The Dynasty That Changed the World

The future of the U.S. dollar is an evergreen concern. Will Trump’s turn to economic nationalism, unchecked executive rule, and fiscal profligacy cause the greenback to lose its reserve currency dominance? Should you put your savings into gold? Is it time to find exposure to panda and dim sum bonds, crypto ETFs, and other exotic assets?

Many people have engaged in wild speculation in this area. Some see dollar demise as imminent or already in progress. An equally large group dismisses such alarmism as baseless. They often point to the long, disappointing record of dollar doomers; the inertia of network effects that lock countries into whatever everyone else is using; and the lack of viable alternatives. The U.S. currency’s hegemony, they argue, is here to stay.

Historical perspective in this debate often tends to reach back into the past to figure out how other hegemonic currencies have fared. Thus comparisons of the U.S. dollar with the role of the British pound in the nineteenth century are common. Some even reach back to the gold florin of the Renaissance and the Dutch guilder. Such comparisons feel strained, to say the least. One effect of thinking in terms of a sequence of successive currencies is to create a very static understanding of the history of the U.S. currency itself. Since America’s ascent to global supremacy after 1945, it is supposed that the dollar has essentially been the only game in town. Any future contender will have to take on eight decades of accumulated influence and habitual dollar usage around the world by governments and private parties alike.

But there is a more productive way to use history to think about what dedollarization is, and what forms it might take. This is to compare the dollar not with the past of sterling or the guilder, but with its own earlier history. Because a careful look at twentieth-century economic history shows that the relative predominance of the U.S. currency has been far from constant in the last 75 years.

In fact, there has been dedollarization in the past, understood as a prolonged period during which the U.S. dollar’s share of global reserves fell. Like the current uncertainty about the dollar, this phenomenon had both geopolitical and macro-economic drivers. The geopolitical instigator was a sanctions shock akin to the 2022 freezing of Russian assets: the 1979 U.S. freeze of Iranian dollar assets during the hostage crisis in Tehran. The macroeconomic causes were concerns over U.S. inflation and fiscal policy and the lingering debt crisis of the 1980s. Understanding this episode points us to two dimensions of dedollarization that are vital to taking the measure of what is going on today: speed and width.

Petrodollars as the First Dollar Trap

When we think of breaks in the dollar’s history, the end of the Bretton Woods system of fixed exchange rates in 1971 is the first thing that leaps to mind. Richard Nixon’s closing of the gold window created the system of fiat currencies that still exists today. For the U.S. dollar, however, this was a moment of triumph rather than uncertainty.

The dollar had overtaken the pound sterling in the mid-1950s. But active intervention by the Bank of England, which forced many British colonies and allies to remain in a sterling area and keep a part of their official reserves in pounds, helped stem the bleeding somewhat during the early 1960s. It was only after the 1967 sterling crisis that sterling’s global reserve share fell precipitously. In a short period it went from a major global money traded everywhere in the world to a rather small European currency. This graph from Catherine Schenk’s standard work The Decline of Sterling shows how dramatic the exit of sterling and the ascent of the dollar was.

Source: Schenk, The Decline of Sterling: Managing the Retreat of an International Currency (Cambridge, 2010), p. 23.

The oil crisis of the 1973 was a blow to Western dominance in the world economy. But if anything it only reinforced the dollar’s role as an official reserve asset. As we can see from the Schenk graph, the end of Bretton Woods and the First Oil Shock coincided with an unprecedented height of dollar reserve holdings, approaching 80 percent of all central bank reserves in the world.

In geopolitical terms, the growth of the dollar reserve share enabled the U.S. to hold the wealth of oil-exporting countries at risk. Petrodollars (the oil export earnings of OPEC states that were recycled into savings in Western banks and then lent out internationally) were the original form of what my Cornell colleague Eswar Prasad has described as the “dollar trap”. Do something against Washington’s interests, and you can expect to have your assets frozen.

It is easy to assume that dollar dominance has been essentially stable from the Seventies until now. But this is not the case. The 1970s were a period of clear dollar dominance in the form of a growing pool of petrodollars. But something quite dramatic occurred in the following decade. We can see this if we look at where major states chose to hold their reserves.

Anatomy of a Fall: The Dollar Decline of 1979-1980

The most widely used source for reserve composition data today is the IMF’s Composition Of Foreign Exchange Reserves (COFER) data set, which is updated every quarter. But the COFER quarterly data only goes back to 1995. In fact, the dollar share of global reserves is broadly known but somewhat nebulous for much of the postwar period. Until the late 1970s even the International Monetary Fund only published overviews of world reserves that showed the proportion between gold and currencies, but not the distribution between different currencies. This changed in 1979, when we can find the first IMF Annual Report that lists “Currency Composition” as a rubric.

This was well-timed. Because what took place at precisely this time was a noticeable fall in the dollar share of global reserves. Here is the Currency Composition data of the IMF from the 1983 Annual Report.

Source: IMF Annual Report 1983.

The picture is clear: by the end of 1980, the dollar share of global reserves had fallen 11% in only four years. It went from constituting four-fifths to two-thirds of the official reserves. Every other currency tracked gained at the dollar’s expense.

What explains this? High U.S. inflation drove reserve managers out of the dollar. But this factor had been around for some time and hardly explains all of the decline. The puzzle only grows when one considers the simultaneous moves by the Federal Reserve around this time. To quell persistent U.S. inflation, in the fall of 1979 Fed chairman Paul Volcker began to hike interest rates aggressively. The Volcker Shock was a bloodbath for developing economies that were tipped into debt crisis. But for reserve managers around the world, the higher U.S. interest rates should have increased the attractiveness of holding dollars as a reserve asset. Yet the opposite happened: official dollar reserves fell, and by more than they ever had before. How was this possible?

The Economic Consequences of the Carter Freeze

One major part of the answer lies in one of the big geoeconomic shocks of the period, nowadays largely forgotten: the U.S. freeze of Iranian dollar assets worldwide, ordered by President Carter on 14 November 1979. Earlier that month, Iranian students and revolutionaries had taken 52 American diplomats hostage in Tehran. When rumors began to swell that the new revolutionary government was about to withdraw billions of the Shah’s petrodollar deposits from Chase Manhattan Bank in New York, Carter ordered all Iranian dollar assets to be immobilized.

The freeze sequestered about $12 billion in Iranian petrodollars, of which more than half were U.S. dollars held in London banks, the heart of the so-called Eurodollar market. The size and extra-territorial nature of the Carter Freeze caused it to ripple through global markets. In geoeconomic history, it was the first serious sanctions-induced dedollarization episode of modern times.

To be sure, the Carter Freeze only dented the dollar. But it seriously boosted the appeal of other currencies in the 1980s, especially the German mark and the Japanese yen. It also accelerated the surge in gold prices, which peaked in the year 1980 at $850 per ounce–a record that stood, in inflation-corrected terms, until this summer. That we have reached gold prices similar to those around the time of the Carter Freeze is unsurprising. It is now widely understood that the G7 freezing of $300 billion in Russian reserves in February 2022 has caused a structural increase in central bank gold purchases.

To get a sense of the panic caused among oil producers by the Carter Freeze we can consult the pages of the financial press. In the Financial Times and Economist in late 1979 and early 1980 worries abound from Arab finance ministers and reserve managers about the safety of their dollar holdings. And they acted on these fears. In the first half of 1980 almost all the new OPEC surpluses were being invested outside New York and London; about half the total was now outside U.S. and U.K. jurisdiction.

Source: “Investing Oil Money: OPEC’s Grand Juggling Act,” Financial Times, 14 October 1980.

Major petroleum exporters such as Saudi Arabia and Kuwait began to recycle their earnings into Deutschmark, yen, and Swiss francs. By 1986 Riyadh was holding just one third of its reserves in dollars, with much of the rest in marks and yen. Smaller petrostates like Libya and Iraq, which were the most anti-American in their policies, chose massive gold-buying as a diversification strategy. Within months, the recycling of petroleum export earnings into dollars–one of the major pillars stabilizing the dollar in the 1970s–decreased significantly. It was thanks to increased flows from industrial countries that Washington was able to cushion this.

The international effect of the Volcker Shock was thus to offset some of the damage done by the Carter Freeze in the following years. Eventually a very large pool of global savings, especially European and Japanese money, was lured back into the Treasury and U.S. corporate bond market with the carrot of sky-high interest rates. But the stick of asset freeze risk meant that oil exporters permanently reduced their allocation to dollars. Subsequent episodes of asset freezing–the Bank of England’s seizure of several billion in Argentine reserves in London during the 1982 Falklands War and the Reagan Administration’s 1986 freezing of Libyan assets–only reinforced this trend. Consider why a Kuwaiti journalist would put this question to Ronald Reagan in May 1987:

Source: Weekly Compilation of Presidential Documents, Vol. 23 (19 May 1987), p. 559.

The combined effect of these geopolitical and macroeconomic forces was that by the end of the 1980s the world was at the peak of its First Dedollarization: the dollar share of global reserves fell from 79 percent in 1977 to 48 percent in 1990. The dollar was now first among equals, constituting a plurality but no longer a real majority of global reserves. This was an ironic end of the Cold War: U.S. geopolitical dominance was accompanied by relative decline in monetary preeminence.

This situation, however, did not last long. By the start of the new millennium, the dollar had almost returned to its old superiority, reaching 71 percent of global reserves in the year 2000. The rapid re-dollarization of the 1990s is a striking phenomenon in need of historical explanation. I will offer some ideas about it in a future post. What matters is that today, in October 2025, a quarter of the way into the twenty-first century, the dollar’s reserve share stands at 57 percent of global reserves: a very gradual decline over the course of two and a half decades, but still above its nadir when the Berlin Wall came down.

Three Drivers of Ongoing Dedollarization

What can we learn from the First Dedollarization of the 1980s? One is that shifts in a currency’s reserve status come in different shapes and sizes. Flights out of a dominant currency that happen rapidly and go into only a few alternatives are more easily reversed.

One reason is that such flights happen fast, which often means that they are motivated by panic and without necessarily expressing a well-considered choice for the long-term appeal of a new haven. The second is that they are narrow, meaning that they rest on a small number of new poles in the international financial world. When one of the new havens in turn suffers a shock or a relative political or economic setback, the capital placed in its assets can easily flow back into the old currency. Both these things happened in the 1980s: official reserves that went into gold, Deutschmark, and yen especially returned massively to dollars in the 1990s.

The weakening of the U.S. dollar’s reserve currency status since 2000 is different in both respects. Not only is it much slower–compare a 11 percent fall in three years, as happened from 1977 to 1980, to a 14 percent decline across 25 years–it is also much more broad-based. Serkan Arslanalp, Barry Eichengreen, and Sima Simpson-Bell have argued that the twenty-first century has been marked by the “Stealth Erosion of Dollar Dominance”. They show that there has been a small but notable trend by reserve managers to shift into “non-traditional” currencies.

These are the moneys of small, open, liberal and trade-dependent economies: currencies such as the Norwegian and Swedish crown, the Canadian, Singaporean, Hong Kong, Australian and New Zealand dollar, and the South Korean won. At the same time we know that the diversification of non-Western central banks and sovereign wealth funds is increasingly an “all of the above” strategy: gold, equities, private credit, real estate, agricultural land, commodities, crypto, and other asset classes are all serving as destinations for investment that previously would have gone into more straightforward liquid dollar-denominated assets like Treasuries.

To get the full picture, we should also incorporate the behavior of private holders of dollar assets. If we look beyond official reserves at the dollar as a private-sector safe haven, the picture becomes more complex. But using the two dimensions of speed and width, we can identify at least three distinct dedollarization processes emanating from different actors, unfolding at unequal speeds, and directed at varying alternatives.

• 1. A long-run effort by China to wean itself off dollar dependence and build alternative payments infrastructures based around RMB and gold. This is big but, as many analysts have pointed out, a slowly-unfolding development.

• 2. A recent sale of dollar assets and hedging of dollar investment in the U.S. by American allies, especially large European and Asian institutional investors. This is quick and liable to sudden reversal, but increasingly widely allocated through diffuse “ex-U.S.” portfolio diversification strategies.

• 3. A general geopolitical shift by non-Western central banks (Russia, India, Gulf states, etc.) into gold and by their sovereign wealth funds into non-U.S. equities and real assets. This is small- to medium-sized and relatively slow, but also quite widespread in its destinations.

It is important to hold these three processes apart in our minds; despite a cumulative effect that amounts to gradual net dedollarization, they push in different future directions. Overall, however, it is the two characteristics of slow speed and ample width of the destinations that predominate. There is no one asset class that stands to gain disproportionately from the dollar’s loss of influence.

Where might all this go? In the year 2025 it is a fool’s errand to make confident predictions. But one way in which monetary and financial history can show us how current dedollarization trends are distinctive is by recording their two defining characteristics: slowness and width. These two dimensions make it perhaps less immediately threatening for the United States. But they also suggest it will be harder to reverse. Dollar hegemony will not collapse overnight. But the multitude of current factors slowly chipping away at its reserve status mean that every bit of influence lost is more likely than before to be gone for good.