A friend asks, apropos of my post about the dollar’s future as reserve currency:
As a currency becomes weaker and less sought after by central banks doesn’t it take a toll on the issuing nation’s economic standing in other ways? Did the pound’s decline as a reserve currency coincide with the decline of England’s power and influence? Or is there no economic connection between the two?
There’s certainly an economic connection, but I think it’s mainly a case of a country’s declining power and influence leading to loss of its reserve-currency status, not the other way around. To be sure, there’s a bit of a feedback loop: Once your currency is no longer the global standard, you lose even more power and influence. On the other hand, the UK caused itself an awful lot of economic pain in the 1920s trying to reestablish the pound’s primacy. (See J.M. Keynes, “The Economic Consequences of Mr. Churchill.”) The country might have been better off just accepting that its moment had passed and figuring out how to be competitive in a world not dominated by the pound.