Talk of de-dollarization and the US dollar (USD) losing its status as a global reserve currency has heated up in recent weeks.
History may not always exactly repeat, but it often does rhyme.
So, let’s take a look back at the downfall of the last global reserve currency - Great Britain’s pound sterling (GBP) - to see what lessons we can apply to the USD today.
History is often very complex, and since global reserve currencies maintain their standing for long periods, we will hit some highlights to give you a bird’s eye view of what unfolded. This is a long post to adequately hit on these areas, and we tried to avoid turning it into a textbook.
You will probably draw some parallels of your own along the way, and we will share a few at the end.
Let’s begin by setting the stage with just how strong and widespread the British Empire really was in its heyday.
Brief Overview of the British Empire
Like the US today, the Britain was considered the preeminent power of its time.
The British Empire spanned many centuries. Its infancy was in the late 1500s as it colonized Ireland and established trade outposts in India. It continued to grow during the next few centuries, becoming the leading world power after the Napoleonic Wars and reaching the apex of its powers in the tail end of the 1800s (although it still grew in size up until after World War I).
It is considered the largest empire in history, covering about 25% of the world’s land area at its peak, overseeing between 470 and 570 million people over 50 colonies across Africa, Asia, the Americas, and Oceania. For reference, the world population in 1900 was estimated to be 1.6 billion people.
When you look at a map, it’s quite amazing that such a small country was able to dominate the world stage to that extent.
Being surrounded by water became the British’s biggest advantage as it developed one of the most lethal naval fleets in history. Its success was built upon powerful ships and weaponry, advanced military tactics and the establishment of bases around the world.
Heading into the 1900s, the British pound sterling made up about 63% of the world’s reserves.
The vast breadth of its empire was its strength, but the cost of maintaining it ultimately contributed heavily to its downfall. A true double-edged sword.
World War I - The Beginning of the Decline
At the dawn of the century, cracks started to show as its dominance began to be challenged by other countries, such as the US, Germany and Japan.
But, really, it was the devastation brought on by World War I where things started to turn south for the empire.
It was a costly war, in terms of lives lost, resources used and the overall economic strain it put on countries, particularly Britain, which had to borrow heavily from the US to finance its war efforts.
In addition to the US, Britain also leaned heavily on its colonies, which provided troops and resources to Britain. It was widely seen that the British did not adequately appreciate or recognize these contributions, though. The bitter taste left the colonies questioning the validity of British rule and with a growing desire for independence, which would play out in greater fashion in later decades. But the seeds of decolonization were firmly planted here.
But, if you look at the reach of the GBP as a reserve currency, it declined to almost 50% during the 1910s and bounced back above 60% after the war.
The Great Depression
Once the 1920s hit, though, the US began to surge in power and influence, its place in the world pecking order firmly established after the war.
By 1922, the dollar actually overtook the pound sterling in terms of global reserve currency status, making up about 47%, compared to 43% for the pound sterling.
By 1924, it was 60% USD to 35% GBP.
By 1926, it was 73% USD to 24% GBP.
The ‘20s really were “Roaring” in America.
But things quickly started to shift back towards the end of the decade, and with the onset of the Great Depression, the GBP became the dominant world reserve currency again - 50% to 37% for the USD.
Since, Britain did not experience as strong of a boom during the ‘20s, it didn’t appear to experience the Depression quite as badly as America, although it was still hit hard.
The presence of a social welfare program for the unemployed and financially struggling helped buoy the country in comparison to the US.
It wasn’t until 1933 that President Franklin Roosevelt began enacting similar systems with the New Deal, which helped bring the end of the Great Depression.
The British government also took steps to stimulate the economy, including devaluing the pound sterling to make exports more competitive, and increasing public spending on infrastructure projects.
World War II
As recovery from the Great Depression proceeded, it wasn’t long until World War II began in 1939.
At the time, the GBP accounted for 66% of world reserves, with the USD accounting for 31%.
Interestingly, as the war went on, the GBP continued to gain share, up to 81% by 1945, shortly after the war, with the USD sitting at 16.2%.
This, even though the world had begun to see the US as the preeminent global power. This status was partially due to being the strongest country left standing, as a war fought on European soil severely depleted all other powers as a matter of attrition. Having an ocean separating America from the war front sheltered the homeland and allowed for the continued growth of the country.
The Bretton Woods Agreement
After the war, the Bretton Woods Agreement was established in July 1944.
It ended up establishing a “new world order” if you will, with a new global financial system, the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which is now part of the World Bank Group.
The IMF was created to promote international monetary cooperation, facilitate international trade, and provide short-term financial assistance to countries experiencing balance of payments difficulties.
The IBRD was established to provide long-term financing for the reconstruction and development of war-torn countries and other developing nations.
What Bretton Woods is really known for, though, is the establishment of fixed exchange rates and pegging the USD to gold at a fixed rate, with other currencies being pegged to the USD. Essentially, the USD became the central figure in global currency.
This lasted until 1971 when President Richard Nixon elected to take the USD off the gold standard, leading us to the current system of floating exchange rates.
The GBP was also pegged to gold, but Britain's economy struggled to keep up with the US, and the country faced a persistent balance of payments deficit.
But even with this, it still took time for the USD to truly overtake the GBP as the leading currency held in global reserves, and for the British Empire to truly fade away.
There were really two events over the next 20 years that sped up the downfall and marked the end of this era.
The Suez Canal Crisis
By 1956, the USD became the leading reserve currency again, making up about 52%, compared to 37% for the GBP.
But it was what happened in 1956 that the rest of the world saw the unraveling of the British Empire - the Suez Canal Crisis.
For backstory, the canal served as a vital transportation route for Europe through the Middle East. At the time, it was owned by Britain and France.
But, in stepped Egyptian President Gamal Abdel Nasser, who decided to nationalize the Suez Canal.
Britain and France teamed up with Israel to form a secret alliance and launch a covert military campaign to retake control of the canal from Egypt. On October 29, 1956, Israeli forces invaded Egypt by land, while British and French paratroopers landed near the canal.
This created international uproar and disapproval around the world. America, the Soviet Union and the United Nations all opposed the invasion and demanded the withdrawal of all troops from Egypt. Due to this pressure, troops were withdrawn, and the canal was reopened.
The crisis led to significant economic consequences as Britain lost control of the canal, and it also exposed Britain’s military weakness. Britain was now perceived as too weak to act on its own in even a minor military conflict, and it also truly had lost global influence compared to the United States.
In short, it was an Empire in name only, at this point.
Decolonization
Due to this perceived weakness, decolonization was picking up even more steam, post-WWII.
Those seeds that were planted after WWI were now sprouting in full.
Seen as an illegal and immoral move, the Crisis gave further ammunition to British colonies who wanted autonomy, as it became clear to question if Britain was a fair and just colonial power, and whether they wanted to be associated with it anymore.
And, Britain really just did not have the power, reach or resources to maintain control over territories spread all over the globe anymore.
Decolonization continued through the 50s, 60s and 70s. By the end of the 20th century, most of the British Empire's former territories had gained independence.
The final significant British territory to gain independence was Hong Kong, which was handed over to China in 1997.
Devaluing of the GBP
By the mid 1960s, the USD was well-established as the dominant world reserve currency, at about 75% to the GBP’s roughly 25%.
It would just take one more domino to fall for the transition to truly be complete.
On November 18, 1967, the British government announced that it would devalue the GBP by 14.3% against the US dollar, from a rate of $2.80 to $2.40.
This marked the final nail in the coffin for the GBP as it dropped below 10% of global reserves by the beginning of the 1970s.
The thinking was that this move was necessary to fix the economy and make Britain more competitive on the international stage, but many believed it would lead to higher inflation and reduce the purchasing power of the population.
Not too far off from similar debates we are having in America today.
A brief look at the USD’s share of reserve currency from then until now
By 1971, the USD made up about 85% of the world’s reserve currencies.
This was when Nixon took the US off the gold standard. It was the peak of the US as a reserve currency in terms of how widespread it was held.
Just nine years later, it had dropped to 57%, and it actually dropped another 10 percentage points by 1990, before surging back up to 71% by 2000.
It slowly moved back down over the next 20 years to 60%, roughly where it stands today.
Conclusions: What does this mean for the USD going forward?
First, let’s get this out of the way, if the dollar does lose its status as the world’s reserve currency, it doesn’t necessarily mean the US will collapse.
Britain is still 5th in global GDP today, and the GBP, while only about 4.95% of global reserves, is still the fourth most held reserve currency.
But, there are some parallels worth keeping an eye on going forward.
World War I marked the beginning of the downfall for the British Empire and the GBP as a reserve currency, but it wasn’t until about 50 years later that its downfall was complete.
Coincidentally, we are a little more than 50 years since Nixon took the USD off the gold standard. It may not have been the beginning of the downfall for the USD, but it did mark its high point, so it’s something to keep in mind, especially with the current state of affairs surrounding the USD.
We have also seen periods of fluctuation for both currencies, with its strength and widespread use helping it maintain and regain status.
Just like the GBP fell during the 1920s and recovered in the 30s, the USD did the same during the 80s while recovering during the 90s.
Where the British Empire failed was simply a tale as old as time, spanning across politics, businesses, or other entities.
A surge in power led to increased territory and influence, which also led to increased riches for the wealthy, eventually leading to a growing wealth gap. But, all of these became harder and harder to maintain, as the bloated bureaucracy was maddeningly inefficient. It was no longer the nimble and innovative power that led to its rise, so other countries were able to gain relative power quickly, fueled by a hunger to sit at the throne.
But, the sheer size and entrenchment of its powers meant that the Empire had a lot of unravelling to do, and this took time. In the midst of it, most people were not aware that the Empire was falling. The words “British” and “Empire” were ingrained in their minds, and the idea of it being anything else was hard to grasp.
In that light, it is easy to draw many parallels with America today. We very well could be in the midst of its decline and not even know it.
America has certainly stretched itself thin on the global stage. Although it doesn’t necessarily maintain a physical empire in the sense of lording over colonies, it does maintain military bases around the globe and intervene in many conflicts. And, it certainly has a growing mountain of debt to show for it.
Just as the Suez Canal Crisis led many around the globe to question Britain and its methods of involving itself in foreign affairs, the US has had several such instances over the years, including Vietnam and Iraq. It may even be in the midst of one now with Ukraine, if you consider how much money is being sent over there in the midst of domestic economic concerns.
A big reason the US overtook Britain was due to the British being right in the thick of two World Wars, which greatly depleted its power and resources. The US, being separated from the conflicts by the Atlantic Ocean, was able to protect its country and infrastructure, continue to grow, and also assert its influence on the world stage when it was needed, eventually being seen by all as the leading power of its time.
In these terms, it will be interesting to see if China (or some other undetermined power) is able to overtake the US, and whether that will occur as a result of military conflicts, economic ones, or both.
Just as British colonies felt tension and wanted to break free from the Empire’s dominance, there is a growing tension around the world with countries wanting to break free from America’s dominance, both militarily and economically.
Some of these moves are starting to occur now, as countries are signaling they are starting to step away from the USD. These storylines have played out before, though, to little avail. It may require a similar moment to the Suez Canal Crisis, where the world truly saw Britain as weak, for the dominoes to start falling against America. What that event could be remains to be seen.
It feels as if America’s reign as the world’s leading power is on the downtrend, but how far it has to fall before that transition is complete remains to be seen. It would appear there is still a bit of runway left, but you never know. The reign will certainly end at some point, as nothing lasts forever. How that unfolds will certainly provide lessons for the next world power to consider closely.