Of late there has been a lot of talk of de-dollarisation of the world, meaning reducing or eliminating the importance of the US currency in the three motives that Keynes ascribed to currency: as a means of exchange or payments; as a store of value; and for speculation. The BRICS countries, God bless them, are even meeting in August to discuss a BRICS currency, unmindful of the fact that China will want its yuan to be that currency and that India will say over my dead body. What the other three say won’t matter. Talk about pipe dreams.
But how easy is it really to dislodge a global anchor currency? Is mere economic and military might enough for that? Germany had emerged as a challenger to British power in 1870 after it defeated France. There was talk even then — inspired by the Germans naturally— that the German currency would displace the British pound soon. But it took 75 years after that, till 1945 when the Second World War ended. And it was the US dollar that emerged triumphant because during 1914-18 there had also been the First World War when all the British and French gold ended up in the US as collateral for American loans to Britain and France. Even so the pound remained a major currency till the huge devaluation of 1966. In short, China can huff and puff all it wants but it won’t be able to blow the American house down. Indeed, it would do well to hark back just 25 years when everyone thought the euro would replace the dollar as the global currency, or at least be an effective substitute. That too didn’t happen.
So what does it take for a currency to become an international medium of exchange, an international store of value and an international instrument of speculation? The answer is trust, which is the one thing that China under Xi Jinping doesn’t inspire. China has a $16 trillion economy and it dominates world trade. It has a large — but untested — military machine. It has started acquiring gold in large quantities. But America has what truly matters, international trust.
The real question is why. After all, it was just 52 years ago that the US reneged on its commitment to pay $35 for an ounce of gold and countries were left with paper. Last year it also froze Russian dollar assets. The Chinese are saying America has ‘weaponised’ the dollar. It has also flooded the world with dollars. And many other such actions in total disregard of others. So why is America still trusted? The answer perhaps lies in its soft power built on its values and the institutions that uphold those values. Britain was a brutal coloniser but there was a time when everyone wanted to be like Britain. Now everyone wants to be like America which, too, has been brutal in its pursuit of commerce but much nicer in many other ways than Britain ever was. In a way this is like the Stockholm Syndrome of global finance.