Issuing the world's reserve currency gives a country the advantage of not having to, in effect, pay for many of its imports. Trump has never understood that.
The audio version ia available here:
This is the transcript:
Are the dollar's days over? That's a question I need to ask because there has to be doubt about whether the US dollar can now be the world's reserve currency.
The doubt has of course been created by our great friend Donald Trump who has done everything he can to undermine the credibility of the US economy in the eyes of the rest of the world, and of course, therefore, he is putting the status of the US dollar as the world's reserve currency at risk.
So, what is a reserve currency, and can they cease to hold that status? These are the two particularly important questions to answer.
The second one is the easiest and quickest to answer and is important simply because it makes the rest of the consideration relevant, and the answer is that a currency can cease to be the world's reserve currency. And we know that's true because until, near-enough, the start of the Second World War, the pound sterling, issued, of course, by the United Kingdom, was the world's reserve currency.
We ran the biggest empire in the world.
We did more of the world's trade than anyone else.
And as a consequence, the pound sterling, backed by the Bank of England, was the reserve currency of the world.
And, the Second World War did for that. We were no longer in any position to dictate terms to the rest of the world when, at the end of that war, we had national debt of 255% of our gross national income as a country, and therefore our money was in deep trouble in a very real sense because we had had to borrow so much from the US during the course of the war, which we had to repay over the following 30 or 40 years, which we did largely as a consequence of inflation writing the value off over that period.
But that's not the point. To, therefore, ask what is a reserve currency, and can the dollar lose that status, are both highly relevant questions.
So, what is a reserve currency? A reserve currency is quite simply the most trusted currency in the world.
Remember that all currency is money and all money is debt. It's a promise to pay.
There is nothing that actually now backs up the value of the dollar, and even when the pound sterling was officially a reserve currency, there was never really enough gold to back up its value.
The fact is that people trust the dollar because they've always trusted the USA to be able to make payment of its debts ever since the time of World War II, when it became the world's dominant economic power, largely because of course not a single bomb fell on the whole of the USA excepting Pearl Harbor.
So the US was the world's most powerful nation, and it issued the world's most powerful currency, and it was the richest country in the world, and it partook in more trade than just about any other country as well, meaning that the dollar was available everywhere. And, as a result of the dollar being available everywhere and everyone believing that the US would always back up its promise to pay, which is fundamental when it comes to the issue of a currency, it was used to trade some of the world's key commodities.
Obvious things include oil, which has been priced in dollars virtually since the Second World War, and gold, and wheat, and some other fundamental products. Orange juice, for example. All of those things are traded in dollars, and that makes the dollar extremely powerful.
But it's more than that. Not only does it facilitate trade, it also in a sense creates a store of value. What it proves is the value of something. The dollar price of gold proves to every other country what the value of gold is in their currency, because their exchange rate can be related to the value of gold set in dollars. So the reserve currency in this sense helps to establish norms for valuation around the world, but it does something more.
In some cases, not many now, but in some cases, the reserve currency of the world even provides a peg or basis for valuation for a currency as a whole. For example, Panama uses the US dollar as the basis for its own currency, but it does issue its own dollars. They're just at a fixed exchange rate with the US dollar, and that is something that does happen. It's not terribly important, but I think I should make the point.
More important by a long way, is the fact that very large numbers of central banks around the world will wish to hold foreign reserves to ensure that their countries can settle their debts as they fall you. If the dollar is the currency in which the world's debts are denominated, and indeed, in which very large proportions of the world's debt is actually issued because, for example, things like the World Bank and the International Monetary Fund, as well as very large parts of the world's financial markets, all issue their debts and other forms of financial instrument in dollar denominations, then the central banks of the world need to hold dollars to be able to ensure that they can settle those dollar debt liabilities.
And that means that this is a reserve currency because it is held in reserve to guarantee that debts can be paid. That's where the name comes from. But as a consequence of that, it means that having sufficient dollars in the world to ensure that debts can be paid is important and for that reason, there's actually a very important role that the USA has to play, which is it has to pump enough dollars out into the world to guarantee that the dollar can play this role.
Now, all of that is under threat. Those characteristics of the reserve currency, the facilitation of trade, the store of value, the pegging of value for some currencies, the financial market functionality in the form of providing reserves, and the provision of confidence and liquidity, all of those things are under threat because of what Donald Trump is doing.
He's basically saying he does not want to issue more debt into the world. He says that he wants to cut the value of the US federal debt, but the value of the US federal debt, something like $36 trillion at the moment, is actually the value of the outstanding dollars in the world, which are used for the purpose of it being a reserve currency.
And if he's going to threaten that status, or if he's going to start playing silly games with the value of the dollar by undertaking trade wars, which clearly he is, or if he's also going to play further silly games by threatening the Federal Reserve to demand that the interest rate paid on the dollar might be artificially pegged in a way that the market doesn't like, then the reserve currency status of the dollar is immediately prejudiced.
The fact is that once somebody starts to play with the value of their currency in this way, that currency normally becomes toxic. Nobody wants it. It's a simple, straightforward statement of fact. And if you doubt that, have a look at what has happened to the Turkish lira over the last 10 years or so, which has been destroyed by the policies of President Erdogan.
Now, my point here is therefore, that Trump is threatening just by those simple, straightforward facts, 📍 by playing with tariffs, undertaking trade war, and threatening to change the interest rate on the dollar, the reserve status of that dollar.
What's the consequence? Well, it means that the USA would lose the enormous, fundamentally important economic advantage that it has secured by having the world's reserve currency. And that advantage is something which is the absolute opposite of what Trump says day in, day out.
The fact is that the world has not taken the USA for a ride by running trade surpluses with the USA, in other words, selling more into the USA than they buy from the USA. That's an inevitable consequence of the fact that people who sell goods into the USA want to keep the dollars they're paid and they need to keep the dollars they're paid because unless they keep the dollars they're paid, their central banks can't hold dollars, and therefore there isn't the opportunity to provide the financial liquidity that the world's financial markets need.
So, the world can't afford to buy from the States as much as it sells to the States, because otherwise there would not be enough dollars in the world for the dollar to be the world's reserve currency.
It's a simple, straightforward statement of fact that I just made, but it seems that Donald Trump doesn't understand this.
But what he also doesn't understand is something actually very, very much more fundamental, which is that what this really means is that the USA has effectively bought those imports into the US, which have boosted the standard of living in that country, effectively for nothing because people don't actually want to redeem the dollars they're paid. That means, therefore, that the rest of the world is not exploiting the USA. It's subsidising it. He's got everything the wrong way round; as simple and straightforward an error as can be made in economics. That's what Donald Trump has done.
So, what happens now if Trump really does remove the status of the dollar as the world's reserve currency?
First of all, we'd need to decide what else might be the world's reserve currency. It's definitely not sterling. A small island off the northwest of Europe is not now in the position to provide the world with that facility. The pound is out of the running.
The Euro could be in the running, but obviously, there are problems. It does not represent the currency of any one state, but the currency of multiple states, and it does therefore have some inherent uncertainties in it.
So could it be the Japanese currency, the yen? Highly unlikely because the yen has been operating in such an unusual financial market for so long because of the scale of Japanese national debt, which is well over 200% of GDP now, that this is unlikely to provide an alternative.
Nor, frankly, can China stand up and provide the alternative at present. It simply isn't trusted enough. That is a fundamental problem for it at present.
So could it be that the world's alternative reserve currency, and there may be such a thing, will not be any of those currencies, but a basket of them, maybe including the dollar, but something like Lord Keynes described in 1945, when he wanted to create something called the Bancor, B-A-N-C-O-R, the Bancor, which was going to be used purely for the purposes of international trade settlement and which was a weighted balanced basket of world currencies that would move gradually in composition of value over time to reflect their broad movement in trading conditions between those countries, but which would provide a means of settlement, which the international banks could then hold, and which central banks could hold to ensure that they had international liquidity.
That is entirely possible. It is, in fact, the obvious way to go forward and to make it viable and to provide a more stable world situation; this should obviously include currencies of other major nations, Brazil, South Africa, India, but even smaller countries in the world could partake as well. There is no reason why not, and then they might be able to borrow in their own currency, with that fact being taken into account in the weighting of the Bancor itself, providing as a consequence, less dependence of those states on internal politics in the USA, which will be a blessing to everyone.
And what will happen to the USA if it loses reserve currency status? It will have to pay for its imports. That will reduce its standard of living, significantly.
Trump thinks he's actually going to boost America by punishing those people who have been running trade surpluses by over-supplying imports into the USA. He's actually going to punish America by forcing the people of the USA to finally pay for the items that they bring in from overseas, which they have not needed to do because the dollar has never been redeemed.
It's an interesting, a difficult, a turbulent time, but we need to get our heads around this because if Trump destroys the dollar, as well he might, we are in uncharted territory because when the pound failed, the dollar was available. Now, as the dollar fails, there is no other currency obviously available, and therefore, we need to think hard now about what might happen.
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Rationally, Bancor makes sense, but politically, who is going to make it happen?
There will be a post-Trump world, one day
I can’t imagine that the creation of a global reserve currency such as the ‘Bancor’ would go down very well with the tens of millions of radicalised nutjobs (to use the technical term), who already believe the ‘Great Reset’ conspiracy, that a shadowy liberal cabal are somehow plotting to turn us all into LGBTQ slaves. Or somesuch nonsense.
I agree with all that but also, will the U.S be able to continue to carry the deficits it incurs from military spending and so forth?
If confidence in the dollar does wane, then their defence spending will have to take a hit, never mind other departments.
Now, I wonder who that will upset at home (clue: President Eisenhower)?
John Maynard Keynes is mentioned in a new book and article in Lobster journal here:
“Historical Notes: Keynes, social democracy and the Great Moving Right Show” by Scott Newton (2025)
https://www.lobster-magazine.co.uk/article/issue/90/historical-notes-keynes-social-democracy-and-the-great-moving-right-show/
Declaration of interest: The Lobster website is one that I host and manage for the editor.
Thank you Ian.
An excellent article which I would recommend.
The Liberal party, drawing support from the Non-conformists and more radical thinkers, laid the foundations of the welfare state but in the changed world of the 1920s were squeezed by the Tories and the rise of the Labour party. The electorate trebled in 1918 with about a third of men and women over 30 getting the vote. Plus their own divisions between Lloyd -George and Asquith.
As we have observed before, the events of 1931 where Labour turned just accepted the traditional bankers explanation of the crisis and its ‘solution’, seem to be playing out again in the Starmer-Reeves government. If we don’t learn we are often condemned to repeat the mistakes.
Classical Liberalism was Laissez-faire capitalism-the term I learnt in O level history in the 1960s. I think the term neo-liberalism risks some confusion between liberal thinking which implies tolerance, compassion and a willingness to question, with the predatory form of capitalism we have now ( techno-feudalism is a term I have seen lately). But I can’t think of another term.
The confusion on what is liberalismn is strong.
Our ‘liberals’ have swung between social liberalism predmoninatly and orange book / Manchester school economic neoliberlism, neother of which are pretty.
BRICS countries have been exploring this for some time, prior to Trump. One of the issues of continuing to use the dollar, or the Euro, is the ease with which western countries used the payment systems to sanction countries they don’t like. These political choices have shown how unreliable both the euro and the dollar are, and will be going forward, in a multi polar world.
This is the most perplexing issue. Trump’s isolationism represents a genuine American theme, but one they always managed to keep out of the White House. What Trump is dismantling is not just what passes for the World Order, but the US built and designed World Order. It is deconstructing its own creation. And it has no idea what the alternative looks like. It is an experiment, based on a hunch.
The reason Neoliberal economics is indifferent to trade deficits, is because if you are the World Reserve Currency, trade deficits don’t matter. Import the world, and enjoy. Britain did it, when it was the world reserve currency, with the help of raw materials from the Empire. The problem is, trade deficits matter if you aren’t the World Reserve Currency; or in war, or a crisis (and if you are not the world leader it is a great deal worse). Trade deficits don’t matter in Neoliberal economics, only because economists view the world and reality only through a US economic prism; economics is a lost discipline. Everybody else requires to work very hard to earn a stable source of foreign currency to buy foreign stuff. If you have a significant trade deficit your currency is permanently at risk of foreign stuff being very expensive.
On Britain’s history, I would argue that after WWI, for Britain ‘the game was up’. We were in hock to the US, and the writing was already deeply etched on the wall. What made Britain’s position particularly bad was not just the amount it was in hock to the US, but that WWII exposed its weakened, long under-capitalised and outdated, inefficient industrial base (remember ‘lend lease’ – we couldn’t produce the required industrial output, notably in ships – supposedly a strength), and its dependency was also endemically in trade with the US and to the world for goods (and even food), and increasingly would rely on a longer term dependency on foreign currency, especially post-Empire. Britain has always claimed it is the world’s leading “trading nation” (but it only works if you are the World Reserve Currency, have a reliable trade surplus, or an Empire). Britain frankly doesn’t work (and hasn’t – before and after Thatcher), because it isn’t a World Reserve Currency, the Empire is gone (but not the consequences), and we run endemic huge trade deficits. The City can’t fiddle it anymore (except for itself, and partly be feeding off Britain’s own decaying carcase). For a supposed trading nation, we are one of the world’s leading failures. All you need to do at look at the state we are in, and how long we have been in it.
Thanks, John.
Thank you and well said, John.
May I make you laugh or cry? My friend and former colleague has been in Angola, Ethiopia, Kenya, Tanzania, Tunisia and Zambia this year, trying to persuade their big firms, especially tech unicorns, to list in London.
Sad….
I forgot to mention that she brought me a bottle of Ethiopian red wine. It’s fine.
Minor pedantry here. Mostly because it’s fascinating.
There was one bombing run over mainland USA in WWII
https://worldwarwings.com/japanese-pilot-bombed-us-wwii/
“if Trump destroys the dollar, as well he might, we are in uncharted territory ”
I think that might actually be the whole pupose of the heritage foundation and poject 2025, the destruction of the dollar and the adoption of some kind of crypto currency, produced by a bunch of crypto loving billionaires.
Coupled with this he was talking yesterday about changing the constitution and running for president again in 2028.
There are indeed some dangerous times ahead for us all I fear!!
Re your early paragraph above, what percentage of debt to GNI do you consider sounds an alarm for a country like the UK?
No, not at all.
But others do.
More significant pedantry: Pearl Harbor was not US territory at the time of the WWII bombing. Rather, Hawaii at that time was illegally annexed (i.e. against the wishes of its population) by the USA. It became a US state following a referendum in 1959.
Ok…..
to be even more pedantic, its formal status was a US Territory , incorporated in 1900 and lasting until 1959.
It’s state flag includes the British Union flag. Full story on the web for those who like these things.
As you have always said, money is all about trust.
Budget deficit spending creates new dollars and these must be held by someone and (largely) held in US Treasuries. With the deficit as it is, this is pumping out USD 1.7trn a year which, at the moment, people are content to keep. They are happy to keep them and accumulate more of them because they trust that they will hold their value. People cannot, in aggregate, hold fewer dollars.
The trade deficit is almost USD 1trn a year – this means that foreigners ship goods/services to the US in exchange for dollars which they are content to hold because they expect them to keep their value so that they can be spent at a later date. Foreigners cannot, in aggregate, sell their dollars. Indeed, unless the trade deficit turns around (and it won’t anytime soon) they must keep accumulating more.
So, what happens when people decide that accumulating ever larger pots of dollars makes no sense (let alone getting rid of what they already have)? What happens when trust is lost?
Well, they all run for the exit at once. The first sellers get out but in the end the market is just an exercise in pass the parcel…. and eventually, a new price for dollars is found – versus other currencies/gold and also a higher rate on interest on USTs – where people are content to accumulate more dollars again….. or until the twin deficits in the US are abruptly reversed.
Whilst there has been much talk about how the dollar is used in international trade this is not the point – “transactional balances” to oil the wheels of trade finance are small compared to overall dollar holdings. It is all about the willingness of people to accumulate more dollars as “savings”.
When Hemmingway was asked “How did you go bankrupt?” he replied “Slowly, then quickly”. I suspect this might be an apt description about the status of the mighty dollar.
Much to agree with
An alternative currency will be needed if Trump continues to mess up their economy, and I expect him to do so.
I have expressed reservations about the Bancor previously. Pragmatically, who will set exchange rates and how will they be democratically accountable? I think the practical problems of establishing the Bancor will prevent it happening.
But we still need a reserve currency if (when) the dollar goes down the pan. As you point out there is no obvious alternative. What I think will happen is similar to the Bancor. Countries will diversify their holdings of foreign currencies. So each country will use a basket of other currencies, which will change over time. Indeed this already happens to some extent. The baskets, for each country will be different, will be more diverse than at present and will contain many fewer US dollars. There is no need for this to be coordinated.
And the dollar will slide in value and, as you say, Americans will start to have to pay for their imported goods.
Thanks Tim.
When Richard first posted about the Bancor idea on this site (as a non-economist it wasn’t something I had heard about before) I found the idea intriguing, but the question that came to the fore was “how do you get there from here?” I think you are saying there isn’t a practicable route, but even so it would be interesting for someone to map out what new institutional arrangements would be needed to make such a currency workable.
I agree that countries (and institutions within those currencies) are likely to want to control the obvious current risks of dollars by transfering money to other currencies, and that is probably already happening and will continue as long as Trump is President. The question is which currencies, as Richard says there aren’t too many credible candidates. Even with a “basket” it is likely that once you get beyond the Euro and Chinese yuan other national currencies underpin too small an economy and in many cases are effectively slaves to the dollar due to previous IMF (etc) loans.
Richard suggests the fact that the Euro isn’t “owned” by a single sovereign state makes it a weak candidate, but I wonder if that is really the case. The fact that the European Central Bank has to relate to multiple countries suggests to me that it could be a model for the sort of governance needed to underpin the Bancor. Is it something that could be built on to create a global reserve currency not tied to a particular country?
Give me time…
Thbis idea might be in a new book…
I confess I have formed no clear view of Bancor; but Timothy Geithner was interested in it (it came to nothing). Timothy Geithner? He was United States secretary of the Treasury under President Barack Obama, 2009-2013 (following the Crash)..
If Donald Trump ever wants to thank anyone for providing the political environment for Trump to thrive, it is Timothy Geithner. It proves nothing of course, but it is scarcely a ringing recommendation of the Bancor idea ……..
I don’t follow the logic that the US does not “in effect“ pay for its imports. American buys a widget from Chinese maker priced at 10 dollars. American sends 10 dollars to Chinese maker ands gets widget in return. Chinese maker either saves those dollars or buys non-US item priced in dollars. Those dollars then circulate for evermore outside the US in the international dollar trading system. How does America get its 10 dollars back in exchange for nothing? What step(s) am I missing?
Trade involves exchange i.e. the dollars should return but they don’t.
There is no exchange because people do not want US goods, they just want the dollars, which are ciostless to produce.
So “costless” in the sense that that US exchanges dollars for Chinese goods , rather than exchanging Chinese goods for US goods ? I believe Warren Mosler once said something to the effect that Chinese imports to the US were a benefit because “…they send us their goods, and all they get from us is a bank statement”.
We have done the inanity of Mosler’s comments in general recently….
Maybe this is worth a read: https://uk.bookshop.org/p/books/the-mandibles-a-family-2029-2047-lionel-shriver/3741345?ean=9780007560776. Lionel Shriver’s book on the impacts of the dollar ceasing to be the world reserve currency.
On China, I think it is worth noting that China will be the world’s largest economy by 2030 and that the US is currently (before Trump’s tariffs) expected to be 2nd with India not that far behind and growing rapidly. And then there are Brazil, Indonesia, Russia, Mexico and the Eurozone. Whether the US will retain the projected 2nd position when Trump and Project 2025 have done with it, remains to be seen – I am inclined to think it may not. Even if the Project 2025/US billionaires club is warded off and Trump goes in 2028 or earlier, it is going to take the US many years to recover its financial reputation and position. Add to that the facts that there are now economies that can compete with/exceed the US in terms of scale and output. and the fact that the US abuse of the dollar’s position as a political and militaristic tool is globally much more widely recognized and understood. None of that seems to play well towards the US dollar being a reserve currency of choice, or even fact, going forward.
It’s also perhaps significant that as of March 2025, China’s Cross-Border Interbank Payment System (CIPS) has participants in 119 countries and regions. These participants, including both Direct and Indirect participants, allow the system to cover over 4900 banking institutions in 186 countries and regions [Gemini]. CIPS offers real-time settlement and uses the same messaging protocol as SWIFT; the latter makes transition a relatively simple migration in terms of implementation and technology, if not in terms of politics.
This article makes interesting reading – https://nitishastra.substack.com/p/swift-vs-cips-rise-of-chinas-digital
Perhaps there doesn’t have to be a formal global currency treaty going forwards. The west is no longer in a position to impose one as it was in 1944.
It seems possible to me that the world, (US and a few vassals excepted), might just quietly transition to exclusively using CIPS as its exchange vehicle because it’s there, its stable, it’s instantaneous, it’s secure and there is very little reason to reinvent an opposition mechanism. Once that has happened, the dollar might just quietly sink into history. The US would no doubt everything in its power to oppose this and use every veto it has to do so, but then, of late, it’s only enthusiastic veto supporter has been Israel.
It’s also worth considering that the rising generations now in their 20’s and 30’s and even 40’s have far less allegiance to neoliberal mythology, are aware that their lives have been orchestrated by neoliberal propaganda and social abuse and, most particularly, will be, even are, experiencing the realities of the terrible damage that the Bretton Woods generations of the 1950s and 1960s and the US have inflicted on the planet and their life opportunities. For many of them, quiet transition to a system operated by a stable nation that doesn’t advance by war and conquest and is functionally technologically superior to any western nation, the US included, probably seems to be not a threat but an opportunity. (My grandaughters, both in their late teens, both see the future as being possessed by China and the east, not the US or the UK. And they don’t use, or want to use, Twitter or BlueSky. Their digital go tos include RedNote (Xiahiongshu), Weibo and TikTok, which, despite being 72, I increasingly find myself turning to for information and interest).
I don’t think Trump has done for the dollar per se – he may be a compelling event in its terminal decline, but, really, what has done for the dollar is US imperialism, US militarism, climate change and US economic neoliberalism – so one might as well blame Charles Koch, the military-industrial complex, big pharma, big agri, oil and James Buchanan.