919-1939), the global monetary landscape underwent fragmentation as peripheral European countries tied their currencies to their major trading partners. The fractures in geopolitics caused the said fragmentation. Europe was heading towards another war. In 1931, Britain abandoned the gold standard, and by 1932, the international monetary system splintered into three blocs: the residual gold standard countries led by the United States, the Sterling area with Britain and its pegged nations, and the Central and Eastern European countries led by Germany, practicing exchange control.[8]

After the Second World War, extensive consultations between the allies that began in 1941 (with the Atlantic Charter and the Mutual Aid agreement), led to the birth of the Bretton Woods institutions.[9] These negotiations were influenced by the compulsions of post-war reconstruction efforts in Europe, free-trade evangelists in the United States, and the debates between Harry Dexter White and John Maynard Keynes[10] on the nature of international monetary cooperation. The values of national currencies were to be pegged to gold or to a currency freely convertible into gold (which in practice meant the US Dollar as the US emerged as the dominant global economy with a sufficiently liquid and reliable currency) and current account restrictions were to be substantially removed within five years of the fund commencing operations.[11] But due to differences on the approach to be taken for post-war reconstruction of the global economy- United States favoured free trade while Western Europe preferred public investment into the economy- the agreement did not materialize as planned. There were difficulties in maintaining a stable gold reserve, trade imbalances between countries, and inflation.  The Bretton Woods system fell in 1971 with President Nixon’s announcement[12] that Dollar would no longer be pegged to gold.

Since then, multiple systems for exchange rate management have emerged. Some countries use currency pegs (for example, Qatar[13]) while some let their currencies float within a pre-decided band, i.e., managed float (for example, China[14]). Today, the value of majority of the world’s currencies are determined by market forces of supply and demand. However, the US Dollar remains the foundational currency upon which the values of other currencies rely. This is popularly known as the issue of ‘cross value.’ The Dollar is also the foundation upon which the Liberal world order created after 1945 and led by the Global North is built upon.

Quest for Alternative Currency Systems

Emerging economies like India and China have been observing the practical operation of the liberal order in the twenty-first century. The west has sanctioned any country that it considers as an aggressor, transgressor, or an enemy. Such sanctions are aimed at limiting access to the global financial system dominated by the US owing to the primacy of the Dollar as the dominant trading currency. The pandemic and the Ukraine crisis have also exemplified the domino effect that a single crisis can have on the world economy. While the Global North is better placed due to their historical privileges to manage such crises, the Global South is an unwitting participant. This has prompted the emerging economies to hedge against potential risks, including currency risks.

The geostrategic competitors of the US, i.e., China and Russia are pushing alternative mechanisms for cross border trade. The People’s Bank of China (PBOC) published a paper in 2006 on ‘The Timing, Path, and Strategies of RMB Internationalization’.[15] India’s central bank, the Reserve Bank of India, has also published a report on ‘Internationalisation of INR’.[16] This is the first time in civilizational history that internationalization of currencies is an official policy for nations and surprisingly, nations from the Global South. As noted earlier, it was by a network effect in the pre-1945 era and by an agreement between countries post-1945 that dominant international trading currencies were established.

Conclusion:

The internationalization of a currency[17] accords it many benefits including strategic leverage, reduced transaction costs, macroeconomic flexibility, and reputation. The gold standard and inter-war systems spread through network effects from dominant trading partners to the periphery. Bretton Woods institutions cemented the Dollar’s supremacy in the global economy; a unique occurrence in modern history where countries consented to cooperating in an international monetary order.

Today, for the first time, nations are actively advocating the use of their fiat currencies in global transactions as an official policy. To mitigate risks associated with the US Dollar, emerging economies are pursuing strategies to reduce reliance on it, setting the stage for potentially conflicting initiatives. China and India, aspire to internationalize their currencies while the BRICS bloc (of which they are members) discusses an alternative to the Dollar. But there is still is no direct rival to the US Dollar because the issue of cross-value cannot be resolved until nations can configure a way to independently value their currencies[18]. The future of the international monetary order can be envisioned as a scenario with multiple convertible international currencies with varied degrees of credibility and strength where Dollar continues to play a dominant role in international trade.

Featured Image: An illustration of different currency bills. Courtesy of the author.

[1] “Report of the Inter-Departmental Group (IDG) on Internationalisation of INR”, Reserve Bank of India, 5^th July 2023  Reserve Bank of India – Reports (rbi.org.in)

[2] “Yuan exceeds dollar in China’s bilateral trade for the first time”, Nikkei Asia, 24 July 2023, https://asia.nikkei.com/Business/Markets/Currencies/Yuan-exceeds-dollar-in-China-s-bilateral-trade-for-first-time.

[3] “Putin: Russia moving away from “untrustworthy” U.S. dollar, euro and pound”, CGTN, 7 September 2022, Putin says Russia moving away from U.S. dollar, euro, pound – CGTN

[4] Before 1914, the gold standard meant that every country’s money was based on and could be exchanged for a specific amount of gold.

[5] If a dominant trading partner was on the gold standard, a country was more likely to adopt the gold standard to facilitate ease of exchange.

[6] One of the reasons for not adopting the gold standard faster was the threat of counterfeiting. Once steam powered minting made counterfeiting more difficult, nations moved to the gold standard faster. For more information, refer: Barry Eichengreen, “Globalizing Capital: A History of the International Monetary System” (Princeton: Princeton University Press, 2008), 13-15,

[7] For more information on the evolution of the international monetary system, please consult, Barry Eichengreen, “Globalizing Capital: A History of the International Monetary System” (Princeton: Princeton University Press, 2008)

[8] For more information on the evolution of the international monetary system, please consult: Barry Eichengreen, “Globalizing Capital: A History of the International Monetary System” (Princeton: Princeton University Press, 2008)

[9] Bretton Woods institutions are the World Bank and the International Monetary Fund. In the twenty-first century, these institutions perform many functions but after their primary purpose was European reconstruction and facilitating international trade by monitoring balance of payment accounts across the world respectively. For more information, please refer Harold James, The Multiple Contexts of Bretton Woods, Past & Present, Volume 210, Issue suppl_6, 2011, Pages 290–308, https://doi.org/10.1093/pastj/gtq051

[10] Steil, B. (2014). The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order. Princeton: Princeton University Press. https://doi.org/10.1515/9781400846573

[11] The policy was meant to facilitate free trade between countries which the US favoured due to its potential to lead to faster growth and development. For more information on the original articles of the IMF, please consult https://www.imf.org/external/pubs/ft/aa/pdf/aa.pdf

[12] International Monetary Fund, ‘About the IMF: History: The end of the Bretton Woods System (1972–81)’, imf.org

[13] Qatar Central Bank, “Qatar Central Bank – Exchange Rate Policy (qcb.gov.qa)”

[14] China’s monetary policy in 2022: The way forward – Chinadaily.com.cn, February 28^th 2022

[15] Benjamin J. Cohen, “The Yuan Tomorrow? Evaluating China’s Currency Internationalisation Strategy” New Political Economy, 17:3, 361-371, DOI: 10.1080/13563467.2011.615915

[16] “Report of the Inter-Departmental Group (IDG) on Internationalisation of INR”, Reserve Bank of India, 5^th July 2023  Reserve Bank of India – Reports (rbi.org.in)

[17] For more information on why countries would look towards internationalising their currencies, please read, Cohen, B.J. “The Benefits and Costs of an International Currency: Getting the Calculus Right.” Open Econ Rev 23, 13–31 (2012). https://doi.org/10.1007/s11079-011-9216-2

[18] The value of a British Pound to Rupee or Rupee to the Thai Baht is cross-valued using the Dollar because it has been the dominant currency since 1971. Fluctuations in the Dollar affect all currencies, from the British Pound to the Australian Dollar.