openpolitics.com

When businesses in two countries — say, India and Argentina — want to conduct a deal, they almost always arrange payment not in rupees or pesos but in dollars. Everyone wants to hold the world’s most trusted and liquid currency. Nearly 90 percent of bank-financed international transactions are conducted in dollars, a share that is close to all-time highs.

.. Even though the crisis began that year in the United States, American banks dominate global finance more now than they did before the crisis — in part because debt troubles have dogged banks in Europe, Japan and China even more persistently.

.. The share of countries that use the dollar as their main “anchor” — the currency against which they measure and stabilize the value of their own currency — has risen to 60 percent today from about 30 percent in 1950 and 50 percent in 1980. And those countries collectively account for some 70 percent of the global gross domestic product. In other words, most of the world chooses to live in a dollar bloc.

.. In a dollar world, most countries are happiest when the dominant currency is cheap and plentiful. A strong dollar raises the cost of borrowing, which slows global economic growth and has often triggered debt crises in the emerging world. A weak dollar has the opposite effect, which is why the weakening of the dollar this year offers more evidence of its dominance: Partly as a result, the world is enjoying an unusually broad recovery encompassing every major economy.

.. Many observers nonetheless assume that with China rising as an economic power, financial clout will follow. Perhaps, but the United States surpassed Britain as the world’s largest economy in the late 19th century, and the dollar did not fully displace British sterling as the leading reserve currency until after the world wars, which left British finances shattered.

.. That doesn’t mean it will take World War III to end the dollar’s reign, but it will take time and a shock bigger than one unpredictable president.

.. History also suggests that economic size alone will not be enough to propel China to financial superpower status. From 1450 through the late 1700s, the leading reserve currency was held by smaller countries — first Portugal, followed by Spain, the Netherlands and France. These nations were all major trading and military powers with credible financial systems, but not one was the world’s largest economy.

.. Throughout those centuries, the leading economy was primarily China. It never gained the advantages of having the leading reserve currency because, then as now, its financial system lacked credibility.