Barry Eichengreen argues the dollar’s reserve-currency status is being slowly eroded by U.S. debt, political polarization, Fed independence risks, and fraying alliance trust, though no near-term replacement is obvious.
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This is an interview with Barry Eichengreen about the rise and fall of reserve currencies and what could eventually challenge the U.S. dollar. He frames reserve-currency history as a mix of economic power, financial market depth, domestic political institutions, and alliance politics. Looking back, he explains how the pound sterling gave way to the dollar through Britain’s relative decline, the creation of the Federal Reserve, World War I and II, and Britain’s weakening imperial position. He also emphasizes that reserve-currency shifts are often gradual rather than binary, with periods of overlap and reversal. A major thread is that war and geopolitical alignment have historically shaped currency leadership. Eichengreen says states borrow to finance wars, and that alliance blocs matter because countries prefer to hold and use the currencies of trusted partners. …
Tactically, the dollar remains dominant, but headline risk is skewed toward further trust erosion if U.S. officials keep signaling unpredictable treatment of allies and foreign holders.
Over coming months, watch for gradual reserve diversification, gold accumulation, and euro-internationalization efforts; the base case is slow erosion rather than abrupt dollar failure unless U.S. political institutions deteriorate further.
Structurally, reserve-currency leadership depends on credible institutions plus geopolitical trust. The long-run regime risk is that the U.S. keeps the currency role but loses some of the exceptional borrowing and safe-haven premium that came with it.
Global reserve-currency development is tied to war and state borrowing over the last millennium.
He explicitly says financial market development is tied to the pursuit of war and that states borrow to prosecute offensive or defensive wars.
The standard path to international currency status requires economic size, trade, deep financial markets, and political credibility.
He lays out economic and political prerequisites including trade, trade credit, checks and balances, and alliance politics.
The dollar and pound were roughly co-equal after World War I before the Great Depression weakened the dollar.
He says the Fed Act and WWI elevated the dollar, then the Depression and banking crises undermined confidence and led to reserve liquidation.
What were the essential steps required for some coins and currencies to become so dominant and become a global reserve currency?
What was it that caused the pound to lose its dominance to the dollar, and what were the mechanics of that gradual transition?
Is it your assessment that every time a country or empire gets overstretched with too many war expenses, that's one of the reasons why a reserve currency loses power over time?
Yes, the development of financial markets over the last millennium is tied up with the pursuit of war — states borrow and incur debts to prosecute wars. This pattern appears in the rise and fall of the Florentine Florin in the 14th-15th centuries, the Dutch Gilder, the pound sterling, and now adventures in the Strait of Hormuz.
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