Deep Dive
The Dutch Gilder's Rise and Collapse
Amsterdam became the world's financial center in 1609 because it was one of the few places where money was protected by rule of law. The Bank of Amsterdam promised deposits were backed by silver, but secretly loaned that silver to the Dutch East India Company and government, giving the Dutch exorbitant privilege — they borrowed at 2-3% while Britain paid 5-6% and France 10-12%. This privilege saved the republic during the 1672 invasion when larger rivals closed in, yet cheap money also bred complacency. Over-borrowing by provincial governments and the East India Company, rampant real estate speculation, and increasing inequality meant financial profits concentrated among elites while productive trade and craftsmanship declined. Ironically, Dutch bankers funded the industrial rise of Britain, France, and the US — the very nations that would overtake them. The fourth Anglo-Dutch war and French Revolution bankrupted the East India Company, destroyed trust in Amsterdam's bank, and eventually led to French conquest in 1795, after which London became the undisputed financial center.
Britain's Pound: Longer Dominance, Slower Decline
Britain inherited exorbitant privilege from the Dutch around 1799 and used it to borrow at 3% while France paid 10%, allowing Britain to hire European armies to fight Napoleon on its behalf. The British state borrowed to nearly 200% of GDP and suspended the pound's gold convertibility, yet the currency remained valuable because it was backed by the mighty British state — people could use pounds to pay taxes and to buy British goods, which were the world's most productive. After Napoleon's defeat, ultra-cheap money fueled the first industrial revolution, making Britain both industrial and financial superpower. However, Britain's dominance suffered as electricity and assembly-line production emerged — Britain's steam-powered industries resisted change while Germany and the US developed behind tariff walls, only unleashing competitive industries once they reached massive scale. Like the Dutch before them, cheap money allowed British government overreach into unprofitable colonial ventures. When Germany challenged Britain in World War One, Britain again used exorbitant privilege to fund allies, but the US created the Federal Reserve in 1913 and removed restrictions on foreign bank branches, suddenly creating a viable alternative. By 1920 the dollar overtook the pound, though Britain recovered temporarily through high interest rates and regained dominance before World War Two — but post-war, the US held 80% of global gold and Britain had maxed out its borrowing, forcing it to cede reserve currency status at Bretton Woods in 1944.
The Dollar's Unique Strength After 1971
The dollar became undisputed king in 1944 under the gold standard, repeating the same pattern as the Dutch and British — exorbitant privilege funded massive military spending and ally subsidies while American financial elites funded rival industrial powers. By the 1960s so much gold had left the US that Nixon suspended convertibility in 1971, which everyone thought would be temporary. But unlike the Dutch Gilder or even the pound, the dollar thrived without gold because it was backed by a powerful state that taxes in dollars and forces acceptance of dollars. More crucially, abandoning gold completely changed how reserve currencies work — instead of lending money that flows back to financial centers, America now spends money into the global economy, meaning the world lends to America rather than borrowing from it. Economists like Michael Pettis argue this spending is what makes the dollar so dominant today. Export-oriented economies in Asia deliberately structured their development models to grow by exporting to the US, the only country making its currency easily available through continuous spending. The dollar became more convenient for trade precisely because Americans overspend, a reversal of historical logic where deficits once killed reserve currencies.
How Trump and Biden Damaged Dollar Confidence
Biden first undermined the dollar's safety in 2022 by freezing foreign reserves from nations America disliked — something the Dutch never attempted and Britain only did during actual warfare. Trump then shocked markets by announcing sky-high tariffs against allies and discussed potentially taxing foreign reserves to bring the dollar down, believing it had become an exorbitant burden. For the first time in decades, markets panicked after Trump's policies were announced and money flowed out of the US during crisis rather than into it — the defining signal that exorbitant privilege was eroding. This weaponization of the dollar contradicts the entire foundation of its dominance: export-oriented economies accepted lower returns on dollar reserves because they believed the system was fair and their money was safe. If America keeps threatening to freeze reserves or tax foreign holdings, nations will accelerate de-dollarization, shifting to other currencies like the renminbi. The irony is that the very thing that saved the dollar after 1971 — American spending power — depends on foreigners willingly lending or investing, which requires trust in rule of law and fairness. Once that trust breaks, the dollar loses not just privilege but also the exorbitant burden of maintaining global financial stability.
No Clear Successor, But the Risk Remains Real
Unlike the Dutch pound, which faced clear replacement by the pound, or the British pound, which faced replacement by the dollar after 1913, the current dollar has no obvious successor. China has the industrial strength but lacks the soft power and network effects — the dollar's real moat is that developing exporters have spent decades building entire economies around selling to Americans. For China to replace the dollar it would need not just policy changes but also a willingness from developing nations to abandon export-led growth models, which seems unlikely. However, the US can still push the system too far. The dollar's dominance depends on relatively low inflation, rule of law, profitable stock markets, and perceived safety — all currently under pressure. If tariffs ignite inflation and foreign capital stops flowing into US stocks, the American economy could shrink dramatically. Consider that US GDP is merely equal to the EU and smaller than China's raw production — it's only the dollar's power that makes America the world's largest economy. If the dollar weakens significantly, the US would lose the ability to wage war globally, subsidize allies freely, or run massive deficits. History suggests this leads not to Third World status but to a century of relative stagnation like Britain endured after 1944, where the nation became steadily poorer compared to rivals. The one silver lining: both the EU and China have worse demographics, so if the US plays it safe strategically, the dollar could eventually recover stronger than ever — but only if future administrations respect the fragile foundations of trust and fairness that currently sustain it.