I would normally start a post with a summary for all the impatient folks. But you need to read through this one from top to bottom. This is about world economics and the evil reserve currency lifecycle.
I like to question everything, even my own beliefs, and I encourage you to do the same. Don’t trust anyone, not even me. I don’t know anything. I only (strongly) suspect this. That is why you should research this topic further on your own. Consider this post an introduction. I will still go into specific topics. But mainly, I will focus on storytelling instead of proofing. I will focus on proofing my theories in future posts.
We will discuss global reserve currencies and their history, aswell as examine the economic state of different nations at that time. We will discuss why they eventually failed. Understanding history is the key to predicting the future. And don’t worry, this is not a history lesson like in school, no one will teach you this in school. This of for anyone interested in the reality of world economics. Let’s begin
What is a Global Reserve Currency (GRC)
So what even if a reserve currency? If you type that in you will get an answer similar to “a reserve currency is a large amount of currency held by central banks and major financial institutions. They use it for international transactions.” as explaines by Investopedia.
if you don’t fully understand that, let me explain it a little bit further. A Global Reserve Currency is a currency that most big banks and governments have. So you may ask yourself. How does a GRC even become a thing?
Most countries have to choose to buy that currency by their own will. We will get into specifics on how the past currencies became GRC. But generally, it happens after big wars. The country that wins the big war (for example WW2) gets a lot of perks (obviously). Like for example political advantages and economic prosperity. This country then prospers from winning with an economic boom. Due to this, the value of its currency grows. This in turn leads to other countries having an initiative to invest in that currency (just like stocks). As a result, the currency becomes a GRC. Keep in mind that this explanation is reallty simplyfied, but is enouth to understand everything written here.
The advantages of having a GRC
Mostly everyone wins in the short run. Countries that invest in the GRC see its value go up, thus leading to an economic gain. But the country that owns the GRC gets by far the most perks.
Here is a list (just skim through this list, its not that important right now)
- Global Trade Dominance: The country with the Global reserve currency becomes a hub for international trade. Most international transactions, including the pricing of commodities like oil, are conducted in that currency. This dominance in global trade can contribute to economic strength and influence.
- Lower Borrowing Costs: The country can borrow at lower interest rates because its currency is in high demand globally. Investors and countries often hold reserves in the Global reserve currency, creating a stable and liquid market for that currency. This demand allows the issuing country to borrow more easily and at favorable terms.
- Currency Seigniorage: The country benefits from seigniorage, which is the profit made by the government by issuing currency. As the Global reserve currency, there is a continuous demand for this currency, allowing the issuing country to essentially “print money” (issue currency) and use it to buy goods and services.
- Global Financial Influence: The country has significant influence over the global financial system. It can shape international monetary policies and standards, impacting other countries’ economic policies and financial regulations.
- Internationalization of Businesses: Companies from a country with a Global reserve currency may find it easier to engage in international business. Transactions conducted in the reserve currency can simplify financial processes and reduce currency exchange costs.
- Central Role in International Organizations: The country is likely to play a central role in international organizations such as the International Monetary Fund (IMF) and the World Bank, which often use the global reserve currency as a key unit of account.
- Prestige and Soft Power: Having a global reserve currency enhances the country’s prestige and soft power. It symbolizes economic stability, trustworthiness, and financial strength, leading to greater influence in diplomatic and geopolitical matters.
- Foreign Policy Leverage: The country can use its currency as a tool in foreign policy. For example, it may impose economic sanctions more effectively by controlling access to its currency, influencing the behavior of other nations.
- Economic Stability: The demand for the global reserve currency contributes to the stability of the issuing country’s economy. This stability is attractive to investors and can lead to a more resilient financial system.
- Reduced Exchange Rate Risk: Businesses and governments around the world hold reserves in the global reserve currency to reduce exchange rate risk. This currency stability makes it an attractive choice for international transactions.
As you can see it is beneficial to own the reserve currency. And that’s why countries go to war for this.
This is actually by far the biggest reason why big wars even take place. Sure there are other reasons for each war. but if you zoom out far enough you will see that this is the main reason. At the end of the day, it’s all about money and power.
The Reserve Currency Lifecycle
Now that we know what a global reserve currency is aswell as the benefits of having a GRC, let me tell you how a reserve currency lifecycle looks.
We have seen many reserve currencies rise and fall. In future posts, we will discuss the exact historical events of each currency, but for now, I will keep it simple.
We know now generally how a currency becomes the GRC but now we will discuss the other side of the story, the fall.
From 1450 onwards, the global financial landscape witnessed six significant epochs of world reserve currencies. These were Portugal (1450–1530), Spain (1530–1640), the Netherlands (1640–1720), France (1720–1815), Great Britain (1815–1920), and the United States, which has held this status from 1921 (but officially 1944) to the present day. As you can see, global reserve currencies last on average little bit less than 100 years.
After the big boom, a country always faces a downward spiral that eventually leads to its demise. Below I’ll show you a step-by-step explanation of how a reserve currency lifecycle plays out as well as the reasons for the failure so it’s easy to understand and brief.
Gold standard
As mentioned earlier, introducing a new global reserve currency has short-term benefits. Historically, such currencies begin with a gold standard, tying money directly to gold’s value. This allows the exchange of the currency for a specific gold amount and vice versa and therefore prevents fraud by anchoring money to a rare and valuable resource. This makes the currency real and valuable. At this point the we are in the middle of the reserve currency lifecycle, this it the peak.
Greed and abandonment
Eventually, rich politicians and business owners get greedy and abandon the gold standard. If you look it up, it will probably say that the abandonment was due to some absurd reason. “It was necessary to save the economics of the countries”. But the real reason is greed. If you abandon the gold standard, your money is no longer tied to any monetary value. Its “value” is only an illusion. Due to this, a country can print more money without any cost. Think about it, you are not allowed to print money, but the government can? that is not fair. You might say it’s “good for the economy”, but it’s not. The rich and powerful are the only winners in this scheme.
The currency is now called Fiat after abandoning the gold standard. It’s fake and only has value because we agree on it, not because its based on something.
Breaking point
Inflation starts to exponentially increase. Rich people can hedge against (protect themselves from) inflation but regular people like you and me have it way harder. Social and economic unrest starts to rise. People are angry because their living standards start to drop. This creates a volatile environment. People are uneasy and one little spark can set off an internal war.
It usually starts with a protest and ends with a revolution. People are unhappy with their life quality and decide to make a drastic change. A perfect example of this is the French Revolution. It’s one of the more famous, but many like it have happened over the years.
The biggest country having an internal war peaks interest in other countries interested in making a new global reserve currency and ultimately starting a war with them. So now Big Dog has both internal and external conflicts. This always leads to their demise and the downfall of the current reserve currency.And just like that the reserve currency lifecycle ends.
The winning party now with resources creates a new global reserve currency and announces that it will be better than the previous because “it will be held on a gold standard!”…..
And so the evil spiral of reserve currency lifecycles continues whith the start of a new one…
All currencies start with a gold standard and end in a revolution.
Conclusion
In summary, the the reserve currency lifecycle often unfolds as follows. A nation emerges victorious in a significant war. Subsequently, it establishes a reserve currency backed by gold. However, over time, the allure of wealth and power leads politicians to abandon the gold standard. This shift often proves to be a turning point, sparking internal discontent and, in many cases, revolutionary movements.
Forsaking the gold standard can trigger a series of events. These events set the stage for both internal and external conflicts. Such decisions may cause social unrest, economic inequality, and political instability. Other nations might respond with hostility due to economic repercussions or geopolitical considerations.
As conflicts intensify, the nation that once stood triumphant in war may find itself facing a multifaceted crisis that encompasses economic, social, and political dimensions. Internal dissent and external pressures contribute to the nation’s decline. Declarations of war from other nations also play a part.
Ultimately, the demise of the prevailing power sees the emergence of a new global order. This change is often accompanied by the establishment of a different reserve currency. This transition reflects not only the economic consequences of policy decisions but also the broader geopolitical shifts that occur in the aftermath of such pivotal moments in history. The rise and fall of global reserve currencies encapsulate the intricate interplay between political choices, economic realities, and the ever-changing dynamics of the international stage.
Extras
In the future, we will discuss where in this cycle we are right now, and what ugly tactics governments use to stay on top for as long as possible. We will discuss the petrol dollar, megacorporation, and possible future reserve currencies. We will also get into Bitcoin and how it may be the first-ever method to break this evil loop.