Reference News Network, October 23 report: The U.S. "Wall Street Journal" website published an article titled "Will the Dollar Lose Its Dominance? It Happened Once in History" on October 9. The author is Barry Eichengreen. The following is an excerpt:

Is the dollar's status as the world's reserve currency beginning to wane?

Some people believe it is. They point out that President Trump's tariff policies, the United States' growing debt, and the use of financial sanctions as a tool of foreign policy have all harmed the dollar's position. After Russia was banned from using the dollar in 2022, it turned to using the Chinese yuan for international transactions. Other countries are also exploring alternatives, fearing that debt will force the Federal Reserve to keep policy rates low, thus driving up inflation and causing the dollar to depreciate.

Many people find these arguments too far-fetched. The fact that the dollar is so widely used and that the U.S. economy is so large means that the dollar's international status is solid.

But those who are blindly optimistic forget one fact: the dollar has lost its dominance before. This history is worth revisiting.

The Fed Helped the Rise

Before World War I, the dollar was not used internationally at all, with the pound being the world currency. American banks were not allowed to set up branches abroad, and the United States had no central bank to support its financial markets.

In 1913, this changed with the passage of the Federal Reserve Act. This law created the central bank, the Federal Reserve, and allowed American commercial banks to establish branches abroad.

The creators of the Federal Reserve wanted to create a new American banking system, but their motives varied. The irritable Virginia Congressman Carter Glass, who considered himself a financial expert, sought to establish a decentralized public banking system to provide credit to Southerners who lacked sufficient financial services. Nelson Aldrich, a senator from Rhode Island and chairman of the influential Senate Finance Committee, wanted to emulate the Bank of England to establish a central bank to alleviate financial crises.

Paul Warburg, a German-American banker and one of the most influential financial critics in the U.S., was smart and had a mustache. The U.S.'s reliance on the pound was a competitive disadvantage because it forced American exporters to seek trade credit abroad and bear exchange rate risks. Warburg lobbied for the establishment of a central bank to create a U.S. trade credit market, which were essentially short-term promissory notes that functioned as promises to pay on time. Warburg's bank was ready to buy these credits, called "trade acceptances," at predetermined prices, keeping their cost and availability stable and predictable, allowing American importers and exporters to finance their trade in dollars.

Warburg's vision came true. In 1910, he accompanied Aldrich on a secret meeting on Jekyll Island in Georgia, where a group of prominent bankers outlined the basic content of the Federal Reserve Act. President Woodrow Wilson appointed Warburg as a member of the Federal Reserve Board. While in office, Warburg encouraged the Fed to support the emerging dollar credit market, advocated for relaxing the types of credits the Fed could purchase or discount, enabling the central bank to not only play a role in commodity trade financing, but also to provide financing for purely financial transactions such as short-term loans.

To further promote market development, Warburg established the American Acceptance Council as a policy advocate for the industry in 1919. In 1921, he founded the International Acceptance Bank, which had a bank consortium providing dollar financing for foreign trade.

By the late 1920s, under Warburg's direct promotion, New York became the main source of trade credit, and the dollar replaced the pound as the main international currency. Of course, Warburg's efforts were supported by institutional conditions. Since 1890, the U.S. had been the largest economy in the world, and in 1915, it became the largest exporter. After World War I, the U.S. had the largest financial market and became the main source of foreign loans. Therefore, the rise of the dollar was inevitable - although it took a long time.

Severely Damaged During the Great Depression

However, what is gained can also be lost.

Starting in 1929, with the outbreak of the Great Depression, both U.S. imports and exports declined. The Smoot-Hawley Tariff Act and the foreign retaliation it triggered dealt another blow to trade. Three devastating financial crises disrupted the flow of funds, making importers and exporters hesitant to rely on the U.S. banking system.

At that time, one-third of the U.S. banks and the Federal Reserve's dollar acceptances were issued by foreigners, mainly Germany. After experiencing hyperinflation from 1922 to 1923, the German public dared not entrust their savings to domestic banks. Cash-strapped banks charged two-digit interest rates when lending to German importers and exporters. The well-funded U.S. banks, attracted by high interest rates, began to provide trade credit to German banks, which then provided money to German companies. The dollar acceptance market supported transactions for both American and foreign traders, marking a significant expansion of the dollar's role internationally.

When struggling U.S. banks stopped lending, everything collapsed. The German government responded by suspending payment of its debts, including acceptance credits. U.S. banks had to take the blame. That is, the foreign acceptances they held might be worthless.

At the time, the Federal Reserve refused to intervene and support the market, worsening the situation. By 1934, the value of dollar acceptances had dropped to just half that of pound acceptances.

Political Intervention Undermined the Position

Why did the U.S. allow the international status of the dollar to be so dramatically weakened?

First, people were important. Benjamin Strong, the president of the New York Federal Reserve Bank, was a close friend of Warburg. Strong was a firm internationalist who believed the Federal Reserve should play a role in supporting the dollar as a global currency. Strong died of tuberculosis in 1928. His successor, George Harrison, was less concerned about supporting the dollar trade credit market.

Second, politics were important. Glass had risen to become a senator and served as the chairman of the Banking and Currency Subcommittee. Glass blamed Warburg's push for relaxed Federal Reserve regulations and Strong's excessive support for the dollar acceptance market for the ups and downs of Wall Street. In Glass's view, their actions fueled reckless speculation, leading to the collapse of the financial system, and President Herbert Hoover agreed with this view. Glass began pressuring the Federal Reserve to only purchase acceptances for commodity trade financing. These "real bills" had reliable commodities as collateral, ensuring performance. Moreover, since they financed legitimate economic activities, discounting them would not fuel financial speculation.

Sensitive to criticism, the Federal Reserve cut back its operations. Commercial banks were unsure whether the central bank could guarantee market liquidity, and became less willing to buy acceptances. Although the U.S. eventually recovered from the Great Depression, the once crucial international acceptance market never recovered.

It wasn't until after World War II that the dollar once again became the main global currency. This was actually a logical result, as the U.S. was the only economy that had not been severely damaged. The Federal Reserve learned from earlier experiences, realizing its responsibility was to act as a lender of last resort and provider of liquidity, thereby promoting and maintaining the dollar's international dominance.

The lesson of 2025 is clear. The dollar's international dominance is not eternal. To maintain this status, it must be actively cultivated and maintained, requiring the support of competent officials. Political interference, however, brings danger.

Original: https://www.toutiao.com/article/7564308609070121522/

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