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In the preface to your latest book, Money Beyond Borders, you warn your readers that it is not another work on the history of money. Yet, with its scope and reach, your work strongly resembles that of David Graeber, Debt: 5,000 Years of History, which was in reality a history of money as much as it was a history of debt. How do you position yourself within the broader historiography of research on global currencies?
I resisted the temptation to write yet another history of money. There are already many of those available.
Instead, I focused on the cross-border uses of money – in modern terms, on the status of international currencies.
In doing so, I hope I have successfully highlighted the tension between, on the one hand, currencies as a construct of the state and, on the other, the necessitate for a form of international liquidity, a global medium of payment that transcends the state.
This tension is at the heart of the book.
And it is given that of this tension that you immediately turn to geopolitics. You thus recount the history of the successes and failures of global currencies. Is there a pattern or a set of lessons to be learned from the history of successes and failures of currencies that allows us to understand the shift from one global currency to another, and are these characteristics relevant in the current context?
I like to think of myself as both an economist and a political scientist.
You could say I’m a professional economist and an amateur political scientist – although I’ve been working at the intersection of these two disciplines for a long time.
The status of global currencies is an example of a subject where one cannot avoid examining the interaction between the international economy and international politics.
The status of a global currency rests on the strength of the issuing country’s trade and financial ties with the rest of the world – that is, its international economic relations. But this status similarly has political foundations. Global currencies are the currencies of states where there is a separation of powers and where the rule of law discourages opportunistic behavior by the issuer. This status also depends on the issuer’s ability to forge and maintain durable geopolitical alliances, as in any alliance, one holds and uses the currencies of its allies.
These three dimensions of currency were highlighted by the new Trump administration, but political scientists have been thinking about these issues for a long time.
I’m thinking of Benjamin Cohen, an economics PhD who has spent his academic career in political science departments and has done important work on global currencies. I’m also thinking of political scientist Susan Strange. And Charles Kindleberger on the economics side. I am part of a long tradition of bringing international politics and international economics together around this topic.
You emphasize institutions and the rule of law, but also military power. Is one of these dimensions more important than the others? Can they substitute for each other? When one thinks of the history of the pound sterling, for example, its role as an international currency survived long after the United Kingdom was a dominant military power, and perhaps thanks to the stability of its legal system and institutions. Today, the United States might seek to replace the stability of its legal system and institutions with a greater show of force in order to strengthen the dollar’s role.
You are right: the pound sterling was still the leading international currency in the 1930s, long after the heyday of British geopolitics.
The strength of its institutions, the depth and liquidity of its financial markets, the long century spent making the City of London a leading international financial center – all these factors contributed to the currency’s longevity. But another equally determining factor – and this is relevant again today – was the lack of a significant alternative.
For much of the 1930s, the United States was in the midst of a deep depression. It suffered three serious banking crises. The Fed stopped supporting international trade credit markets. This is largely why the pound sterling regained and then retained its position as the leading international currency in the 1930s.
the Suez Crisis of 1956 highlighted Britain’s geopolitical weakness and sealed the fate of the pound as an international reserve currency. The UK needed assistance from the IMF to support its currency, and the United States demanded that the country comply with U.S. Wishes – to put it politely – as a condition of their support.
The Suez Crisis symbolically marked the transition of the pound sterling to second place among international currencies. But in this specific case, the key point was that Britain was financially weak and that this financial weakness forced it to accept a military setback, and not the other way around. In other words, the interaction between economic and geopolitical weaknesses had effects in both directions.
Throughout history, the main international currencies have been those of states that had both a strong economy and solid governance institutions, and the ability to defend their borders against external threats and project their geopolitical power.
These two elements had to be combined and articulated to maintain the international position of their currency.
Many believe that the complete of the dollar actually began in 1971 with the Nixon shock. Yet, the dollar has survived as a reserve currency, if not a dominant one, practically until today. How do you explain what has happened since then? Why has dedollarization, which has been announced for fifty years now, not yet happened?
Some observers – and well-informed ones at that – had indeed concluded that the end of the Bretton Woods system meant the end of the dollar as a global currency.
Charlie Kindleberger wrote in 1976 an unfortunate, now-famous passage about the death of the dollar as an international currency. But with the exception of the second half of the 1970s – just when he was writing and a period when observers were deeply concerned about the U.S. Balance of payments, the strength of the U.S. Economy, and the commitment of U.S. Authorities to maintaining what would eventually be called the “strong dollar policy” – U.S. Monetary management was not so bad.
Paul Volcker restored price stability, and under the leadership of Alan Greenspan, the Fed reacted quickly to threats to financial stability. The same goes for Greenspan’s successors to date: their policies may have had other costs, but they helped preserve the dollar’s international role.
Combined with the lack of an attractive alternative, this explains why those who predicted the imminent demise of the dollar have continued to be wrong.
Do you therefore think that the fall of an international currency works, a bit like in Hemingway’s expression for personal bankruptcy, “gradually, then suddenly”?
Rudi Dornbusch also had a nice formula that extends this: “Crises accept longer to develop than one thinks; then, once they break out, they progress much faster than one could have imagined.”
This is particularly true for currency crises.
Network effects, historical persistence, and habit formation are powerful factors. In the monetary and financial field, it is advantageous to hold and use the same currencies as those held and used by other actors with whom you deal. But there can also be events that push people to move massively away from established practices in favor of something new. The nervous discussions currently surrounding the dollar suggest that such a moment may be approaching.
And perhaps the difference with the 1970s is that today You can argue for existing or emerging alternatives. One of these could be the euro, the other the yuan. Do you consider that the landscape of possible alternative currencies is fundamentally different today than it was in the 1970s?
The “rivals” of the dollar are certainly more serious today than the German mark in the 1970s or the Japanese yen in the 1980s – when the German and Japanese governments, for reasons of their own, opposed the internationalization of their currency.
Today, officials in the Eurozone and China are actively encouraging the internationalization of their currencies. That said, neither the euro nor the renminbi is currently able to replace the dollar.
I am probably more critical of the euro in my book than my European friends would like, but what Europe and the Eurozone should do to strengthen the international appeal of their currency is not very mysterious: complete the union of European capital markets, issue more common debt, and develop a stronger common foreign and defense policy. Progress in these areas could accelerate, given the provocations of the Trump administration, but it starts from zero. However, the political will needed to do so in the Eurozone is not currently there.
The creation of the euro took half a century. I don’t predict it will take another fifty years to truly internationalize this currency – but it’s clear that it won’t happen overnight.
And what about the yuan?
Its internationalization has indeed picked up, but seems to have stalled.
When you look at the data on reserves held in yuan or on cross-border transactions transmitted via SWIFT – because even the Chinese cross-border interbank payment system CIPS still relies on SWIFT – progress is practically at a standstill. This could be due to the slowdown in Chinese growth – which has gone from double-digit to a range of 4% to 5%. It could also be due to unresolved problems in China in the real estate sector and local government financing vehicles. Finally, the checks and balances that have characterized all major currencies throughout history are absent in China: nothing prevents the Politburo or President Xi from waking up tomorrow and changing the rules of the monetary game. When you want to have a global currency, this is a problem.
These factors will continue to make international investors, both private and public, reluctant to rely too heavily on the yuan.
the CIPS system is growing. Chinese banks are granting more loans abroad in their own currency. But it is important to remember how far the renminbi remains behind the dollar as a global currency. It represents only 2% of identified global reserves – compared to 57% for the dollar. And it accounts for barely 5% of global foreign exchange turnover – compared to 90% for the dollar.
It should also be kept in mind that the traditional idea that a country and a currency need a large platform before they can play a significant global financial role is perhaps changing. New digital technologies have reduced the spreads between exchange rates for currencies of small countries, which were previously too expensive to hold and use: today, you can exchange Australian dollars and Norwegian crowns on your mobile phone.
much of the ground lost by the dollar in recent decades as an international and reserve currency has not been gained by the euro or the yuan, but by the currencies of these small, open, well-managed, and generally inflation-focused countries: in Scandinavia, Norway, Denmark, and Sweden; in East Asia, Singapore and South Korea; and in Oceania, Australia and New Zealand.
The United States seems increasingly aware of the risks to the dollar. To contain them, the GENIUS Act appears to be a strategy to use the issuance of stablecoins as an alternative source of international demand for dollars. This development is interesting when one considers that the crypto-asset ecosystem has largely been built in opposition to the traditional financial system of Wall Street and fiat currencies. With the GENIUS Act, we are witnessing an attempt at reconciliation between these two worlds in a symbiotic relationship in order to try to jointly advance the global dominance of the dollar. Do you think this strategy is viable in a world where the crypto-asset ecosystem is under pressure?
I would caution against the assumption that there is a strategy on the part of the U.S. Government.
As academics, we are trained to always look for an underlying strategy. But in this case, I see no evidence of a coherent approach to strengthening or maintaining the international role of the dollar.
Even on the part of the Treasury Secretary?
Scott Bessent has made contradictory statements about whether he wants a weaker or stronger dollar, and whether he would be willing to sacrifice the international position of the currency in exchange for a “more competitive” exchange rate.
Regarding stablecoins, if you read the GENIUS Act and the press release accompanying it published by the Treasury at Bessent’s signature, they mention various reasons for regulating the stablecoin ecosystem: consumer protection, market integrity, financial stability, and… strengthening the international role of the dollar.
But this is essentially a catch-all approach to rationalize why, in response to lobbying and election contributions from crypto companies, the government should license and legitimize issuers. Stablecoins have the secondary benefit of creating additional demand for U.S. Treasury bonds – as they are held as collateral by stablecoin issuers. This is quite convenient for the United States – and it’s even better if these dollar stablecoins are used in other parts of the world. But I don’t think the GENIUS Act is a coherent strategy to maintain or strengthen the dollar’s international role.
And even if it were, I’m not convinced that such a strategy will be successful.
Why?
In reality, the adoption of stablecoins in the rest of the world has not been so impressive. Stablecoins are mainly used as gateways to and from the crypto sphere for fund transfers and for illicit transactions.
other digital alternatives may compete with stablecoins and may well dominate them in the long run.
What do you have in mind?
I am thinking in particular of interconnected instant payment systems, very popular in Asia, central bank digital currencies, which can operate on a single blockchain or mBridge, and the tokenization of bank deposits – on which SWIFT and the major banks are currently betting.
Stablecoins raise the obvious problem of their incompatibility with the uniqueness of money: to put it simply, will you be able to use the “Walmart coin” at Amazon and the “Amazon coin” at Walmart? In other words, will stablecoins really be stable?
Their ability to maintain their value will depend on the design and implementation of the regulations associated with the GENIUS Act – which is itself only a broad regulatory framework. We have not yet seen the concrete regulations, let alone their implementation. We do not understand whether the brokers in the Treasury bond market have the liquidity to cope with fire sales by stablecoin issuers, or whether these redemptions will spill over into the crypto sphere, triggering a run on stablecoins.
In Europe, the euro digital is increasingly presented as a way to strengthen the international role of the common currency, insofar as it can create a truly public, sovereign and potentially international payment system. But this project also faces strong resistance from the European banking system, which fears that the expansion of the euro digital to a large retail use will deprive European banks of a large part of their demand deposits. Central bank digital currencies (CBDCs) could raise quasi-existential questions about the fractional-reserve banking system. Are we running the risk of moving away from the fractional-reserve banking system if we move towards CBDCs? And what are the consequences for the evolution of the financial system, in your opinion?
I would put forward that the risks associated with swap lines in euros are not so significant.
They are guaranteed at the exchange rate in effect on the date the line is activated: the idea that swaps are risky is therefore a misconception, and I think, in fact, that swaps are important for strengthening the attractiveness of the euro as a global currency. Foreign central banks will only allow companies and banks in their jurisdiction to borrow, hold and use euros if they can act as lenders of last resort in that currency. And for this, they need swap lines.
If I understand correctly, liquidity lines are designed to protect the Eurozone securities markets against external shocks. If foreign central banks holding euro-denominated securities as reserves need liquidity, the forced sale of these securities could destabilize the euro securities markets. Liquidity lines allow these foreign central banks to obtain liquidity from the ECB by temporarily pledging their securities as collateral, which avoids them being forced to sell these assets on the market and helps to preserve its stability. The ECB is thus more inclined to see foreign central banks accumulate euro reserves and foreign central banks are reassured – knowing that they can actually use these euro reserves.
The United States seems increasingly aware of the risks to the dollar. To contain them, the GENIUS Act appears to be a strategy to use the issuance of stablecoins as an alternative source of international demand for dollars. This development is interesting when one considers that the crypto-asset ecosystem has largely been built in opposition to the traditional financial system of Wall Street and fiat currencies. With the GENIUS Act, we are witnessing an attempt at reconciliation between these two worlds in a symbiotic relationship in order to try to jointly advance the global dominance of the dollar. Do you think this strategy is viable in a world where the crypto-asset ecosystem is under pressure?
I don’t predict that the Fed swap lines will disappear. But these are two eventualities that Europe must prepare for.
The Eurozone should seek other sources of dollar liquidity than the Fed, such as credit lines from commercial banks. It could hold more dollars or other reserves of its own, and it could strengthen the regulation of the dollar exposure of European banks and companies.
The possibility that worries me – or at least questions me – is the hypothesis that in a real financial shock, these Asian central banks would not do everything possible to keep their dollar reserves for themselves?
Your hypothesis reminds me of what happened in the United States during the Great Depression, in 1932-1933. Each Federal Reserve Bank separately held its own gold reserves. When the New York banks were taken by storm and the Federal Reserve Bank of New York needed gold, the Federal Reserve Bank of Chicago – which had a surplus of bullion – refused to ship it to New York, fearing it would need it itself to support liquidity and stem the bank run in its own district.
I can imagine the same dynamic occurring in the relationship you envision between the Eurozone and Asia.
This could therefore be the role of the BRI or the IMF to organize support measures for dollar liquidity if necessary.
Absolutely.
