Why the Global Dollar System Is So Hard to Replace

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In the early 1960s, the Federal Reserve noticed something it could not explain. Foreigners were earning deposits in American banks, but they were not converting them into gold from Fort Knox as economists expected. Instead, they were using those deposits in a completely different way. The Fed sent researchers to London to find out what was happening.

They discovered that foreign banks and businesses were trading claims on American deposits and using them as cash. Soon, banks in London went a step further. They began creating new dollar-denominated loans and deposits on their own balance sheets. In effect, they were creating dollars outside the United States and beyond the direct control of the Fed or the Treasury.

That offshore market became known as the eurodollar system. Today, it contains roughly $14 trillion, compared with around $19 trillion in domestic US dollars. It plays a central role in financing global trade and continues to grow, including in China, even as headlines suggest the world is turning away from America.

The contrast between what countries say about the dollar and how they actually use it is crucial. Brendan Greeley, a former Financial Times economics editor and author of “The Almighty Dollar" argues that the dollar is not a referendum on the United States. People may be frustrated with America and still rely on its currency. The important question is why.

The Dollar Existed Long Before the United States

Let's start with an uncomfortable fact from the dollar's own biography: it is older than the United States. The currency adopted by America’s founders was based on the Spanish piece of eight, a widely used silver coin struck from metal mined in Mexico and Bolivia. Its name can be traced back to Joachimsthal, a silver-mining valley in Bohemia. Joachimsthaler became thaler, then daalder, and eventually dollar. The term was already familiar in England and even appeared in Shakespeare’s plays long before the United States existed.

A new country might have been expected to create an entirely new currency. Instead, the United States joined an existing global monetary system because the dollar was already widely accepted and useful. Foreign silver coins remained legal tender in America until the 1850s.

Even powerful rulers could not simply impose their preferred form of money on global markets. Charles V, the Holy Roman Emperor, had to mint his silver in a form that merchants in Antwerp already recognized and trusted. In practice, he had to copy the established international coin rather than create a new standard of his own.

This challenges the simple idea that money becomes valuable because a government declares it to be money. Greeley argues that governments do not create monetary dominance by decree alone. A currency becomes dominant because people find it useful, reliable, and easy to exchange, regardless of how they feel about the country behind it.

The Three Pillars Supporting Dollar Dominance

If the dollar’s dominance were based only on habit, it would be easier to replace. Greeley argues that the system rests on three deeper foundations that make the use of dollars a practical choice.

The first is deposit insurance. After the Great Depression, the United States created a national system to protect bank deposits. Nearly a century later, the dollar still benefits from a vast pool of safe, regulated and federally insured deposits. The Eurozone has no equivalent system covering all member states; each country remains responsible for its own banks.

The second is the Federal Reserve’s network of swap lines. During a crisis, the Fed can lend dollars to foreign central banks, which then provide them to commercial banks in their own countries. These facilities helped stabilise the global financial system in 2008 and again in 2020, before shrinking once the pressure eased.

Historically, access to Fed swap lines has depended mainly on whether a country had a credible and responsible central bank, not whether its government supported Washington’s policies. China also offers yuan swap lines, but not on the same scale, and they may come with more conditions.

The third pillar is the quality of American financial institutions. US bank regulation is imperfect, but it generally works. More importantly, New York’s capital markets can turn a wide range of investments and projects into dollar-denominated assets.

Greeley refers to an old joke that Rome disappeared but left behind the Church, while the British Empire disappeared but left behind the Bank of England. His extension is that even if America changed dramatically, the world might still be left with New York’s capital markets.

None of these pillars depends on other countries admiring America. Greeley remembers how warmly Americans were received when he lived in rural Germany in the 1990s. That feeling has faded across much of Europe, but the global dollar system continues to grow. Its strength comes from the institutions supporting it, not from affection for the United States.

The Real Threats to Dollar Dominance

None of this makes the dollar invulnerable. It simply means the biggest risks are not necessarily where most commentary looks for them. If dollar dominance rests on deposit insurance, swap lines and institutional quality, those are the foundations worth watching.

Stablecoins could test the first pillar. They function like dollar deposits but do not come with the same insurance. Greeley expects that a major failure could eventually lead to tighter regulation, with stablecoin issuers brought into the existing system and required to provide stronger protection for users.

The second risk is the politicisation of swap lines. The US Treasury has signalled a willingness to use its own swap arrangements to encourage policies that favour Washington. Kevin Warsh has also suggested that the Fed’s international operations should be more closely coordinated with the executive branch.

Fed swap lines have historically been used to support the global dollar system during crises, without requiring countries to align politically with the United States. If that changed, governments might eventually have to choose between financial support from Washington and support from Beijing. Currency fragmentation could begin quietly, through new conditions attached to emergency dollar access.

The third risk is a gradual decline in institutional quality. This is harder to track because it cannot be measured as clearly as deposit insurance or swap-line access. Regulation, legal reliability and the strength of capital markets can weaken slowly, without a single event marking the change.

When assessing predictions about the dollar, the important question is what evidence they rely on. Arguments based mainly on how the world feels about America have repeatedly failed because the dollar system was never built on popularity. Arguments focused on the institutions and financial infrastructure supporting it deserve more attention.

The dollar has survived the empire that first produced it, the disappearance of the silver that once gave it value, and the end of its convertibility into gold. It endured because people continued to find it useful. That usefulness is less visible than political sentiment, but it is also more durable and slower to change.

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DISCLAIMER: This article is based on a conversation from Top Traders Unplugged and reflects themes, ideas, and perspectives discussed during the episode. The views expressed are those of the guest and participants in the conversation and should not be interpreted as investment advice or as the official views of Top Traders Unplugged.

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