[By Barry Eichengreen, translated by Whale Life]
When economists attempt to explain the preeminent position of the U.S. dollar as the only truly global currency, they often attribute it to structural factors: America's share of global GDP, the depth and liquidity of American financial markets. This analytical framework supports the optimistic judgment of many market participants—that no matter what happens, as long as the United States maintains its status as the world's economic hegemon, the dollar will always be a safe haven.
However, the second Trump administration reminds us that numbers alone do not tell the whole story. As historians have noted, the explanation for the rise and fall of international monetary status is ultimately about human action rather than abstract economic size or market data. It is humans who establish the institutional frameworks that support the international status of the dollar, and ultimately, it is humans themselves who decide whether these institutions will endure.
If we trace back to the spiritual father of the global dollar system, it would be Paul Warburg, a German-American. As a descendant of the Hamburg Warburg banking family, he had worked in international finance in Hamburg, Paris, and London before marrying into the Kuhn Loeb banking family in 1895 and moving to the United States in 1902. Warburg's extensive international experience led him to deeply understand that London's position as the center of global trade credit and investment finance brought significant advantages to Britain. Merchants and bankers from many parts of the world (including the United States) were almost entirely dependent on London's pound sterling credit system.
Like many naturalized citizens, Warburg had deep affection for his new homeland, the United States. He was concerned that America's excessive dependence on the London pound sterling system would leave the nation vulnerable to uncontrollable international financial shocks. At the same time, he realized that London's appeal as an international financial center stemmed from the supporting role of the Bank of England as a "lender of last resort," which ensured market liquidity and stability. From this, he concluded that the absence of a central banking system was a fundamental obstacle to the internationalization of the dollar.
Since 1906, Warburg tirelessly advocated for the creation of a central banking system. He argued that this proposed central bank should shoulder a core function: developing a market for credit instruments denominated in dollars to finance international trade. He used European financial terminology, calling these bank drafts or notes "commercial acceptances," and envisioned that the central bank could promote the development of new trade credit markets by "accepting" or purchasing these notes.
Paul Warburg (1868-1932), considered the "master designer" of the Federal Reserve
Warburg wrote columns in newspapers, overcame his stage fright caused by a heavy accent, and participated in public forums. In 1910, he took part in a secret meeting on Jekyll Island off the coast of Georgia, where he and a small group of experts drafted the terms that later became the Federal Reserve Act. When the Federal Reserve was established in 1914, he was one of the inaugural council members. The regulatory provisions Warburg drafted allowed the Federal Reserve to nurture the market by purchasing commercial acceptances denominated in dollars. By the 1920s, the size of the market for these dollar commercial acceptances had equaled that of the London pound credit system, and in some years even surpassed it.
The process of the dollar challenging the pound sterling's status encountered setbacks in the 1930s when the Federal Reserve exited the acceptance market, and the United States experienced severe banking and financial crises. After World War II, the United States became the sole superpower in the Western world, creating a historic opportunity for the rise of the dollar. However, the true foundation for the international status of the dollar was due to the efforts of another key figure—Harry Dexter White.
In contrast to Warburg's aristocratic background, White came from a humble family. His parents were Lithuanian immigrants; his father had once been a peddler and later ran a hardware store. White's aloof personality made his early academic career difficult, but he gained prominence after joining the U.S. Treasury Department under Henry Morgenthau in 1934. He eventually rose to become assistant secretary of the treasury, fully responsible for all international economic and financial affairs handled by the U.S. Treasury during World War II. After revisions, the plan White drafted during the war became the blueprint for the United States to construct the International Monetary Fund (IMF), the World Bank, and the Bretton Woods system, laying the foundation for the post-war international monetary order and dollar hegemony.
Of course, the United States still needed to negotiate with other participating countries at the Bretton Woods Conference in New Hampshire in 1944. White's counterpart was John Maynard Keynes, the British negotiator. Ultimately, the core clauses of the "White Plan" were directly written into the Bretton Woods Agreement.
Specifically, White sought to establish the special status of the dollar as the only fully convertible international currency within the newly established Bretton Woods system. The early draft of the agreement stipulated that exchange rates should be pegged to gold or "gold convertible currencies." When Dennis Robertson, a colleague of Keynes, innocently pointed out that perhaps only the dollar could be freely convertible to gold after the war, White seized the opportunity to consolidate the dollar's position. He and his team worked through the night to modify the draft agreement, replacing the phrase "gold convertible currency" with "gold...or a currency equivalent to the actual gold content and fineness as of July 1, 1944." Thus, the Bretton Woods Agreement established the dollar as the core of the post-war international monetary system, with other currencies revolving around it like planets around the sun.
The arrival of the dollar hegemony era was not solely due to White and the Bretton Woods system he created. The Marshall Plan provided Europe with the necessary dollar funds to restore international payments, helping its economy reintegrate into the global system. When the U.S. Congress resisted joining the "International Trade Organization" (ITO), the U.S. government found an alternative route by signing the General Agreement on Tariffs and Trade (GATT).
American support for European integration and the establishment of the European Economic Community convinced European policymakers that relying on a steadfast ally's currency was a wise choice. NATO made European countries realize that they not only had economic partners but also geopolitical allies—this ally's commitment (and currency) was trustworthy. America's robust economic growth demonstrated its ability to honor its commitments.
In 1946, Harry Dexter White, Assistant Secretary of the U.S. Treasury (left), and John Maynard Keynes, Honorary Adviser to the British Treasury, converse during the first board meeting of the International Monetary Fund.
Therefore, even after the collapse of the dollar-gold parity system under the Bretton Woods system in 1971, the dollar's global core position continued. This resilience stems from the institutional legacy built by Warburg, White, and their colleagues: an independent Federal Reserve, an open world trade system jointly maintained by the United States and Europe, and an unbreakable geopolitical alliance. The dollar's enduring dominance is rooted not only in hard indicators such as its share of global GDP and the scale of financial transactions but also in an interdependent international relations network.
Donald Trump caused significant damage to these networks and reciprocity mechanisms in just a few months (even if he did not completely destroy them). What Trump and his appointed officials questioned were the core value systems and institutional arrangements that have supported dollar hegemony for nearly a century.
For the first time in history, the institutional architecture sustaining dollar hegemony faces a substantive threat.
Firstly, America's economic exceptionalism has been called into question. In recent years, America's economic performance has outpaced other developed countries, boasting leading technology companies globally, leading research in artificial intelligence, fostering a culture of entrepreneurship that tolerates failure, and having a mature venture capital system while continuously attracting global talent—but these advantages do not guarantee continuation.
America's public sector and universities' research capabilities are being hollowed out. It remains uncertain whether technical migrants will continue to view the United States as a land of opportunities. Policy uncertainty and doubts about the rule of law may weaken America's investment appeal.
Since the early 1950s, America's share of global exports has dropped significantly from 18% to 11%. This trend itself is not problematic—it reflects the successful reconstruction of the global economy after World War II, in which the United States played a crucial role. However, if politicians implement high tariff barriers (believing international trade to be a zero-sum game) leading to further shrinkage of America's trade share, it will have far-reaching consequences. History repeatedly shows that the breadth of a country's business networks supports its currency's international status, and the severance of trade ties erodes its currency's global credibility.
This inherent logic is easy to understand. A dominant trading power's currency naturally becomes the settlement choice for its importers and exporters, which are major players in the global market. When businesses from other countries engage in trade with this economy, they tend to use its currency due to the convenience for clients and suppliers. Similar motivations apply when foreign entities seek financing in the dominant country's financial markets. Therefore, when an economy's weight in global trade and finance decreases, the market forces driving the widespread circulation of its currency necessarily weaken. Destructive "America First" tariff policies will accelerate this process.
The dollar's position also faces risks due to America's abuse of sanctions tools. Before the outbreak of the Russia-Ukraine war, the United States had increasingly used this financial weapon: the number of sanctioned individuals rose sharply from 912 in 2000 to more than 9,400 in 2021. The sanctions against Russia in 2022 particularly highlighted the risks—when Russia's dollar assets were not only frozen but potentially confiscated and redirected to Ukraine's reconstruction, countries' motivation to accelerate de-dollarization to avoid risks increased dramatically, serving as a wake-up call for others.
It is worth noting that previous sanctions were mostly implemented in collaboration with allies, making it difficult for Russia to find alternatives to the dollar in international payments. However, historical experiences may not always hold—European countries clearly opposed Trump's "maximum pressure" policy and unilateral sanctions against Iran during his first term.
On April 1 local time, a bipartisan group of U.S. senators introduced a draft bill imposing sanctions on Russia, threatening to impose a 500% secondary tariff on countries purchasing Russian oil, natural gas, uranium, and other products. Senator Graham's personal website
During Trump's second term, the decline in transatlantic cooperation will significantly increase the probability of policy divergence between both sides. Trump did not shy away from threatening to use economic weapons (tariffs, sanctions, etc.) and preferred to act alone rather than cooperate with allies. If the United States continues to act unilaterally, the currencies of countries not participating in the sanctions will benefit from attempts to diversify international reserve currencies away from the dollar.
Moreover, America's fiscal and financial prospects are also concerning. The reason the dollar attracts central banks of various countries as foreign exchange reserves and is favored by corporate treasurers, sovereign wealth fund managers, and international investors lies in its ample supply and stable value. For a long time, the United States has been able to continuously supply dollars to meet the expanding global economic liquidity needs without undermining market confidence due to excessive money issuance.
If current trends continue, America's fiscal and financial difficulties may push the dollar off the cliff in the coming years. The long-term forecast by the Congressional Budget Office shows that the public debt-to-GDP ratio in the United States will rise from 99% in 2024 to 116% in 2034, 139% in 2044, and 166% in 2054. Upcoming legislation (including extending Trump's 2017 tax cuts) may accelerate the debt expansion. Although there is no specific "debt/GDP threshold" triggering a loss of confidence, endless tax cuts, unrealistic spending cuts, and high political polarization will eventually shake international investors' confidence in the dollar's future at some point.
If the attractiveness of the dollar stems from expectations of its stable value, then Trump's administration's moves to undermine the independence of the Federal Reserve will severely damage this advantage. In February this year, Trump signed an executive order stating that officials with significant administrative powers must be subject to supervision by elected presidents, requiring all "so-called 'independent regulatory agencies'" to submit regulations to the White House for review before publication. Acting Attorney General Sarah Harris of the U.S. Department of Justice told the Senate that the department would no longer support the legal provision that the president must cite a "just cause" to remove heads of independent agencies.
It remains unclear whether these orders will directly challenge the independence of the Federal Reserve or the security of Chairman Powell's position, but Trump has already dismissed two Democratic commissioners of the independent Federal Trade Commission. International investors will draw their own conclusions.
Moreover, it is questionable whether foreign holders of U.S. Treasury bonds will continue to receive fair treatment. Reports suggest that Trump's Treasury Secretary Scott Buchheit once considered ignoring investors' wishes and forcibly converting five-year and ten-year Treasury bonds held by foreign investors into low-interest century bonds. During the 2024 election period, Trump's advisors, including Lighthizer, proposed taxing foreign purchases of U.S. Treasury bonds to depreciate the dollar and enhance export competitiveness.
Stephen Miran, the chairman of the Economic Advisory Committee nominated by Trump, openly supported such policies and designed operational paths earlier in his career as an investment strategist. He proposed levying a "usage fee" on interest payments to foreign official institutions holding U.S. Treasuries. This approach circumvents restrictions on "withholding taxes" under international treaties under the guise of a "usage fee." This actually violates the principle of "equal treatment for domestic and foreign investors"—which is also the cornerstone of the dollar's international status. The restriction on foreign bond purchases viewed by the Trump team as a "remedy" is likely to quickly trigger uncontrollable consequences.
Since the beginning of this year, the trend of U.S. Treasury yields. Chart by the Financial Times of the UK
Finally, if the United States is perceived as abandoning its allies, the global status of the dollar will inevitably suffer. Countries choose to hold their allies' currencies as foreign exchange reserves and use them for international payments not only because they see their allies as reliable managers of foreign assets but also because holding an ally's currency symbolizes trust. Before World War I, both the Triple Alliance (Germany, Austria-Hungary, Italy) and the Triple Entente (France, Britain, Russia) member states held their allies' currencies as reserves. More countries chose currencies of nations with which they had security understanding agreements as reserves.
In the 1930s, not only Commonwealth countries but also many of Britain's allies stored their reserves in London through the "sterling area" mechanism, pegging their exchange rates to the pound. In the 1960s, the Japanese and German governments supported the dollar and helped maintain its international monetary status because they valued their defense alliances with the United States—especially the direct stationing of American troops on their territories. Today, the proportion of dollars held by South Korea and Japan as foreign exchange reserves is disproportionately high because they rely on America's security umbrella. With Trump's fierce disputes with Zelenskyy in the Oval Office and his appeasement policy toward Russia, the proposition that "the international status of a currency depends on the politics of allies" is about to face real-world testing.
In the end, the fate of the dollar depends not only on whether American leaders are willing to uphold the rule of law, respect checks and balances, and honor their external commitments but also on whether Congress, courts, and the public can effectively constrain their leaders. Who would have thought things would come to this?
(The original article was published on the commentary section of the Financial Times website, titled “Can the Dollar Maintain Its Status as the King of Currencies?” The translation is provided for readers' reference only and does not represent the views of Guancha.cn.)
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Notice: This article is an exclusive contribution to Guancha.cn. The views expressed are purely those of the author and do not necessarily reflect the platform's stance. Unauthorized reproduction is prohibited, and legal action will be taken for violations. Follow us on WeChat at guanchacn for daily interesting articles.