The digital dollar is the modern renaissance for fervently boosting the US dollar’s position as the world currency reserve. Lately, the US dollar status has been further weakening. Moreover, the system is losing its confidence in fiat as a store of value.
A situation that has created long term slideS in the amount of reserves that are in dollars.
Regulatory confusion in the wake of digital currencies has created tensions in the adoption of clear compliance frameworks around the innovation. While the United States’ sole competitor – China, is busy adjudicating digital assets as key areas of innovation; the United States is directing hostility against cryptocurrencies.
In all earnest, Washington’s miasma against cryptocurrency is clearly driving innovation to China. The Asian economy is quickly moving to break things and the prospect of emerging as a dominant financial hub is alarming.
The Rise of the United States Dollar is attributed to the Federal Reserve Act of 1913 following great instability and unreliability of the time’s banknotes currency system. To create stability around international exchanges, most nations pegged their national currencies to gold.
Around 1913, The United States had already outweighed Britain as the world’s largest economy.
The break out of World War I in 1914 saw many countries abandon the gold standard as a national reserve. Meanwhile, this move was fueled by the need to pay for military expenses through paper money.
Economists believed that gold was increasingly devaluing their paper money. However, Britain went ahead to hold on to gold as its reserve for three more years. A decision that plucked away Britain’s position as a center of commerce.
For the first time, the country found itself having to borrow money. Britain turned the United States and in the subsequent flow of events; the US became the lender of choice for most nations willing to buy into dollar-pegged bonds. Britain abandoned its gold standard and the dollar replaced the pound as the global leading reserve.
Entry into World War I as a key supplier of weapons and goods, the United States found itself collecting vast amounts of gold payments. A move that signaled a return to the gold standard.
A meeting in 1944 at Bretton Wood, New Hampshire saw 44 delegates from the allied countries come up with a new system. This new system would not any nation at a disadvantage in the lucrative foreign exchange market and international trade.
Therefore, they devised that the world’s currencies could be linked to the US dollar and not gold. On the other hand, the US dollar was linked to gold. Popularly known as the Bretton Woods Agreement, the proposal established that all central banks would maintain fixed exchange rates between the US dollar and other currencies. In turn and on-demand, the US could redeem their dollar reserves for gold.
Deficit spending on servicing the Vietnam War flooded the United States market with paper money. The situation threatened the stability of the US dollar. Forcing many countries to convert their reserves into gold once again.
This created an extremely high demand for gold that then US President Richard Nixon delinked the dollar from gold; and replaced the system with today’s floating exchange rates. Since the dollar has remained the leading global currency reserve.
The International Monetary Fund (IMF) claims that at least 61% of global foreign banks are held in US dollars. The majority of the reserves are in cash or cash bonds.
Meanwhile, the reserve is influenced by the size and strength of the United States economy as well as the country dominance in financial markets. Despite unbridled printing of U.S dollars, large deficit spending and foreign debts in the figure of trillions of dollars -; US treasury securities still maintain as the world’s safest store of value.
The United States enjoys myriad benefits with the US dollar’s position in macroeconomics. So big have been these benefits, that a former president of France described the position as an “exorbitant privilege”
It is a status that gives the superpower edge against inhumane intolerance by imposing sanctions. The framing of an alternative cryptocurrency serves as a way to avoid the US dollar as a reserve. China is not likely to give up on this front for innovation.
In case the United States does not execute a digital makeover of its greenback and deploy a digital dollar,
I am afraid, that the US dollar will be stripped of its power as a worldwide central bank reserve.