A group of economists was asked to contemplate a question about sanctions on Russia and their potential for deep, long-term consequences on the United States.
At issue is a source of American power so ubiquitous it’s been assumed for generations to be unshakeable: The almighty dollar and its role as a global reserve currency.
Imagine being able to run up massive deficits every year; spend more on your military and government programs; enjoy cheaper interest rates on debt; and still never worry about your currency collapsing because it’s used everywhere.
Now imagine also being able to punish your enemies by cutting off access to this currency, making it illegal to transfer any money through U.S. banks.
The U.S. need not imagine this exorbitant privilege, to borrow a term from a former French leader: It’s been the reality since the Second World War, when the U.S. dollar became the dominant international currency.
Around the world it’s popular with people, companies and governments, in everything from cross-border sales to the central bank holdings other countries use to stabilize their economies.
“It’s a pretty great deal,” said David Laidler, professor emeritus at Western University and University of Chicago-trained monetary economist.
“It’s international money, is what it is.”
Now the steward of that international currency, the U.S., with its allies, has cut Russia off from banking systems; prohibited dollar transactions; isolated Russia’s central bank; and all but assured Russia’s first debt default in a century.
What if Russia tries seeking relief from the Washington-based International Monetary Fund or World Bank? The U.S. and other G7 countries are working to cut off that access too, all punishment for Russia violently invading its neighbour.
As U.S. President Joe Biden said Friday: “[We’re] crushing the Russian economy.”
So dozens of prominent economists were asked this week in a recurring survey run by the University of Chicago whether we’re about to witness a ground-shifting economic event.
Those economists from Yale, MIT, Harvard, Princeton, Berkeley and Stanford were specifically asked whether this weaponization of dollar finance might lead to countries shifting away from the dollar as the dominant international currency.
Most confessed to not having an answer about where things go from here: 42 per cent said they didn’t know, 16 per cent predicted a shift, and 28 per cent predicted no shift. Fourteen per cent had no opinion or did not answer.
Those predicting no change argued there’s just no logical successor to the dollar. Others countered that the greenback’s pre-eminence will be gradually eroded by cryptocurrencies and other currencies.
That debate is unfolding beyond the towers of academe.
Some bankers have called the punishment of Russia a turning point in financial history, predicting that U.S. rivals have new incentives to start using other currencies, especially after the U.S. seized Afghanistan’s assets last year following the Taliban takeover.
The role of the dollar: How it started
The dawn of American monetary supremacy coincided with the last world war, while the sun was setting not just over the British empire but over the dominance of the British pound.
Guests from around the world were welcomed to Bretton Woods, N.H., in 1944 with a statement from U.S. President Franklin Roosevelt, who later described the goal of that conference: avoiding a repeat of the international economic warfare of the 1930s that culminated in the bloodiest conflict in human history.
Central to that effort was creating the two above-mentioned bodies, a new International Monetary Fund to stabilize currencies and a World Bank to lead development and reconstruction.
They would be located in the U.S. capital, and the IMF would base its exchange rates on the U.S. dollar, which itself was pegged to the price of gold (until 1971).
Britain resented its loss of status and wanted to remain the epicentre of the financial world — but its massive war debts and damage left the U.S. as the uncontested superpower of the capitalist world.
The U.S. dollar is to this day involved in nearly 90 per cent of all international currency exchanges, is used in half of cross-border goods purchases, and represents about 60 per cent of central bank reserves held in cash and bonds.
That centrality makes U.S. sanctions an especially powerful tool.
Remember Meng Wanzhou? Canadians undoubtedly do recall the extraordinary ripple-effects, economic and human, that followed the arrest of that Huawei executive.
What’s less well-known is the reason for Meng’s arrest: The Chinese citizen was charged with violating American sanctions against Iran.
She was accused of sending payments from China, in U.S. dollars through a New York bank, to a secret Huawei subsidiary in Iran, and of then concealing those payments.
How it’s going now
It’s no surprise American rivals want to reform the system.
China’s central bank 13 years ago called for reforms toward a multinational reserve currency system, and it now has a digital currency system with a so-called e-yuan app that has over 260 million users, though it insists this isn’t aimed at the dollar.
Russia has complained bitterly for years about the U.S. abusing its currency supremacy, and Vladimir Putin said last year that the U.S. is biting the hand that feeds it, by reducing confidence in the U.S.-centric system.
The totality of our sanctions is crushing the Russian economy. <br> <br>The ruble has lost more than half its value. <br> <br>The list of private businesses leaving Russia is growing by the day.
—@POTUS
Russia has attempted to de-dollarize for years by severely cutting its use of greenbacks in trade with Brazil, India, China and South Africa, and in the holdings in Russia’s national wealth fund.
Is change imminent?
The U.S. has worked to preserve its advantage.
Just this week, the Biden administration announced a study on developing government-backed cryptocurrency, and one of its stated objectives was to preserve the American role in the financial system.
So is change imminent?
A software entrepreneur and hedge-fund manager who’s written about how cryptocurrencies will affect the dollar says it’s inevitable but will occur gradually, over many years.
“In my mind, it’s already happening. And it was already happening before any of that Russia-Ukraine stuff started,” Erik Townsend said.
“It’s ending in slow motion. You can’t replace something until you provide the replacement.”
In his view, digital currencies are the logical successor, as implied by the title of his book — Beyond Blockchain: The Death of the Dollar and the Rise of Digital Currency.
The euro has been too unstable, he said, dashing early expectations it might rival the dollar. The Chinese yuan remains little-used internationally.
He said it’ll take a period of technological upheaval to determine which form of digital currency becomes most popular for international transactions.
He expects we’ll see competition between government- and private-sector-created currencies, we’ll have new exchanges where we convert these currencies, and ultimately governments may regulate or restrict foreign rival currencies.
What’s the Canadian angle?
He said it’s taken U.S. politicians way too long to launch a study like the one this week, given how important this issue is for their country.
Over 100 countries are already studying or piloting central bank digital currencies for cross-border or domestic use, the White House said this week in announcing its study.
Not that the dollar’s dominance is all positive for the U.S.
A briefing note for members of the U.S. Congress spelled out some of the drawbacks of a stronger dollar: It makes foreign goods cheaper, and easier to import, so American manufacturing plants have a harder time competing, causing closures and lost blue-collar jobs. Lower interest rates can also lead to more debt.
Laidler says it’s still, on balance, a great advantage to the U.S. The end of dollar hegemony would leave America less powerful and less wealthy, he said.
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He’s firmly in the camp of those doubting the greenback will be supplanted anytime soon: There’s no other currency that rivals it, he said, and as for digital currencies, he said central banks will wind up adopting and regulating them.
“I think it’s a long way off,” he said of the dollar’s reserve-status demise.
And what’s the Canadian interest in all this?
Laidler said some Canadian nationalists might appreciate a less influential U.S. But it would also hurt our country given that we rely on American buyers for three-quarters of our exports, he said. “The U.S. would be a less prosperous country…. That wouldn’t be such a good thing.”