The Dollar’s Long Tail

NEW DELHI – The ongoing economic crisis and the persistent deficits of the United States have increasingly called into question the dollar’s role as the world’s anchor currency. Recent moves to internationalize China’s renminbi have led to anticipation of a looming shift in the global monetary system. Many prominent economists, including the members of a United Nations panel headed by the Nobel laureate economist Joseph Stiglitz, are recommending a “Global Reserve System” to replace the dollar’s hegemony. But the long history of global anchor currencies suggests that the dollar’s days on top may be far from over.

In ancient times, India ran a large trade surplus with the Roman empire. As Pliny wrote in the first century: “Not a year passed in which India did not take 50 million sesterces away from Rome.”  That trade imbalance implied a continuous drain on gold and silver coin, causing shortages of these metals in Rome. In modern terms, the Romans faced a monetary squeeze.

Rome responded by reducing the gold/silver content (the ancient equivalent of monetization), which led to sustained inflation in the empire. But the frequent discovery of Roman coins in India suggests that Roman coinage continued to be accepted internationally long after it must have been obvious that its gold or silver content had fallen.

In the sixteenth century, Spain emerged as a superpower following its conquest of South America. Between 1501 and 1600, 17 million kilograms of pure silver and 181,000 kilograms of pure gold flowed from the Americas to Spain, which spent the money on wars in the Netherlands and elsewhere. This increase in liquidity caused both an economic boom and inflation across Europe.