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Should we prepare for the end of the King Dollar? A Conversation with Barry Eichengreen

This interview was originally published in Grand Continent

In the foreword of your book, you warn your reader that this is not yet another book about the history of money. And yet your work was very reminiscent in its breadth and scope of David Graeber’s 5,000 Years of Debt, which was really a history of money as well as a history of debt. So I was very curious to hear how you would place your work in the broader historiography of research on international currencies.

I resisted the temptation to write yet another history of money, of which there are many, and focused instead on the cross-border uses of money – in modern terminology, on international currency status. My hope is that this places in relief the tension between currencies as a construct of the state on the one hand and the need for a form of international liquidity, a vehicle for payments globally, that transcends the state, on the other. This tension is at the center of the book.

And so because of that tension, you immediately turn to geopolitics. And so you tell a history of successes and failures of international currencies. Is there a template or a set of lessons that emerge from the history of the successes and failures of international currency that allows us to capture the turn from one global currency to another and do these features speak to the current moment?

I like to think that I’m both an economist and a political scientist. Truth be told, one might say I’m a professional economist and amateur political scientist, though I’ve been working on the border between the two disciplines for a long time. International currency status is an example of a topic where one can’t avoid  looking at the interplay of international economics and international politics.

As I write toward the beginning of the book, international currency status rests on the strength of the issuing country’s commercial and financial links with the rest of the world – on its international economic relationships. But international currency status also has political foundations. International currencies are the currencies of states where there exists a separation of powers, where rule of law deters opportunistic behavior by the issuer. International currency status depends also on the issuer’s ability to forge and maintain durable geopolitical alliances, since countries hold and use the currencies of their alliance partners. All three aspects have been pointed up by Trump 2.0, but political scientists have thought about these issues for a long time. Think of Benjamin Cohen, a Ph.D. in economics who has spent his academic career in political science departments and who has done important work on international currencies. Think of the political scientist Susan Strange, likewise. Or think of Charles Kindleberger from the economics side. There’s a long tradition of bringing international politics and international economics together around this topic, as I attempt to do in this book.

You insist a lot in the book on institutions and the rule of law, and you also insist on military might. Is there in your mind one that is more important than the other? Can they be substitutes? Can you replace military might by a very stable legal and political system or vice versa? When you think of the history of the pound sterling for example, it seems that sterling’s role as an international currency survived well beyond the time when the UK was a dominant military power, and potentially because of the stability of its legal system and its institutions? Today the US may seek to replace the stability of its legal system and institutions by greater display of force as a way to shore up the role of the Dollar.

You’re right: sterling was still the leading international currency in the 1930s, well past Britain’s geopolitical heyday. The strength of its institutions, the depth and liquidity of its financial markets, the century and more of building up the City of London as a leading international financial center – these factors all played a role in the currency’s endurance. But at least as important – something that is again relevant today – was the absence of a meaningful alternative. For much of the 1930s, the US was in the throes of a deep depression. It suffered three serious banking crises. The Fed stopped backstopping the market for international (trade) credits.  This was an important part of the reason why sterling regained and then maintained its position as the leading international currency in the 1930s. 

In the end, of course, events like the 1956 Suez Crisis highlighted Britain’s geopolitical weakness and sealed the fate of the pound as an international reserve currency.  The UK needed help from the IMF to prop up sterling, and the U.S. demanded that the country defer to America’s geopolitical wishes – to put the matter politely – as a condition of its support.  The Suez Crisis symbolized how sterling was now firmly relegated to the second tier of international currencies.  But in this instance, the fundamental fact was that Britain was financially weak, and that financial weakness forced it to accept a military climbdown – not so much the other way around.  The interaction of economic weaknesses and geopolitical weaknesses cut both ways, in other words.

Throughout history, leading international currencies have been the currencies of states that have both strong economies and institutions of governance on the one hand, and the ability to defend their borders against external threats and to project geopolitical power on the other. Both elements have to be present to sustain their currency’s international position.

If we turn to the US more specifically, because it really looks like your book is a way of talking about the dollar today or the dollar tomorrow. Many imagine that the end of the dollar really started in 1971 with the Nixon shock. And yet the dollar survived as the leading, if not the dominant, reserve currency pretty much until today. And so what is your account of what happened since then? How is it that the demise of the dollar that we’ve been calling for the last 50 years now has so far been proven wrong?

Some otherwise sage observers did conclude that the end of Bretton Woods spelled the end of the dollar as an international currency. Charlie Kindleberger wrote a famous, maybe infamous, passage in 1976 about how the dollar was dead as an international currency. But with the exception of the second half 1970s – just when Kindleberger wrote – a period when observers were deeply worried about the U.S. balance of payments, the strength of the U.S. economy, and the commitment of U.S. authorities to maintain what eventually came to be called the “strong dollar policy,” U.S. monetary stewardship was not that bad. Paul Volcker restored price stability. Under Alan Greenspan, the Fed was quick to respond to threats to financial stability. The same is true of Greenspan’s successors up to now.  Their policies may have other costs, but they helped to preserve the dollar’s international role.

Together with the absence of an attractive alternative, this explains why otherwise wise observers predicting the imminent demise of the dollar continued to be wrong. International currency status is a very slow-moving variable; only a very large shock, larger even than the collapse of Bretton Woods, can decisively displace  it. But we also know that there can be tipping points where slowly moving variables accelerate dramatically.

So do you think that the fall of an international currency operates like Hemingway thought of his own personal bankruptcy: “Gradually, then suddenly”?  

Or as Rudi Dornbusch said, “crises take longer to develop than you think they will, and then once they erupt they proceed much faster than you ever thought they could.”  This is certainly the case for currency crises. 

Network effects, historical persistence, habit formation, call it what you may, are strong. In the monetary and financial domain, it pays to hold and use the same currency or currencies held and used by others with whom you do business. But there can also be events that lead people to simultaneously move away from established practice in favor of something new. The nervous chatter we hear around the dollar currently raises the possibility that such a moment could be coming.

And maybe the difference between today and the ’70s is that today we can make the case for alternatives existing or starting to exist. One potentially being the euro, the other might be the renminbi. Do you view today the landscape of possible alternative currencies as fundamentally different today from where we were in the 70s?

Well, rivals to the dollar certainly are more serious today than the German mark in the 1970s or the Japanese yen in the 1980s, when the German and Japanese governments, for their own peculiar reasons, resisted currency internationalization. Today, Euro Area and Chinese officials are actively encouraging internationalization of their currencies.  That said, neither the Euro nor the Renminbi is in a position currently where it can fill the dollar’s shoes. 

I‘m probably more dismissive of the Euro in the book than my European friends would prefer! There’s no mystery about what Europe and the Euro Area need to do to enhance the international attractions of their currency. But to all appearances they still lack the political will to do it: to complete Europe’s capital markets union, to issue more common debt, and to develop a more forceful common, foreign and defense policy. Movement in these directions may be accelerating, what with the Trump Administration’s provocations, but from a standing start. Creating the Euro took half a century. I’m not predicting that meaningfully internationalizing the Euro will take another half century. But it won’t happen overnight. 

Does that make you more hopeful about the renminbi as an alternative then?

To the contrary, Renminbi internationalization seems to have stalled out. If you look at data on reserves held in renminbi, or on cross-border transactions messaged through SWIFT (even China’s own Cross-Border Interbank Payments System CIPS continues to rely on SWIFT), progress on Renminbi internationalization has all but stopped. This could be because Chinese growth has slowed from double digits to the 4% to 5% range. It could be because of China’s unresolved problems around real estate and local government financial vehicles. It could be that the kind of political checks and balances that have characterized every leading international currency in history are absent in China. There’s nothing to prevent the Politburo or President Xi from waking up tomorrow and changing the rules of the monetary game. These factors will continue to render international investors, both private and public, reluctant to lean too heavily on the Renminbi.

To be sure, CIPS is growing. China’s banks are doing more overseas lending in their own currency. But it’s important to remember how far the Renminbi remains behind the dollar as a global currency. It accounts for 2% of identified global reserves, compared to the dollar’s 57%.  It accounts for barely 5% of global foreign exchange turnover, compared to the dollar’s 90%.

The other thing to bear in mind is that the traditional story that a country and a currency need a large platform before they can play consequential global financial roles may be changing.  New digital technologies have narrowed bid-ask spreads for the currencies of smaller countries, currencies that were previously prohibitively expensive to hold and use. Today you can trade Australian dollars and Norwegian krona on your cellphone. Consequently,  much of the ground that the dollar has lost in recent decades as an international and reserve currency has been gained not by the Euro or the Renminbi but by the currencies of these small, open, well-managed, generally  inflation-targeting countries: in Scandinavia meaning Norway, Denmark and Sweden, in East Asia the likes of Singapore and South Korea, and in Oceania the likes of Australia and New Zealand.

But the US seems to be increasingly aware of the risks and the shadows cast over the dollar. And there seems to be the beginning of a strategy to try and contain these risks. The GENIUS Act appears to be a strategy to use the issuance of stablecoins as an alternative source of international demand for dollars. It’s a very interesting evolution because the cryptocurrency ecosystem was largely built in opposition to the traditional Wall Street financial system and fiat currencies. And with the GENIUS Act, there is an attempt to reconcile these worlds into a symbiotic relationship to try together to advance the global rule of the dollar. So I was wondering how you view that strategy? And is it a sustainable one in a world where the crypto-asset ecosystem is under strain?

I’d caution against assuming the existence of a strategy on the part of this U.S. government. We scholarly observers are trained to look for an underlying strategy.  But in this case I don’t see evidence of a coherent approach to enhancing or maintaining the international role of the dollar.

Even the Treasury Secretary?

Bessent has said conflicting things about whether he wants a weaker or stronger dollar, and about whether he would be prepared to sacrifice the currency’s international standing in return for a “more competitively valued” exchange rate.  Then there’s the dollar stablecoin thing. If you read the GENIUS Act and the associated press release from the Treasury in Bessent’s name, they mention a variety of reasons why the stablecoin ecosystem should be regulated: consumer protection, market integrity, financial stability, and enhancing the international role of the dollar. It’s a kitchen sink approach to rationalizing why, in response to lobbying and campaign contributions from crypto companies, the government should license and legitimize issuers. If stablecoins have the ancillary benefit of creating additional demand for US Treasuries because they are held as backing by stablecoin issuers, that’s convenient from the U.S. point of view. If dollar stablecoins are used in other parts of the world, that’s convenient as well. But I don’t think the GENIUS Act is a coherent strategy for maintaining or enhancing the dollar’s international role.

Even if it’s such a strategy, I’m not convinced it will be successful. Takeup of stablecoins in the rest of the world has been less than impressive.  Stablecoins are used mainly as on-ramps and off-ramps to the larger crypto-sphere, for remittances, and for illicit transactions.  There are other digital alternatives that will give stablecoins a run for their money and quite possibly dominate them in the longer run. I’m thinking about linked fast-payment systems, which are popular in Asia; central bank digital currencies, which can run on a single blockchain or mBridge; and tokenized bank deposits, which is where SWIFT and the big banks are putting their money.  I discuss all of these alternatives in the book.

Stablecoins have the problem that they are not obviously compatible with the singleness of money. Will you be able to use “Walmart coin” at Amazon and “Amazon coin” at Walmart? Will stablecoins even be stable? Whether they will actually maintain their value will depend on design and enforcement of the regulations attached to the Genius Act, which by itself is only a broad regulatory scaffold.  We have yet to see the actual regulations, much less their enforcement.  We don’t know whether broker-dealers in the Treasury market have the liquidity to handle fire-sales by stablecoin issuers, or whether such redemptions will spill back into the crypto-sphere, triggering stablecoin runs.   .

Maybe a word on CBDC. In Europe, a lot of people are presenting the digital euro as a venue to boost the international role of the euro, in that it can create a truly public, sovereign, and potentially international payment system. But as you know, it is also being resisted quite a lot by the European banking system, which is worried that the expansion of the digital euro to a broad retail use would deprive European banks of a large amount of sight deposits. CBDCs can raise almost existential questions about fractional reserve banking. Are we moving away from fractional reserve banking if we are going in the direction of CBDC? And what are the consequences for the evolution of the financial system in your view?

In the United States, people worry about stablecoins having the same negative effect on fractional reserve banking.  They worry that savers will dump their bank deposits for stablecoin tokens,especially if the exchanges on which those tokens are traded pay interest. So much will depend on— coming back to your CBDC case— on design. CBDCs presumably will not be interest-bearing, which will give the banks a modicum of insulation. There may be ceilings on how much digital cash individuals can hold.  Will the banks be the intermediaries between the consumer and the central bank?  Will the Euro Area opt for a wholesale CBDC distributed to and by commercial banks, in other words, or for a retail unit that goes directly into a digital wallet on your phone? There are many options. A Euro CBDC could be designed in a way that it would not damage the banking system.

The ECB is working on expanding its bilateral liquidity and swap lines — it has both swap lines, and liquidity lines, which are essentially standard repo. Do you view this as something that’s meaningful in expanding the role of the euro? And first, do you believe it makes sense for the ECB to have this distinction between liquidity lines and FX swap lines?

I don’t think the risks associated with Euro swap lines are large. These are collateralized at the exchange rate prevailing on the date when the line is activated. So the idea that swaps are risky is a misperception. I do think swaps are important for enhancing the Euro’s attractions as a global currency. Foreign central banks will only feel comfortable about allowing firms and banks in their jurisdiction to borrow, hold and use Euros if they can act as Euro lenders of last resort.  For that they need swaps. 

As I understand it, the liquidity lines are designed to insulate the Euro Area’s own security markets from shocks from outside. If foreign central banks holding euro securities as reserves need cash, fire sales of those securities could destabilize Euro security markets.  Liquidity lines allow those foreign central banks to repo their securities with the ECB, preventing market destabilization. This will make the ECB more comfortable about seeing foreign central banks accumulate euro reserves. It will make foreign central banks more comfortable in the belief that they can actually use those euro reserves.

And talking about FX swap lines, do you think the world should prepare itself for a moment where the US, for a reason or another, starts to treat the Dollar FX swap lines as a more political instrument than it has in the past? They were always a political instrument: The choice of countries that were eligible to these swaps during the GFC was a political decision. But do you expect a more political use of the swap lines to exert leverage? I can imagine, given recent tensions between the US and Europe, and given the acute need for dollar liquidity of the European financial system, the US could threaten Europe. Do you think we should prepare for these sorts of risks? And if so, what can we do to address them?

I’m not predicting that swap lines will be used as political leverage. Nor am I predicting that the Fed’s swap lines will disappear.  But these are contingencies for which Europe must plan. It should look for sources of dollar liquidity other than the Fed, such as lines of credit with commercial banks. It can hold more Dollar or other reserves of its own. And it can tighten regulations on the dollar exposures of European banks and firms

I do worry, or at least wonder, about possibility number one, namely that a future Fed will feel pressure from the White House to provide swaps only to “America’s dearest friends,” such as Hungary and Argentina.  And I do worry, or at least wonder, what Federal Reserve chair designate Kevin Walsh thinks about the Fed’s dollar swaps. He has said that he wants a smaller Fed balance sheet. Is this compatible with dollar swaps? He has said that he wants the Fed to get back to its knitting by focusing narrowly on its mandate. Is concern about the stability of the European financial institutions compatible with a narrow focus on  the Fed’s mandate? All the more reason for the Euro Area to draw up contingency plans.

Europeans happen to have actually quite a limited amount of dollar on their central bank balance sheets. An alternative would be to consider arrangements with friendlier Asian central banks who happen to have a lot of dollars on their balance sheet, and have slightly less of a need for them than the European banking system. Would you advise that the Europeans strike some kind of agreement with the central banks of Korea, Taiwan or even potentially the PBoC, to get access to dollar liquidity if needed?

Another good contingency plan to pursue. But if there is a financial shock, will those Asian central banks insist on keeping their dollar reserves for themselves?  I’m reminded of what happened in the United States during the Great Depression, in 1932-3. Every Federal Reserve Bank separately held its own gold reserves. When there was a run on banks in New York and the New York Fed needed gold, the Chicago Fed, which had bullion in excess, wouldn’t ship it to New York because it worried about needing it for a potential liquidity backstop to stem bank runs in its own district.  I could imagine the same kind of dynamics playing out in your imagined relationship between the Euro Area and Asia.  

So that might be a role for the BIS or for the IMF to play in organizing smooth dollar liquidity backstops if needed.

Absolutely.