Dollar Hegemony Is Ending Due To Geopolitical Changes

Patrick Barron, The Mises Institute | August 19, 2023

Since the Bretton Woods Agreement in 1944, the dollar has been the world’s preferred reserve currency—the major trading nations of the world were willing to hold dollars in vast amounts to satisfy their need for a readily accepted worldwide payment medium. Even when, in 1971, the United States violated its solemn promise to redeem its dollars for gold at thirty-five dollars per ounce, nations were still willing to hold dollars.

Germany Shies Away from Monetary Leadership

In the mid-2010s, I was certain that Germany would abandon the euro and reinstate the deutsche mark. It was clear, especially to some German central bankers, that Germany was being cheated by the European Central Bank. Germany’s TARGET2 surplus represented a vast excess of German exports to other European Union members, who were pledging near-worthless government and corporate bonds in exchange for newly printed euros from the European Central Bank. These bonds would never be redeemed for anything of real value; therefore, it would be simple rational self-interest for Germany to quit the charade.

I predicted that such an action would cause the eurozone to collapse, make Germany’s deutsche mark the preferred unit of trade in Europe, and possibly threaten the dollar for worldwide reserve dominance. Obviously, this never happened. Why?

Germany knew and feared that alarm bells would sound all over the world that, once again, Germany was rising and would dominate Europe. The French, especially, would panic for at least two reasons. One, the collapse of the euro would force France to make a stark choice. Either adopt the deutsche mark—as I expected most northern-tier European countries to do—or try to revert to the French franc, knowing that almost no other nation would be willing to hold francs. France would be cut off from international trade unless it reformed its unsustainable welfare system. However, every time France tried to institute any modicum of welfare reform, the population rioted.

Two, France benefited immensely from internal EU transfer payments—most importantly, farm subsidies. French farmers would be forced to reform or go bankrupt, ending a cushy lifestyle that seemed to be synonymous with France itself. The stark fact was that France had nuclear weapons, and Germany did not. It was unthinkable that either Germany or Japan—the losing Axis powers of World War II, along with Italy—would ever get nuclear weapons. Independent control of one’s own nuclear arsenal was the minimum stake for playing the reserve currency game. Thereafter, the game belonged only to nations with large economies that produced a variety of export goods and services desired throughout the world. That left only America in the game.

The great question is why Germany, even though it eschewed nuclear weapons under its own control, would assent to giving up the deutsche mark and adopting the euro in the first place. At the time, Germany wanted to reunite East and West Germany. The French, who legally held veto power over such a move, made adopting the euro a condition for reunification.

However, why couldn’t Germany just ignore this now-irrelevant agreement in more recent years? The answer is just a theory but probably pertains to some extent to all major European nations. Germany had suffered between six and seven million military losses during the two great wars (World War I losses and World War II losses). Germany’s best and brightest, its future leadership, was lost for all time. These were wars in which the elite of all belligerents fought. Such leadership can never be replaced. The loss of future leadership was equally harsh on the other major European combatants. In the two world wars, the Soviet Union/Russia suffered between nine and thirteen million military dead. France suffered a million and a half dead, the vast majority in World War I. The United Kingdom suffered slightly over one million dead (this number excludes India, Canada, Australia, New Zealand, and South Africa.) As former member of the European Parliament Godfrey Bloom has stated: “The 1914–18 war killed the best of the British Empire. The 1939–45 war killed what remained. Then the welfare state danced on their graves.”

The Event that Changed Everything

Then, a great geopolitical event occurred—Deng Xiaoping rose to power in China following the death of Mao Zedong. Deng instituted sweeping, capitalistic economic reforms, and China rose to become a rival to America in terms of economic power. China had obtained nuclear weapons under Mao. Despite the fact that China was and remains a one-party dictatorship, it now had the two ingredients to challenge the US dollar—a large economy and nuclear weapons. China was blackmail proof.

Like China, Russia had thrown off the worst of its Soviet economic policies under Boris Yeltsin and Vladimir Putin, but its small population and relatively backward economy was not in the same league with America and China. Nevertheless, Russia had been a great ally in World War II and had every reason to believe that, now that it had thrown off communism, it could become a vital part of Europe once again. When the US, the North Atlantic Treaty Organization, and the European Union spurned Russia’s attempt to rejoin the old Concert of Europe, it gradually saw its future as aligned with China.

So, what does all this have to do with the end of the dollar hegemony? The answer is that the new Asian nexus saw a way to break the US use of the dollar hegemony as a political tool. The Achilles’ heel of the dollar is that it is a fiat currency. This suits the US political establishment very well since it allows the US to inflate the dollar at will to pay for welfare and warfare. It also allows the US to impose sanctions on its perceived enemies, such as Russia and Iran, by cutting them out of the Swift international trade messaging system.

It is similar to what happened to Brexit advocate Nigel Farage in the UK. For strictly political reasons, his bank closed his accounts, and Farage was unable to find another that would accept his money for deposit. No bank account means no way to exist in a modern economy. Farage feared that he might be forced to leave his own country.

The US-imposed Russian sanctions froze billions of Russian-owned assets. Rather than cause Russia to back down in Ukraine, however, it seems to have sped up the process—started by Russia—to develop a new world reserve currency backed in some measure by gold. The “BRICS” nations—Brazil, Russia, India, China, and South Africa—have been joined by dozens of others who are determined to break away from the fiat dollar hegemony and use an honest, gold-backed trading settlement system. This new BRICS+ group claims that it will announce a first step in pursuing this goal at its meeting in Johannesburg at the end of August.

The US Will Be Forced to Embrace Gold . . . or Become Isolated

There are many who dismiss this development. After all, the US and the US dollar have been supreme worldwide for eighty years. These critics fail to understand real economics, real monetary theory, and real international statesmanship. The US has been enthralled by three destructive concepts.

The first is Lord John Maynard Keynes’s economics—which ignores Say’s law of markets—effectively endowing the Keynesian concept of “aggregate demand” with godlike status while disregarding “production”—the only means of satisfying the demand. The second is the so-called modern monetary theory, which posits that sovereign states can never go bankrupt due to their ability to print all the money they need.

The third concept is the out-and-out arrogance of the US since the end of World War II, which deigns to cancel entire nations. All this will come to an end when gold returns as the focal point of the BRICS nations’ monetary reform project. At that point, the US will start losing friends until it, too, reluctantly regains its senses and returns to gold, honest dealing, and honest, respectful statesmanship. America will need new leaders for this task. They are there, waiting to be called by the people. The US and the world will be a much better place as a result.

Patrick Barron is a private consultant to the banking industry. He has taught an introductory course in Austrian economics for several years at the University of Iowa. He has also taught at the Graduate School of Banking at the University of Wisconsin for over twenty-five years, and has delivered many presentations at the European Parliament.

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