Money, Trust, and a New World

Before the explosion in Beirut killed and displaced thousands of people, Lebanese citizens were already experiencing one of the worst crises in their country’s history.

Imagine that within months your savings account loses 80% of its value. As your money becomes worth less, everything starts to cost more. Milk at the store that used to cost $5 is now $15. When you try to abandon cash to pay with credit, no one is willing to accept your card.

Facing the collapse of their currency, Lebanese citizens turned to the US dollar.

Restaurants, landlords, street vendors, cell phone service providers, everybody, started demanding payment in USD. Those without access to dollars watched their buying power fall. And those who kept their savings in dollars faced an ugly reality when they ran to the banks. If everybody pulls out all their money, at the same time, the entire system collapses. The bank was not going to let you take out your money. And if they did, they controlled how much.

On the other side of the world, Cubans faced a similar squeeze.

An economy facing a recession, American sanctions, and a sharp drop in tourism left the Communist government struggling to provide essential goods like food, baby milk, and shower gel for its citizens. Cuba imports up to 80% of its goods and all these purchases have to be made in dollars. To balance the dollar shortage, the government had no choice but to lean on its ideological enemy. They dropped a decades-long tax on dollar purchases and opened stores that only accepted USD.

With regular supermarkets understocked, the plan is to use the more expensive, well-stocked dollar stores to build back dollar reserves and be able to import more essential products. But with most people paid in Cuban pesos, Cubans are left to either rely on cash from family abroad or find their own way to make it work.

During times of economic crisis and uncertainty, individuals, institutions, and governments flock to the US dollar.

People in almost every country outside of the US would rather receive dollars than their own local currencies. Why is that?

The power of the dollar is in the broad trust of the United States to endure. Through decades of market crashes, depressions, and wars, the US has sustained economic and political stability. Most believe that if things are not going well at home, they can trust that the dollar won’t fail.

Since being decided in a small New Hampshire cabin eighty years ago, the dollar has been the unofficial currency of the world. Today, it accounts for 90 percent of all international transactions and 61 percent of all foreign bank reserves.

By maintaining its status as the world’s largest economy and taking charge of global leadership, the US’ currency earned the trust of the international community along the way.

But how resilient is this trust?

Trusting the system

Economic systems, like all social systems, are built on trust.

Exchanges between unique items like green paper strips and coffee only work if both people see the value. That cup of coffee is as valuable to your groggy brain in the morning, as the cash you paid for it will be to the café owner at the end of the month.

This trust in value over time enables a large part of how our societies function. By getting some credit, you can multiply your assets in a day with a signature. This allows us to build the present while pushing the costs to the future.

Credit is such a big part of our lives that it makes up 92 percent of all money. Physical cash, the remaining 8 percent, runs through people’s hands while the digital cash sits on computer servers—backed only by imagination. By believing in the system, we can trade with complete strangers. We can have confidence that when we put money in the bank, we’ll be able to get it back later. And even though $100 won’t get you the same today as it did fifty years ago, you can trust the bill to hold its power over weeks, months, and years.

If trust is the backbone of the system, currency is the bloodstream that makes it flow. Money that holds value can be accepted everywhere. And money accepted everywhere is money you can trust.

The dollar continues to hold this status but cracks in the system and the Trump administration’s “America First” approach to global leadership have forced the rest of the world to question, for how much longer?

Empires rise, empires fall

There have been three major empires during the last 400 years whose currencies have fueled the globe. The Dutch, the British, and now the Americans. Within 100-200 years, they were all replaced. But during their reign, they shifted the world order and improved peace, prosperity, and productivity. Their status and economic reach enabled their currencies to dominate, giving them even more power and influence.

Along the way though, they all accumulated massive debt and expanding wealth gaps. A growing rival power began to excel where they were weak, soon taking away their lead. Research by billionaire investor Ray Dalio suggests that we may be in the middle of a similar shift with US global dominance.

Out of eight indicators that Dalio and his team used to measure power, quality of education stood out as the strongest leading signal of an empire’s rise or fall. The United States spent 700 billion dollars on public k-12 education alone in 2018. More than any other country in the world, by a lot. But in the past thirty years, the education system’s global ranking has fallen from 6th to 27th.

Declining credibility to maintain the world order is forcing allies and rivals to rely on the US less. Under the Trump administration, the dollar has increasingly been used as a weapon to impose sanctions, tariffs, and trade negotiations. Any person, country, or company that uses the dollar can be squeezed by American officials if they say so. Affected economies like Russia, Iran, China, and EU members have continued to advocate for a new system that doesn’t rely on a US-controlled infrastructure.

But as long as the dollar continues to be trusted and accessible, its use won’t be challenged any time soon. Uncertainty in the world still proves to make the dollar stronger.

Yet, nothing lasts forever. A new era of digital tools and a shifting world order raise the question, what will the future of the international monetary system look like?

In this lifetime, we could see another national currency overtake the US dollar. Regional currencies used more often, like the EU’s Euro and Chinese Yuan across Asia. A universal world currency breakthrough and overcome practical and political challenges. Or, digital currencies become the standard.

Instead of a collapsed system that forces people to adopt cryptocurrencies like it did in Venezuela, governments embrace the technology and develop their own digital money. Decentralized cryptocurrencies are used with, not instead of, countries’ digital currencies. China is already testing a digital yuan and many other nations have projects underway.

The path to the future is unpredictable, but the outcome should be expected. No matter who is (or isn’t) in control, the system with the most trust wins.