One consequence of the new technological capabilities is a potential weakening of the historical link between monetary stability and fiscal management. Central banks have rolled out massive long-term stimulus programs in response to the economic fallout from the COVID-19 pandemic, raising the risk of inflation and pushing money flows into alternative asset classes. At the same time, the demand for a monetary revolution is growing.
That revolution will be driven by digital technologies that enable not only new forms of government-issued fiat currencies (like the renminbi and the euro) but also private currencies generated in innovative ways, such as through distributed ledgers. This development is as important as the break with specie currency. The world is quickly moving to money based on information rather than on the credibility of a particular government.
New money therefore may be ending the long period of dollar hegemony. Moreover, the COVID-19 crisis has hastened this development by ushering in a more digital version of globalization, featuring a greater exchange of data but less movement of people and goods.
The dollar originally gained preeminence in a context of strong global demand for a deep, liquid, and safe asset, implying that the emergence of alternative safe assets could end the greenback’s primacy. In the past, when precious metals were the basis for currency issuances, alternative safe assets were dominant. Even in the late twentieth century, some commentators looked back nostalgically to a time when they could think of a currency as having real collateral. But now, they can look ahead. With digital currencies, there is real collateral in the form of information generated by the participants in a wide variety of overlapping communities.
Nixon’s closing of the gold window marked the end of a commodity-based monetary order, and the beginning a new world of fiat currencies. Not until the 1990s did governments and central banks learn to manage that new world effectively. Now, we are moving toward another new monetary order, based on information (which is itself a kind of commodity). We may learn to manage the new system faster than we did in the aftermath of the Nixon Shock. But the outcome—a world in which the dollar has been knocked from its global pedestal—could be far more shocking.
Harold James is professor of history and international affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book "The Euro and The Battle of Ideas," and the author of "The Creation and Destruction of Value: The Globalization Cycle," "Krupp: A History of the Legendary German Firm," and "Making the European Monetary Union."