Host: History tells us that no currency remains at the top forever. First it was the Dutch Gilder, then the British pound, and now the world is asking if the US dollar is next. A so-called sell America trade. The American currency slipped to its lowest level against the euro in more than four years. A slow erosion of confidence in dollarbased assets. So is Trump finally pushing the world to move away from using the dollar as their currency of choice? This would be a massive deal. Even Trump himself has said that if you want to go to third world status, lose your reserve currency. But is it actually true? Both Britain and the Netherlands have lost their reserve currency status a while ago. And yet they are still wealthy countries today. And while perhaps easily forgotten, we have actually been here before. In the 1970s, many economists thought that the US dollar was done for and would be replaced by gold or a basket of other currencies. yet it came back stronger than ever. Could the same thing happen to the dollar today? And if the dollar does fall, what can we expect? To answer these questions, we could not just look at the latest data like we normally do on this channel. Instead, we had no choice but to go back 400 years in time to track in detail the rise, survival, resurgence, and fall of the British pound, the rise, fall, and resurgence of the US dollar. And first chapter one, the rise and fall of the Dutch Gilder.

Host: The year is 1609. The newly established Dutch Republic is quickly becoming the global trading powerhouse with the city of Amsterdam at its center. As one of the few places where money was protected by the rule of law, even if your country was literally waging war against the republic, your money would still be safe in Amsterdam. As a consequence, silver coins from all over Europe were flooding to the bank that would later become the template for all central banks, the Bank of Amsterdam. Officially, the Bank of Amsterdam promised that all deposits there were backed by silver coins in the vault. But it would later be revealed that this was not fully the case. In fact, the bank was using its silver to provide basically for free cheap loans to the biggest corporation of the time, the Dutch East India Company. and the city of Amsterdam itself. This meant that the Dutch colonial efforts managed by the East India Company and the Dutch government effectively enjoyed something the French would later call exorbitant privilege. Issuing the reserve currency gave the Dutch three massive advantages over much larger rivals such as France and England. First, the Dutch could borrow at a lower interest rate than they otherwise could. For example, Dutch provinces typically had to pay around 2 to 3% while the much larger British had to pay 5 to 6% and the unreliable French 10 to 12%. Second, the Dutch could borrow much more than they otherwise could, allowing them to fund a massive navy that dominated the seas despite the Dutch Republic being a tiny country. Finally, during a massive geopolitical crisis, money often flowed to the safe haven of Amsterdam rather than away from it. Therefore, while borrowing was often extra expensive for most European states, at the moment that they needed it most, crucially, the Dutch could borrow at extra low rates in times of a crisis. This was crucial during the so-called year of disaster, Rampia, when the tiny republic was invaded by its two much larger rivals, France and England, plus two German bishop bras. Despite troops rapidly closing in on the Bank of Amsterdam, the Dutch provinces could still borrow at rates much lower than the invaders. This privilege allowed the tiny country to hire German mercenaries and simultaneously subsidize the Spanish and Austrian Habsburgs to enter the war on its side. Meanwhile, King Charles II of England was so low on money that he was forced to partially default on his debts, leading to a major financial crisis in London. So exorbitant privilege quite literally saved the Dutch Republic.

Host: However, at some point all of that money did lead to a dark side as well. Perhaps we should call this the exorbitant burden. The crux of it is that money had essentially gotten too easy. This encouraged over borrowing by both the provincial governments and the East India Company. Easy money also contributed to rampant real estate speculation and to overreach by the bank of Amsterdam which massively increased its loans to the overstretched Dutch East India Company. Finally, most of these financial profits went mostly to an increasingly rich financial elite increasing inequality. Economists like Yandere and Atanderada have argued that this exorbitant burden made the Dutch Republic increasingly specialized in global banking which then crowded out the trading and crafts that had made the republic great in the first place. Then ironically the Dutch financial elite got rich funding the industrial rise of the very nations that would overtake the republic, France, the US and especially England. First, the Dutch continued investments to England's rebellious American colonies and this then led to the fourth Anglo Dutch war which ruined the Dutch economy and led to the bankruptcy of the East India Company. This in turn caused a major loss of trust in the Bank of Amsterdam and this made money issued by them worth less than the money they supposedly had in their vault. However, while clearly on the decline, the Dutch financial system managed to cling on partially because the Dutch had diversified their investments by lending a lot to the French crown. But ironically, this would soon lead to their final demise as the French king was overthrown in a violent revolution, further weakening the Dutch so much that it was easily conquered by the French revolutionary forces in 1795, who saw Dutch wealth as a great way to fund their armies. However, ironically, this would mostly benefit their arch rival, the British, as from that point on, money was no longer saved in Amsterdam, cementing the status of London as Amsterdam's successor. And even after being liberated from the French, the Dutch were in so much debt, and London was now so strong that the Dutch would never again regain their exorbitant privilege. They spent well over a century paying back their international debts, leading to a century of economic stagnation. And when borrowing, the Dutch paid a premium now over the English. And especially in times of crisis, the Dutch had to tighten their belt as money now flowed to the great British Empire instead.

Host: But before getting to that story, let's first review how similar the experience of the Dutch Republic is to the dollar situation today. First, the US today is also said to have an exorbitant privilege. Despite having some of the highest debts in the world and one of the highest government deficits in the world right now, the US can borrow at real interest rates that are close to 2%. Very low indeed. On top of that, during big crisis such as during 20072008, the Americans could borrow more and more cheaply as money from all around the world wanted to go back to the safety of New York City. But just as the Dutch Republic, many have argued that the US is now also suffering from everincreasing government overreach, more and more financial bubbles, and increased inequality. And just like the Dutch elites funded the rise of France and especially Britain, so did China's rise mostly come about thanks to the US dollar system. Near the end of their exorbitant privilege, the Dutch faced a series of financial crisis and shocks. The first signal of their decline was that they could no longer borrow more during crisis such as the fourth Anglo Dutch war or French invasion. And this is why after Trump's liberation day, for the first time ever, markets were panicked because money flowed out of the US during this crisis rather than into it. Losing this part of exorbitant privilege was literally the beginning of the end for the Dutch Republic. Just a couple of years later, Amsterdam was occupied by the French. But of course, there are at least two very big differences between the tiny Dutch Republic back then and the US today. The first is obvious. America today is not at risk of an invasion. But more importantly for our story, the second difference is that the dollar today is not tied to a metal like the Dutch guilder was. Thirdly, where the Dutch were in trouble, there was a clear alternative. Britain had a far bigger economy and thanks to a recent influx of Dutch bankers who helped establish the Bank of England, it was the clear alternative. Britain would go on to have the exorbitant privilege next. Today, America's situation looks much less clear-cut than that of the Dutch Republic. There is no clear alternative right now. So to find out what will actually happen to the dollar, we need a more comparable example, which leads us to the rise and fall of the British pound.

Host: Let's go back to 1799. Napoleon had just come to power in France, meaning there were now two rising powers vying to become the new global hedgeimon. France had the biggest army and it was rapidly acquiring land, but Britain had the biggest navy, allowing it to dominate global trade. And while France occupied the wealthy Dutch Republic, by doing so, France had arguably given Britain the biggest price of all, exorbitant privilege. Britain could now borrow at 3% while France had to pay 10% or more. Using this privilege, Britain essentially hired the armies of Europe to fight France on its behalf by subsidizing Austria, Prussia, and Russia. On top of that, they used their giant navy to blockade France and its allies. But to do so, the British state had to borrow to levels previously unseen at almost 200% of GDP. This was so much that it caused a run on the Bank of England, meaning that they had to suspend the pound's convertability to silver and gold, essentially making the pound a so-called fiat currency, much like the dollar is today. Much to the surprise of everybody, this did not make the pound worthless. How can a currency be worth anything at all if it's not backed by a precious metal? The answer is simple. The British pound was backed by the mighty British state. you could always use it to pay taxes in Britain. This in turn meant you could always use it to pay British merchants who were the most productive in the world. So was the pound during this era exactly like the dollar? No, not quite. Because unlike with the dollar today, the Bank of England promised that the pound would once again be as good as gold after the war was over. And they kept that promise. After Napoleon was defeated, Britain was now the unquestioned hedgeimon where everyone wanted to store their money. Whether that was at the Bank of England, at the London Stock Exchange, or British banks, interest rates were lower than ever. And while this had facilitated excess and bubbles in the tiny Dutch Republic, in the 18th century in Britain, ultra cheap money fueled the first industrial revolution, making Britain both the unquestioned industrial and financial superpower. This is crucial because Britain's industries guaranteed that gold would always flow to Britain. Therefore, the papers issued by the Bank of England, the British state, and banks were never questioned. They were free to lend to the world on an epic scale, providing it with a global currency that they used to trade between them even if Britain was not involved. However, as happened to the Netherlands before it, over time, ultra cheap money fueled complacency. Just as Dutch financiers had financed the rise of Britain and France, London now played a crucial role in financing the rise of US industry and to a lesser extent Germany. To make matters the dominant position of British industry began to suffer for two reasons. First, while new inventions like electricity and the assembly line enabled a second industrial revolution, it did not take off in Britain because its steam and water powered industries resisted the change. Second, Germany and the US did not play completely fair. While Britain was committed to globalization that made it rich to be fair, the US and Germany developed their industries behind massive tariff walls only to unleash them on the world when they reached such massive scale that it would be almost impossible to overtake them. Meanwhile, like the Dutch before them, cheap money allowed the British state to overextend itself. Fighting for more and more colonies in, for example, Africa, that did not do much to increase Britain's industrial power. Yet, the power of the British pound helped Britain fight off a new continental challenger, Germany. Britain's army again could not defeat Germany on its own. But thanks to its exorbitant privilege, it funded both France and Russia to fight on its behalf while the mighty British Navy starved Germany of vital resources which ultimately led to its financial collapse. Yet this again meant the British state had to borrow to the hilt and had to limit convertability to gold. However, this time unlike after Napoleon, there was now an alternative to the British pound, the US dollar. But this was honestly quite a surprise for Britain. You see, just before the war, the US dollar was not seen as a serious alternative to the pound, despite the US's industrial and economic strength. This all changed in 1913 when the US created the US Federal Reserve. On top of that, it removed tight restrictions on foreign US bank branches and allowed them to fund foreign trade. These changes meant there was now suddenly a true alternative to the British pound. So unsurprisingly, as Britain exited the First World War with sky-high debt, increasingly people began to doubt that Britain's pound was as actually as good as gold. This is when Britain made the choice that the Dutch were never able to make. It decided to defend the pound reserve currency status by increasing interest rates. These sky-high interest rates depressed Britain's economy for much of the 1920s. However, it allowed Britain to hang on to the other exorbitant privileges a little longer. And while the US dollar actually overtook the pound in the 1920s, high British interest rates and the loss of trust in the stability of the US during the Great Depression actually meant that the pound regained its position before the Second World War. So unlike the Dutch in 1795, Britain had some of its exorbitant privilege when it faced yet another existential threat from the rising of a new European power. Specifically, the dominance of the pound in its current and former colonies allowed the UK to borrow trillions from its empire during the war. However, by this time, its main financial rival, the US, had already lost trust in the pound. Anything the UK bought from the US had to be paid for in gold till 1941. And after that, when Britain was effectively broke, it paid the US by handing over British military bases and by dismantling British trade protections. So by the end of the war, the British state had essentially maxed out its exorbitant privilege. It had borrowed more than it ever had before, while its main monetary rival now held about 80% of all the gold in the world. So when 44 nations came together to design the monetary system of the new world at the Bretonwoods conference, Britain had almost no leverage. It joined a system that officially made the dollar the only reserve currency that would be convertible to gold. Yet, Britain managed to cling on to some of its exorbitant privilege for a long time through the so-called Sterling area, which included much of its former colonies like Australia, New Zealand, as well as much of the Middle East, South Asia, and Africa. And since all of these nations committed to continue most of their reserves in pounds, Britain continued with its exorbitant privilege and this allowed it to repay its massive war debts much faster than it otherwise would by keeping interest rates much lower than inflation. Yet despite this, much like the Dutch Republic had before it, Britain's declining currency coincided with a century of relative stagnation, where, for example, it kept becoming poorer compared to the US, as well as compared to continental European powers that had for decades been poorer like Germany and its old rival, the Netherlands. On top of that, Britain faced relatively volatile decades where the value of the pound took major hits in major currency crisis in for example 1976, the early 1980s around Brexit and again in 2022 when the prime minister Lististras seemed to have forgotten that Britain had long lost its exorbitant privilege. So what can Britain's run tell us about the fate of the dollar today? The first lesson I think is that despite the changing times and massive power differences between the British and the Dutch, the three benefits of exorbitant privilege remained the same. Britain could borrow at lower rates and it could borrow more. And crucially crucially during times of crisis, it could borrow more, not less, allowing it to defeat major threats like France and Germany by subsidizing foreign armies. But while Britain's fate was less dramatic than that of the Dutch, they also first faced major volatility followed by a rapid loss of geopolitical power, a financial meltdown, and a century of relative stagnation that is arguably still going on today. So, what can we learn today from this experience? Well, I think that the presence of alternatives is what really matters. This insanely high Napoleonic war debt could have stopped the rise of the pound in its tracks. But because there was no real alternative, Britain's currency, power, and economy surged, allowing it to prosper and repay its debts. On the other hand, while the dollar looked non-threatening in 1913, just a few policy changes made it overtake the pound in 1920. Yet, thanks to major sacrifices, the pound made a comeback, arguably helping Britain survive yet another war. But still, we now know that the pound was on its way out ever since 1920. Is this the case for the US dollar as well? Not so fast because the dollar has been here before and unlike the pound, it came back stronger than ever. So to truly understand what we can expect from the dollar, we need one more historical story. The story of the rise and fall and rise of the US dollar.

Host: Okay, this story starts in 1944 when the dollar became the undisputed king of global finance. But the following Bretonwood's era unfolded in an eerily similar way to the eras of the Dutch and British dominance. The US started out as the undisputed industrial and financial power and this essentially guaranteed that gold always flowed back to the US. The US financial system supplied the world with dollars through loans and Marshall Plan subsidies. This gave the US the exorbitant privilege to build the biggest navy in the world and to subsidize allies fighting against rivals and to fight wars all around the world. Meanwhile, its financial elite got more and more powerful while they funded emerging industrial rivals who were protected behind tariff walls. Finally, exorbitant privilege led to overspending by the US government until so much gold had left the US that it was forced to >> suspend temporarily the convertability of the dollar into gold or other reserve assets.

Host: Sounds familiar, right? But just as there were clearly no superior alternatives to the pound after Napoleon was defeated, there was no clear alternative to the US dollar in the 1970s. Instead, the Reagan administration convinced allies to realign their currencies with the dollar, just as how Britain convinced the world to join its gold standard in the 19th century. However, this is where the similarities to history end. You see, while Nixon temporarily suspended the convertability to gold in 1971, we now know that this suspension was not temporary. And that makes sense. Why would you want to tie your currency to a yellow rock? The British had shown that currencies can actually survive without it for short periods of time. And now the Americans would prove that the dollar could not just survive without being backed by gold, it could thrive. But make no mistake, just as with the pound under Napoleon, today the US dollar is not backed by nothing. The dollar is backed by the US state, which taxes its citizens in dollars and which forces all US citizens and companies to accept dollars. For a foreigner like me, this means I know I can spend my dollars on anything made in America. And since everyone in the world knows this, I can also spend my dollars on foreign goods and services as well. Importantly though, abandoning the gold standard completely changed the way a reserve currency works. Instead of lending money to the world, which would then always flow back to the main financial center, America now spends its money into the global economy. And instead of the world borrowing from the global financial center, the world now lends to America. So ironically, where spending more than you earned used to be a death sentence for your reserve currency, economists like Michael Pettis now argued that this is exactly what makes the dollar so dominant today.

Host: Conclusion. So why is the fiat dollar so dominant? Well, you see, while global investors will always choose the currency that is most convenient, foreign governments can and do influence this in a major way. For example, when Russia was shut from dollars and euros in 2022, its companies switched to renminbi in no time. On the flip side, the political union of the sterling zone prolonged Britain's exorbitant privilege way longer than it otherwise would have. And today many developing nations especially in Asia have chosen to set up their economic development model in such a way that they grow by exporting to the US. The only country in the world that makes its currency easily available through its spending. This has two major implications for what we can expect from the dollar next. The first is that it will be really much more difficult today than it was back then for any currency to dethrone the dollar. Yes, China already has the industrial strength to do it. And much like the US did in 1913, they could really surprise the world by making money much safer and easier to store in Shanghai with just a few rule changes. However, that will probably not be enough. The dollar is extremely attractive for exportoriented economies precisely because Americans spend so much making it the reserve currency that is relatively safe to build your economic model around. However, now we are getting to implication number two. Make no mistake, the US can still push this system too far. The US's exorbitant privilege still depends on the willingness of foreigners to lend or to invest in the United States. Together, relatively low inflation and the rule of law kept your dollar safe. Heck, America's incredible stock markets made holding many dollar as it's very profitable indeed. But first, Biden undermined the dollar's perceived safety by freezing reserves from nations that it didn't like, something the Dutch never dared and the British only did to nations that they were in a full-scale war with. Then second, Trump shocked the world when his administration announced sky-high tariffs against allies and even discussed to potentially tax foreign reserves in the US as a means to bring the value of the dollar down which he he believes has become an exorbitant burden. This can explain why the US immediately experienced the first signs of losing exorbitant privilege, increased volatility, and losing the ability to borrow more thanks to a crisis. If this trend continues, the US will likely see a massive reduction in its ability to wage war all over the globe. And given that the status of the dollar now largely comes from foreigners investing ever more in the US, the end of foreign trust will probably tank the American stock markets. and lead to a century of relative stagnation. Because as we've seen, losing your exorbitant privilege does not mean you lose your exorbitant burden as well. And to get an idea how much weaker the US may become, consider this. The American economy is just as big as the EU and quite a bit smaller than China. If we just look at all the goods and services that are produced there, it's only thanks to the awesome power of the dollar that America still has the biggest economy in the world by far. Luckily for Trump, history has shown that even if you lose reserve currency status, it may be recovered. Heck, given that both the EU and China have far worse demographics, if the US starts playing it safe from now on, the dollar may even come back stronger than ever. But of course, this all depends on what Trump will do next and whether or not his successor will appreciate the dollar's exorbitant privilege again. But yeah, that is my take. one that is honestly a bit less scientific than usual because unlike when it comes to migration, gun violence, and war economies, we simply don't have that much data on reserve currencies, especially not fiat reserve currencies like the US dollar is today. Therefore, for this video, I heavily relied on the work of economists that have studied history extensively, such as Barry Iiken Green, Yan De, and Michael Pettis. Still, to get the full picture, I highly recommend you check out other analysis about what a world with a weaker dollar will look like, such as the excellent analysis done by our advertising sponsor, The Economist. Specifically, I recommend you check out this analysis on why the current fall of the dollar may not have been about selling, but rather about hedging behavior by foreign investors. Then follow up with this analysis about why the dollar may have much further to fall. And then this analysis on why years after its fall as a global currency, why the pound is still strangely popular today. As these articles show, I believe the economist delivers insights to let you see the bigger picture and think for yourself. This is why I used each of these articles as a source for this video and why I highly recommend you subscribe to The Economist, which I'm excited to say has agreed to give a special 35% discount for Money Macro viewers. Whether you want daily journalism in the Economist app, or you are like me and prefer to catch up on the global economy during the weekends with a cup of coffee and the paper edition, you'll always stay on top of the latest global developments no matter where you are. and signal to others in the meantime that you care about factual information and the values of integrity and responsibilities. So don't miss out. 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