Currency Cornucopia

Hi. It’s been a while, but I’ve been a bit busy, so do forgive me. This section, really, is quite formal since I basically took it from my research (but it’s too opinionated to be part of the history). So, enjoy the analysis of how the ruble failed to achieve hegemony like the dollar did.

The U.S. dollar had held the top spot ever since America dethroned the British Empire and emerged as the economic superpower. Bretton Woods only functioned as a way to make that transition official for governments around the world. To attain the status of being a global currency, however, a country needs much more than just a mighty economy. The Soviet ruble illustrated this point clearly, since after World War II, the U.S.S.R. commanded an economy second only to the U.S. and possessed military capabilities that were roughly on par with the Americans. Yet, the ruble was nowhere near as prevalent as the dollar or even the pound and the franc. This was mostly due to it being non-convertible until 1989, so no foreigner could hold it, it could not be converted into foreign assets, and so no international market utilized it for trade. Be that as it may, even in a theoretical scenario where the ruble was convertible, it was still highly unlikely that the currency would be able to match the influence possessed by the U.S. dollar.

Because foreign trade was highly regulated, access to the ruble for other governments was extremely limited. In contrast, the U.S. was the single biggest trading and investing entity in the entire world, and it also provided extensive aid following the two World Wars. Decades of trade and aid, such as the Marshall Plan, the largest and most ambitious foreign aid program of the 20th century, flooded the world with immense amounts of dollars. Moreover, the U.S.S.R. could not adequately back such a large money supply. Its gold reserves, though substantial, were far smaller than those of the Americans, and the international community simply did not trust Soviet monetary policies as it did the U.S. This is not to say that policies implemented by the U.S. were flawless, but that since their markets operated under forces like supply and demand, decisions were often more transparent than those of the centrally controlled U.S.S.R.

The lack of trust worsened with the U.S.S.R.’s refusal to join the IMF and the World Bank due to ideological conflicts with the West, opting instead to form its own economic bloc that was formalized with the Council for Mutual Economic Assistance (COMECON) in 1949. The IMF was by no means perfect. The voting system was tied to the contribution of the corresponding members, the Fund itself still lacked sufficient resources to deal with crises effectively, and even though America had the largest gold reserve, it still could not mathematically back every single dollar it had printed. Many other major flaws existed, something to be expected due to how young the IMF was, but what the Fund did well enough was to create a collaborative environment between foreign governments and promote integration between neighboring countries. Had COMECON successfully fulfilled these roles, the ruble could have been dominant within the bloc, which would have granted it some global influence. In reality, COMECON was not as multilateral nor cooperative, operating mainly under the decision of the U.S.S.R. Prices, parities, and trade were all under strict governmental control, and COMECON economies, bar the Soviet Union, were all weaker than their Western counterparts. 

Furthermore, the IMF was created to strictly be an economic institution, and although there were definitely instances where politics played a part in votes and policies, regulations like the aforementioned Section 5 of Article IV prevented it from becoming a complete political tool for governments. In contrast, COMECON discussions were heavily influenced by politics due to the absence of a free market and a private sector. Products and prices were not dictated by consumer preferences or market forces but rather by the planning of the governments in charge, which meant that COMECON meetings often reflected the priorities and economic strategies of the member states.

The ideological and structural differences between the superpowers created a gap between the two currencies that could not be bridged unless an extraordinary geopolitical change were to happen. For instance, in a world where the Soviet Union was able to gain complete political dominance, the ruble would have been the most dominant currency, purely on the basis that it would be the only currency left. However, such an event never happened, and as such, the ruble never managed to truly challenge the dollar.

To create and maintain a powerful and influential currency, a country needs to satisfy most, if not all, of the following conditions: a strong economy and adequate backing, openness and freedom in trading, extensive political influence across the globe, and widespread credibility and acceptance. Countries like the U.K., France, and Switzerland all fulfilled these conditions to some degree, and thus their currencies are all stable and trusted. The United States simply took these conditions to the extreme. Its economy was the largest in the world. It held a gold reserve more immense than the rest of the world combined. It maintained the largest trading volume in the world. Its influence cannot be understated, for its military prowess was only challenged by the Soviet Union, and nations depend on its exports to survive. It continuously streamed aid and relief into countries recovering from the war, enhancing its credibility and image in the eyes of the public. For these reasons and more, it is no surprise that the U.S. dollar is now leading as the world’s most dominant currency by a considerable margin.

Welp. That’s it. The language addresses it like it’s happening “now” because, in the context that I wrote this, it was how things were at the time i.e. the past. Thanks for reading, I’ll write something more interesting next time.