The Dollar’s Slow Decline: What History Tells Us About the World’s Reserve Currency

Every empire believes it will last forever. Every reserve currency in history has inspired that same unshakeable confidence, right up until the moment it began to fade. The Portuguese Real, the Dutch Guilder, the British Pound. Each one commanded global commerce. Each one looked permanent from the inside. And each one followed a strikingly similar path on the way down.

Today, that same pattern is playing out with the US Dollar. Not dramatically. Not all at once. But methodically, in ways that are already affecting the price of everything you buy.

How Reserve Currencies Are Born

To understand where the Dollar might be going, it helps to understand how dominant currencies rise in the first place. It never starts with financial engineering. It starts with control, over trade routes, shipping lanes, and the security of global commerce.

The Dutch built this in the 1600s through the Dutch East India Company, a corporation that maintained its own army and navy. If you wanted to trade across oceans, you operated inside their system and used their currency. The United States reached the same position after World War II. Global trade moved through American-protected sea lanes, and the Dollar became the language of international commerce almost by default.

Once that trade dominance is established, wealth flows in almost automatically. Portugal experienced this in the 1500s, when its ships brought spices, silk, and porcelain from Asia and sold them across Europe at enormous markups. Gold and silver poured into Lisbon. Britain repeated the pattern in the 1800s, its factories exported textiles, steel, and machinery to the world while raw materials flowed in at prices largely set by London. After World War II, the United States experienced the same surge. With much of the world’s industrial base destroyed by war, American factories supplied nearly everything. US gold reserves swelled to more than 20,000 tons by the 1950s, more than the rest of the world combined.

At this stage of the cycle, everything looks like success. Wealth rises, confidence grows, and almost no one is paying attention to the structural forces quietly setting up the next phase.

The Bretton Woods Moment and the Peak of Dollar Dominance

For the Dollar, the moment of official dominance came in 1944 at Bretton Woods, New Hampshire. Forty-four nations gathered and agreed to anchor the global financial system around the US Dollar. Other currencies would peg to it, and the Dollar itself would be backed by gold at a fixed rate of $35 per ounce. It was the most deliberate coronation of a reserve currency in history.

But here is what most people miss about that moment: it was also, in hindsight, the peak. Economists refer to this structural problem as the Triffin Dilemma, named after economist Robert Triffin who identified it in the 1960s. The dilemma works like this, to supply enough Dollars for the rest of the world to use in trade and savings, the United States has to send more Dollars out than come back in. That means running persistent trade deficits. Over time, you end up consuming more than you produce. The very system that made you powerful begins to hollow you out from within.

This is not a theory. It is a pattern that has repeated across every major reserve currency transition in the modern era.

The Reversal: From Surplus to Deficit

Once a reserve currency nation reaches peak dominance, the direction quietly reverses. The country that once exported goods to the world starts buying more than it sells. Trade surpluses fade and deficits appear. At first, it doesn’t feel dangerous. It feels like abundance.

Portugal reached this point in the mid-1500s. Instead of generating productive wealth, it began importing grain, textiles, and finished goods from across Europe while spending colonial gold on palaces and royal prestige. Little of that money went into building new productive capacity at home.

Britain followed the same path in the early 1900s. Imports rose while domestic manufacturing declined. The country sustained itself on investment income earned from its empire rather than from domestic production. Trade deficits widened year after year, even as London retained its image as the financial capital of the world.

The United States entered this phase definitively in 1971 when President Nixon ended the Dollar’s convertibility to gold and the Bretton Woods system collapsed. Trade surpluses reversed and never returned. By the 2000s, annual trade deficits were running into the hundreds of billions of Dollars. America imported consumer goods, electronics, and automobiles and paid for them by exporting Dollars, a privilege that only reserve currency status makes possible.

The country still looked wealthy. The system still functioned. But it was now running on accumulated strength rather than generating new strength.

Debasement: The Tool Every Declining Empire Reaches For

When deficits become unmanageable, governments throughout history have reached for the same tool: currency creation. Portugal did it in the 1550s, reducing the silver content of its coins and issuing more currency than its economy could realistically support. Prices climbed. Merchants demanded more Real for the same goods. Purchasing power quietly slipped away.

The Dutch followed a similar path in the 1700s as wars and colonial costs mounted. A currency once known globally for its stability began to weaken. Borrowing became expensive, so money creation filled the gap. By the late 1700s, the Guilder had lost its place as the preferred currency for international trade.

Britain accelerated money printing across two world wars. The Pound was devalued in 1949 by 30% and again in 1967. Each devaluation eroded global confidence further.

The United States entered this phase in 2008 with the Federal Reserve’s first round of quantitative easing, which added trillions of Dollars to the financial system. Then came the pandemic response, which added trillions more. The result was not immediate collapse, it never is. It was gradual erosion. Since 2020, the Dollar has lost roughly 25% of its purchasing power, according to standard inflation measures based on Consumer Price Index data.

The World Starts Looking for the Exit

This is the phase where the historical pattern becomes most visible, and most consequential. Once confidence in a reserve currency begins to erode, the world starts searching for alternatives.

Portugal lost that confidence in the 1570s. International merchants began demanding payment in Spanish silver rather than Real. By 1580, the Real was functionally finished as a reserve currency. The Dutch Guilder lost confidence through the 1700s, and by the 1780s, Amsterdam was no longer the financial center of Europe — London had taken that position.

Britain’s transition came rapidly after World War II. The 1949 devaluation caused international holders to lose nearly a third of their value overnight. Nations shifted reserves from Pounds to Dollars. By 1960, the pound’s share of global reserves had fallen below 20%.

The US Dollar is currently in this phase. The Dollar’s share of global reserves has fallen from approximately 72% in 2000 to around 58% in 2024, according to data from the International Monetary Fund. That is fourteen percentage points, representing trillions of Dollars, shifted out of dollar-denominated assets over roughly two decades.

The moves away from the Dollar are no longer theoretical. Russia and China now settle approximately 90% of their bilateral trade in rubles and yuan rather than Dollars. Brazil and China have eliminated the Dollar from their bilateral trade arrangements. India has purchased oil from the UAE using Indian Rupees. Saudi Arabia, which for decades accepted only Dollars for oil sales, the foundation of the petrodollar system, began accepting Yuan for Chinese oil purchases in recent years. Central banks globally have been purchasing gold at rates not seen in decades. BRICS nations, Brazil, Russia, India, China, South Africa, and their newer members, now collectively hold over 6,000 tons of gold in central bank reserves and represent approximately half the world’s population and over a third of global GDP.

What Comes Next

We are not at the final stage yet, the full replacement of the Dollar by a successor currency. That transition, historically, takes decades and requires a clearly superior alternative to emerge. What seems most likely in the near term is not a clean replacement but a fragmented transition: the Dollar retaining influence in the Americas, the euro in Europe, the yuan in Asia, and gold serving as the neutral settlement asset between regional blocs.

The US government is also actively working to extend Dollar demand through new mechanisms. The GENIUS Act, passed recently, requires US stablecoin issuers to back their coins with US Treasuries or Dollars. Treasury Secretary Scott Bessant testified before Congress that stablecoins could generate significant new demand for US government debt, essentially attempting to export Dollar demand into the cryptocurrency system.

Whether that strategy succeeds or merely delays the inevitable remains to be seen. But the broader pattern is not in dispute. Seven stages, four major reserve currencies over five centuries, and the same sequence repeating each time. Dominance, wealth accumulation, official reserve status, trade reversal, currency debasement, loss of confidence, and eventual replacement.

The mathematics of deficits, debt, and debasement do not respond to arguments about national exceptionalism. They respond to the same forces they always have.

The most important question now is not whether the Dollar weakens, that process is already underway. The question is what replaces it, how disorderly that transition becomes, and what it ultimately means for the purchasing power of ordinary people who have no say in the matter but absorb the consequences regardless.