The 20th century shift from sterling to the dollar is often cited as evidence that currency dominance is not forever. This column presents a nonlinear model of the international monetary system calibrated on historical events. Shifts in dominance require large, simultaneous combinations of shocks, with democracy and conflicts playing a central role. Stress tests suggest that dollar dominance is resilient: a decline would require repeated shocks in the US alongside major reforms in China and Europe. Parallels between the dollar’s rise in the 20th century and that of the renminbi in the 21st century should be treated with extreme caution.
We propose an approach to currency dominance that allows for prospective analysis, taking into account a broad set of fundamentals including geopolitics (Bordo and Bastidon 2026). Beyond identifying the most relevant classes of events associated with switches in currency dominance, we identify specific thresholds on combinations of events. In other words, international monetary system (IMS) patterns are generally highly persistent: they change only in response to specific combinations of shocks that are both large in magnitude and simultaneous. Geopolitics plays an important role. The concept of ‘powerful pacifism’ – i.e. because of imperialist biases in foreign policy which are exacerbated in autocracies, democracies are both less prone to go to war with each other and more likely to defeat autocracies (Lake 1992) – appears to be central.
Figure 1 International monetary system graph model of currency dominance
Notes: Currencies have five possible states describing the emergence and decline of dominance (‘non-core’, ‘challenger’, ‘ascending core’, ‘core’, ‘descending core’). The hub corresponds to the underlying asset of confidence in the international monetary system, i.e. over the period of study gold, then the credibility of monetary policies.
The international monetary system is modelled as a non-linear network of currencies with persistence related to network effects (Eichengreen et al. 2016) (see Figure 1), from the classical gold standard to the present. We describe a proxy for the world system comprising nine currencies: the British pound, the US dollar, the euro (prior to its introduction, the main currencies in the basket), the Japanese yen, the Russian rouble, the Chinese renminbi, an archetypical other emerging economy currency, an archetypical other advanced economy currency, and a digital asset. We build an original database of currency dominance-related events, which is used to calibrate the model. We then conduct a series of stress tests, based on country scenarios deemed most likely in the next decade. These are combined to form global scenarios. The US dollar’s dominance appears to be largely resilient, particularly against the renminbi.
Explaining regime switches in the international monetary system structure
The international monetary system model structure is globally stable within major institutional eras but may shift between eras (see Figure 2). The ‘core’ currency is the dominant currency. It may decline, in which case it becomes a ‘descending core’, then possibly a ‘challenger’, and finally a ‘non-core’ currency. Conversely, ‘non-core’ currencies, which are non-dominant, may follow an upward trajectory, first becoming a ‘challenger’, then an ‘ascending core’, and finally a ‘core’ currency. We identify five classes of events which may explain these regime switches. These classes comprehensively account for the shocks affecting the dominance of each currency, whether favourably or unfavourably, in the reference literatures in economic history, monetary and financial macroeconomics, and political science. These are changes in technology; development and access to resources; monetary, fiscal, and financial institutions; geopolitical forces (including democracy and major conflicts); and regulation. We provide an original database listing these events for the nine currencies of the international monetary system proxy and the five classes of events, for five broad institutional eras: the classical gold standard, the gold exchange standard, Bretton Woods, the managed float, and a ‘contemporary period’ spanning the 2000s to 2020s.
Figure 2 Summary presentation of the international monetary system by eras
Notes: USD: US dollar, GBP: British pound, EUR: euro, JPY: Japanese yen, RUB: Russian rouble, CNY: Chinese renminbi, EME: other emerging market currency, Advanced SOE: other advanced small open economy, STB: digital asset.
Network effects and combinations of events
Network effects in monetary systems (e.g. Eichengreen et al. 2016, Prasad 2016) are central in the modelling of persistent patterns of currency dominance. When the use of a currency as a unit of account and medium of exchange becomes widespread beyond a critical level, it becomes costly to change it. Network effects do not preclude dominant currencies from changing in the event of a series of major shocks, but do preclude such changes from occurring frequently. In the model, currency dominance shifts between ‘non-core’ and ‘core’, via the intermediate states of ‘ascending core’, ‘descending core’, and ‘challenger’ (and vice versa). The purpose of calibration is to identify persistent patterns of network effects and their associated thresholds on combinations of events. Based on the events database, we find that ‘specific’ shocks (i.e. major favourable or unfavourable shocks when the majority of other currencies experience an opposite shock) related to the development and to the democracy and conflicts classes of events play a central role.
Database of currency dominance-related events
The full database lists five currency dominance-related classes of events (for an overview, see Figure 3). The technology class refers to advances in technology and general economic growth, at the country and global level. The development class refers both to development processes and to access to the resources that contribute to them. Access to resources includes the possession and dismantling of colonial empires, as studied by Ferguson (2012) for the British Empire. The monetary, financial, and fiscal institutions class refers to major changes in the organisation of these systems, at the international, regional, and national levels, such as the establishment of central banks and major changes in central banking practices. The democracy and conflicts class refers primarily to major conflicts, notably WWI and WWII. The nature of political regimes is linked to the issue of conflicts: democracies are both less prone to go to war with each other and more likely to defeat autocracies. This finding is related to a microeconomic theory of the state, i.e. rent-seeking behaviours accentuate imperialist biases in foreign policy, and this bias is exacerbated in autocratic states that face high costs of state control (‘powerful pacifism’, Lake 1992). Finally, the crises-regulation cycle class refers to the interaction between major crisis events and their impact on financial regulation, at the international, regional, and national levels. Outside of crises, regulatory shocks can also result from the outcome of elections or referendums.
Figure 3 Summary table of events, by classes of events, currencies, and decades
Notes: Individual events are coded as (+1) (favourable) or (+2) (most exceptional favourable); (-1) (unfavourable) or (-2) (most exceptional unfavourable). Possible multiple events are summed.
The history of British pound and US dollar dominance
The calibrated model highlights the thresholds for the combinations of conditions associated with the major shifts of the 20th century. In particular, the British pound evolves from ‘core’ to ‘descending core’, then a ‘challenger’. This decline in currency dominance is associated with unfavourable shocks to the democracy and conflicts class that are both repeated (over two successive three-decade institutional eras) and exceptional, and combined with unfavourable shocks to ‘development and resources’ (in particular, the dismantling of the British Empire). In parallel, the US dollar evolves from ‘challenger’ to ‘ascending core’, then ‘core’ in later periods. This rise in currency dominance is associated with favourable shocks to the democracy and conflicts class that are repeated (over two successive three-decade institutional eras), specific, and exceptional, and combined with favourable shocks to both the technology and monetary, financial, and fiscal institutions classes.
Figure 4 Simulation, currency dominance by currency
Notes: x-axis: institutional eras. y-axis: states of currency dominance. Width of lines proportional to state frequencies.
US dollar dominance: Prospective
The series of stress tests based on these thresholds associated with a combination of shocks offers a fresh perspective on the prospect of US dollar dominance. The recurring tensions between the executive and the Supreme Court, along with the display of belligerence towards its allies, point to the fact that a shock to democracy and conflicts is currently in effect, but unless it is repeated (after the end of this administration) and severe, dominance should shift at worst from ‘core’ to ‘challenged’. As for the other currencies, there are different ways to become a ‘challenger’, but only one to become ‘ascending core’ then ‘core’ in the calibration based on the last 150 years of international monetary system data: i.e. a favourable shock to democracy and conflicts, when the majority of other currencies are experiencing an unfavourable shock. In other words, a critical decline of US dollar dominance would require, for example, the absence of a smooth democratic transition at the end of this administration; a thorough reform of governance of the challenger currency countries, such as China adopting the rule of law and Europe adopting a fiscal union; and at the same time a widespread unfavourable development of democracy and conflicts involving a majority of the other currencies. Given that it is unlikely that all of these conditions will be met simultaneously, in general, stress tests over the next decade show the resilience of the current centripetal pattern around the US dollar as the hegemon. In particular, that suggests that the parallel between the rise of the US dollar in the 20th century and that of the renminbi in the 21st century should be treated with extreme caution.
These results provide complementary insights to the existing literature on currency dominance, which often relies on portfolio models (e.g. Arvai et al. 2026) or panel data econometrics (e.g. Weiss 2022). In particular, they place the traditional opposition between the economic and geopolitical factors of currency dominance, notably studied by Eichengreen et al. (2019) (‘Mercury’ versus ‘Mars’) or Seddon (2021) (exogenous economic shocks versus structural strategic choices of hegemons), within a broader and more comprehensive framework. The method is reproducible and allows for testing any scenario. A stress test interface is expected to be made freely available.
Source : VOXeu
