Gold, The Dollar, and What Comes Next: The greenback may be felled not by a pair of giants, but by a swarm of midgets.

• Author: Eichengreen, Barry

President Richard M. Nixon's decision to close the gold window on August 15, 1971, almost exactly fifty years ago, marked the end of an era--the era when the United States was able to determine, all but unilaterally, the shape of the international monetary order. That decision launched Europe down the road that led to the Snake, the European Monetary System, and the euro. It led Japan to abandon the currency peg of 360 yen to the dollar put in place more than twenty years before at the behest of U.S. occupation authorities.

The one thing the demise of Bretton Woods didn't change, to the surprise of many, was the international role of the dollar. The dollar remained--and remains--the dominant international and reserve currency. More countries peg their exchange rates to the dollar than to any other currency. The dollar is the vehicle for the majority of international interbank transactions. It is the most traded currency on foreign exchange markets.

Why is not hard to see. The United States was then, when Nixon closed the gold window, and remains today the single largest economy in the world. The market in U.S. Treasury securities, by some measures, is the single largest and most liquid financial market.

The fact that the dollar's dominance survived not only the collapse of Bretton Woods but also the Great Inflation, the Global Financial Crisis (for which the United States was heavily responsible), and the Trump Administration (with its efforts to weaponize the greenback) points us to yet another supportive factor, namely, the absence of alternatives. Even if the bread is stale, the hungry man will eat it if it's the only bread he's got.

The question is whether this is about to change. The Trump Administration's threat to deny access to dollar credit to European entities doing business with Iran prompted the European Union to renew its efforts to enhance the international role of the euro. However, there's little evidence of progress. The practical obstacle to euro internationalization is the absence of an adequate stock of AAA-rated government securities for central banks to hold as reserves. The outstanding stock of AAA-rated euro area government bonds is just one-third the corresponding supply of U.S. Treasury securities. Moreover, nearly half the euro area total is held by the European System of Central Banks and other multilateral financial institutions. Much of the rest is held by Europe's own banks to meet their capital requirements.

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