17Sterling: How a Reserve Currency Actually Dies
The only completed example in modern history. It took seventy years, and the economic decline came decades before the monetary decline — which is the most important thing about it.
The dates that matter are not the ones people expect.
America was the bigger economy from 1872. Sterling was still 87% of global reserves in 1947. Monetary dominance outlives economic dominance by generations.
This cuts both ways for anyone thinking about China and the dollar. China may have overtaken the US on some measures years ago; on the sterling precedent, that tells you almost nothing about when — or whether — the renminbi becomes dominant. But it also means that by the time a currency's decline becomes obvious, the underlying shift happened decades earlier and cannot be reversed.
What actually killed it
Five causes, in rough order of importance:
1. Two wars that converted Britain from the world's creditor into a debtor. This is the fundamental
cause. A reserve currency issuer that owes more than it is owed has lost the basis of its position.
2. An American alternative that was ready. Sterling did not fall into a vacuum. The dollar existed, New
York was deep and liquid, and Bretton Woods had institutionalised it. Note the contrast with today: there
is no equivalently ready alternative to the dollar. 3. Repeated devaluations that destroyed the store-of-value function. 1931, 1949, 1967. Each one
taught foreign holders the same lesson. 4. Suez, 1956. The political shock that proved Britain was no longer sovereign in its own foreign policy.
Reserve currencies rest on the perception of power as much as on economics. 5. The end of empire. The Sterling Area was substantially a coercive arrangement: colonies were required
to hold reserves in London. Decolonisation removed the captive demand.
In 1956, Britain and France, with Israel, moved to seize the Suez Canal after Nasser nationalised it. Militarily the operation was succeeding.
The United States objected. It did not threaten force. It blocked Britain's access to IMF emergency funding and let it be known that the Treasury could sell its sterling holdings, which would have forced an immediate devaluation. Britain's reserves were already falling at a rate that gave it weeks.
Britain withdrew. Anthony Eden resigned within two months. Historians generally date the end of Britain as an independent great power to that episode.
The relevant point for this report: no shot was fired at a British soldier, and the operation still ended. Financial dependency is a form of sovereignty transfer, and it is normally invisible until the moment it is used. This is the strongest argument for de-dollarisation efforts, and it is why countries pursue them even when the economics look unfavourable.
18The Euro: Built Well, Still Second
A currency for 350 million people in twenty countries, backed by an economy comparable to America's, fully convertible, with independent courts and a credible central bank. It has been the world's number two for twenty-seven years and has not moved. Understanding why is the best available guide to what a challenger actually needs.
The euro launched in 1999 with genuine momentum: it took over the legacy shares of the Deutsche Mark, French franc and others, reached about 25.8 per cent of global reserves by 2009, and prompted serious speculation that it would rival the dollar within a generation.
Then the eurozone crisis of 2010–12 happened, and its reserve share fell back to around 19–20 per cent, where it has essentially remained ever since. In 2026 Q1 it was 20.03 per cent.
The four structural flaws
1. There is no European safe asset
This is the decisive one. When you buy a US Treasury you buy a claim on the United States. When you buy a euro-denominated government bond you must choose: a German Bund, an Italian BTP, a Greek bond, a French OAT. These are not the same asset. In 2011–12 German yields went negative while Italian yields exceeded 7 per cent — in the same currency.
A reserve manager wanting to hold €50 billion of "Europe" cannot. The German bond market is about $2 trillion and shrinking under Germany's constitutional debt brake; the safest asset is the scarcest. The eurozone's aggregate debt is large, but it is fragmented across nineteen credit risks, and fragmentation is the enemy of reserve status.
Imagine India had one currency but each state issued its own bonds and could default separately. Maharashtra bonds would be safe; Bihar bonds would be risky; both would be in rupees. Now imagine a foreign central bank wanting to hold "₹4 lakh crore of India". Which state's bonds does it buy?
That is the euro's problem. It has a single currency without a single treasury. The euro is a currency without a country.
2. Monetary union without fiscal union
The eurozone shares a central bank but not a budget. Italy cannot devalue and cannot expect automatic fiscal transfers from Germany. When a shock hits one country, the only adjustment channel is "internal devaluation" — cutting wages and prices. Greece's economy contracted by about 25 per cent between 2008 and 2016 and youth unemployment exceeded 50 per cent. That is the gold standard's cruelty, reimposed in 2010, and it is why the euro is politically fragile in a way the dollar is not.
3. Germany's surplus and the demand problem
A reserve currency issuer must supply its currency to the world, which means running deficits (Chapter 10). The eurozone as a whole runs a large current account surplus — Germany's alone has exceeded 6 per cent of GDP for years. Structurally, the eurozone absorbs the world's savings rather than supplying safe assets to them. You cannot be the world's reserve issuer while running a surplus. The arithmetic forbids it.
4. No unified foreign or defence policy
Reserve currencies rest partly on the perception that the issuer can defend its interests. The EU has twenty-seven foreign policies. It could not enforce its own position on Iran in 2018 — European governments opposed US secondary sanctions, built a workaround called INSTEX, and their own companies complied with Washington anyway because their dollar access mattered more. That episode did more damage to euro credibility than any economic statistic.
Table 18.1 — The euro against the dollar, 2026
| Measure | Euro area | United States |
|---|---|---|
| GDP (nominal) | ~$17tn | ~$30.5tn |
| Population | ~350m | ~342m |
| Share of global FX reserves | 20.0% | 57.1% |
| Share of SWIFT payments | 21.9% | 50.1% |
| Share of trade finance | 5.6% | 81.2% |
| Single unified government bond market | No | Yes ($29tn) |
| Single treasury / fiscal authority | No | Yes |
| Single foreign & defence policy | No | Yes |
Note the euro's payments share (21.9%) is far above its reserve share (20.0%) and vastly above its trade finance share (5.6%). Much euro payment volume is intra-European.
The euro proves that economic size, convertibility, rule of law and an independent central bank are necessary but not sufficient. What the euro lacks — a single deep safe-asset market, a unified fiscal authority, and a coherent geopolitical will — is exactly what India also lacks, in different form. Any Indian strategy that focuses only on trade settlement while ignoring the depth of its bond market is repeating Europe's mistake with fewer resources.
19The Yen, the Plaza Accord, and the Thirty-Year Warning
In 1989 Japanese assets were worth more than American ones and books were written about Japan buying the world. Then Japan agreed to let its currency rise, and spent three decades recovering. Every rising power studies this episode. China studied it hardest.
By the mid-1980s Japan was the world's largest creditor, ran enormous trade surpluses, and American manufacturing was in visible distress. Political pressure in Washington for protection was intense.
On 22 September 1985, at the Plaza Hotel in New York, the finance ministers of the US, Japan, West Germany, France and the UK agreed to intervene jointly to bring the dollar down — principally against the yen.
What happened next
Japan's exports became expensive overnight. To help exporters, the central bank made borrowing almost free. But businesses did not want to build more factories — their products were now uncompetitive. So the cheap money went into the only things that were rising: land and shares. Prices rose because money was cheap; money kept flowing in because prices were rising.
When the central bank finally raised rates, the logic reversed. Asset prices collapsed, but the debts taken to buy those assets did not. Companies and banks spent the next twenty years paying down loans instead of investing. Economists call this a "balance sheet recession", and once it starts, cutting interest rates does not help — nobody wants to borrow at any price.
Why the yen never became a reserve currency
- Japan ran surpluses, not deficits. Same arithmetic problem as the eurozone: a surplus country cannot supply the world with its currency.
- Deliberate policy. Japan's Ministry of Finance actively discouraged yen internationalisation for decades, fearing loss of control over the exchange rate and domestic credit.
- Demography and growth stopped. Japan's population began falling in 2010 and its share of world GDP fell from about 17.8% in 1994 to roughly 3.5% in 2026.
- Zero interest rates made the yen a funding currency, not a store of value. The "carry trade" — borrow yen cheaply, invest elsewhere — means the yen is something people owe, not something they hold.
The Chinese leadership's reading of the Plaza Accord, expressed repeatedly in official commentary and in the 2010 documentary Currency Wars literature that circulated widely among Chinese officials, is roughly: the United States used financial pressure to defeat an economic rival without firing a shot, and Japan complied because it was a security dependent.
Whether that reading is fair is debatable — most economists attribute Japan's lost decades to its own domestic policy errors after 1985, not to the Accord itself. But the reading is what matters, because it drives policy. It is a substantial part of why China maintains capital controls, manages its exchange rate, refuses to sign anything resembling a Plaza-style agreement, and is building parallel financial infrastructure.
For India the lesson is different and more practical: currency appreciation is not a reward for success, it is a tax on your exporters. Any Indian strategy that aims at "a strong rupee" as a goal in itself has misunderstood what happened to Japan.
20The Yuan and Its Ceiling
China is the world's largest exporter, largest manufacturer and largest trading partner for over 120 countries. Its currency is 2.0 per cent of global reserves. That gap is not an accident, and it is not temporary.
Set out the achievements honestly first, because they are real and they are accelerating.
What China has actually built
- CIPS, its cross-border yuan payment system, reached a record daily average of RMB 920.5 billion (about $133.5bn) in March 2026, up 20 per cent year on year, with 1,791 participating institutions across 194 direct and 1,597 indirect members.
- The digital yuan (e-CNY) is the most advanced major-economy CBDC, with cumulative transaction volumes in the trillions of yuan.
- mBridge, the multi-CBDC platform with the UAE, Saudi Arabia, Thailand and Hong Kong, graduated from minimum viable product in early 2026 with over $55 billion in cumulative transactions — a system that can settle cross-border payments without touching a dollar or a correspondent bank.
- Bilateral swap lines with over 40 central banks, worth roughly RMB 4 trillion.
- Commodity pricing: yuan-denominated crude oil futures in Shanghai; iron ore and some LNG contracts in yuan; substantial yuan settlement with Russia, Brazil, Saudi Arabia and Argentina.
- Russia–China trade now settles overwhelmingly in national currencies — Russian officials have cited figures above 90 per cent and, in some statements, above 99 per cent.
This is a serious, well-funded, twenty-year programme and it is working on its own terms. It has also produced a reserve share of 1.99 per cent, up from 1.95 per cent the previous quarter.
The five walls
Wall 1 — Capital controls
A Chinese citizen may convert only $50,000 a year. Corporate outflows require approval. Foreign investors face quota systems. This is not a temporary transitional measure; it is a deliberate choice, reaffirmed after the 2015–16 episode when roughly $1 trillion left the country in eighteen months following a modest devaluation and Beijing had to spend about a quarter of its reserves to stabilise the currency.
A reserve currency must be freely exchangeable. If a foreign central bank cannot be certain it can convert its yuan into anything else on any given Tuesday, it will not hold yuan. There is no way around this, and China knows it.
Wall 2 — No independent courts
Under China's constitution the judiciary is not independent of the Party. For a domestic economy this is manageable. For a reserve currency it is disqualifying, because the entire proposition is "your money is safe here regardless of who you are or what your government does". The Jack Ma episode of 2020–21 — the abrupt cancellation of the world's largest planned IPO after a critical speech — was worth more to the dollar than a decade of American diplomacy.
Wall 3 — The surplus problem, again
China runs a goods trade surplus approaching $1 trillion. To supply the world with yuan, China would have to buy more from the world than it sells — abandoning the export-led model that lifted 800 million people out of poverty. Beijing has shown no willingness to do this and every indication that it will not.
Wall 4 — It does not want the job
Covered in Chapter 15. Reserve status means a permanently strong currency and a shrinking manufacturing sector. China has watched this happen to America and Britain. Its actual objective is narrower: reduce vulnerability to dollar sanctions and secure supply chains. That objective does not require the yuan to replace the dollar. It requires only that enough non-dollar rails exist.
Wall 5 — Demographics and debt
China's population is falling; its working-age population peaked around 2015. Total debt (government, corporate and household) is roughly 300 per cent of GDP, with a property sector that has been in slow-motion restructuring since 2021 and local government financing vehicles carrying liabilities that are still being recognised. A currency's long-run credibility rests on the issuer's long-run growth, and China's has structurally slowed.
| Measure | China's share | Dollar's share |
|---|---|---|
| World merchandise exports | ~14% | — |
| World manufacturing output | ~30% | — |
| Global FX reserves | 2.0% | 57.1% |
| SWIFT payments | 3.1% | 50.1% |
| Trade finance | 8.0% | 81.2% |
| International debt securities | ~1.5% | ~64% |
The single most revealing line is trade finance: 8.0% against a manufacturing share of 30%. Even the goods China itself makes are largely financed in dollars.
It is a mistake to score China against the wrong objective. Beijing is not trying to make the yuan the world's reserve currency by 2035. It is building something more limited and far more achievable: a parallel settlement system that works when the dollar system is closed to you.
CIPS does not need to beat SWIFT. It needs to exist, function, and be available to Russia, Iran, and any future country that finds itself sanctioned. mBridge does not need to handle global trade. It needs to handle Gulf oil going to Asia. The e-CNY does not need to replace the dollar; it needs to give Belt and Road partners an alternative rail.
Judged against that objective, China is succeeding, and the correct question for the 2030s is not "will the yuan replace the dollar?" — it will not — but "will there be two systems, and what does it cost a country like India to have to operate in both?" That question is taken up in Chapters 40 and 43.
21The Impossible Trinity
One diagram explains why China cannot open its capital account, why India manages its rupee, why Britain crashed out of the ERM in 1992, and why the eurozone crisis happened. If you learn one piece of economics from this report, learn this.
A country would like three things at once:
1. A stable exchange rate, so importers, exporters and borrowers can plan. 2. Free movement of capital across its borders, so it can attract foreign investment. 3. Independent monetary policy — the ability to set its own interest rates for its own economy.
It can have any two. Never three. This is not a policy preference; it is arithmetic.
Figure 10. The Mundell–Fleming trilemma. Every country in the world sits on one side of this triangle, and most of the monetary drama of the last fifty years consists of countries trying to sit at the centre and discovering they cannot.
Suppose India wants a fixed rate of ₹80 to the dollar, open borders for money, and low interest rates to boost growth.
India cuts its rate to 4 per cent. America's rate is 5 per cent. Investors do the obvious thing: sell rupees, buy dollars, earn the extra 1 per cent risk-free. Money floods out.
Selling rupees pushes the rupee down. To hold the rate at 80, the RBI must buy rupees with its dollar reserves. But the outflow is potentially unlimited, and the reserves are not. Eventually the RBI must either (a) let the rupee fall — giving up the fixed rate, (b) raise interest rates back to 5 per cent — giving up independent policy, or (c) stop people moving money — giving up free capital flows.
There is no fourth option. That is the entire theorem.
Table 21.1 — Who chose what
| Country / regime | Gives up | Keeps | Consequence |
|---|---|---|---|
| United States | Stable exchange rate | Free capital, independent policy | The dollar swings wildly — America does not much care, since it borrows in its own currency |
| China | Free capital movement | Managed rate, independent policy | Controls its economy and its currency — and cannot have a reserve currency |
| Hong Kong | Independent monetary policy | Fixed rate to USD, free capital | Imports US interest rates entirely, even when unsuitable |
| Gulf states (Saudi, UAE) | Independent monetary policy | Dollar peg, free capital | Fed policy is Gulf policy. Rates rise in Riyadh when Washington decides |
| Eurozone members | Independent policy and own exchange rate | Free capital, single currency | Greece 2010–16: no devaluation possible, only wage cuts |
| India | Partly: capital movement is restricted | Managed float, meaningful policy independence | A deliberate middle position — see below |
India's chosen corner
India occupies a deliberately blurred position, and it is worth being precise about it. India has a managed float: the rupee moves with the market, but the RBI intervenes heavily to smooth volatility. It has partial capital account convertibility: the current account (trade, remittances, travel) is fully convertible; foreign direct investment is largely open; but portfolio flows, external commercial borrowing and outward investment by residents are all subject to limits, and Indian residents may remit only $250,000 a year under the Liberalised Remittance Scheme.
This gives India roughly two-and-a-half of the three corners, purchased by holding $703 billion of reserves as a buffer. It is a defensible position and it has worked: India has not had a currency crisis since 1991, and it rode out the 2013 taper tantrum, the 2020 pandemic and the 2022 rate shock without one.
Here is the sentence that most of Part VII depends on. You cannot internationalise a currency that is not freely convertible.
No foreign central bank will hold rupees in size if it cannot be certain of converting them into dollars or euros on demand, at scale, on any day. No foreign company will invoice in rupees if it cannot hedge and repatriate freely. Every Special Rupee Vostro Account arrangement runs into this wall: partners accept rupees, accumulate a surplus, and then ask what they are supposed to do with it.
So India faces a genuine choice, not a technical one:
- Open the capital account fully — and accept a volatile rupee, vulnerability to sudden stops, and reduced monetary independence.
- Keep the controls — and accept that the rupee will remain a regional settlement currency at best, never a reserve currency.
There is no path that avoids this trade-off, and any strategy document that claims otherwise is not being honest. Chapter 40 sets out what a realistic sequencing looks like.
22Gold, Crypto, SDRs and the Other Candidates
Six proposed alternatives to the dollar, assessed on the six properties from Chapter 6 and the seven pillars from Chapter 13. One of them is quietly succeeding. It is the oldest one.
1. Gold
Gold is the only candidate showing genuine, measurable, sustained growth in its monetary role — and almost nobody frames it as a dollar competitor, which is precisely why it works.
Figure 8. The structural break in 2022 is unmistakable. Central banks averaged about 470 tonnes a year in 2010–21 and have exceeded 1,000 tonnes every year since the freezing of Russian reserves. Q2 2026 alone saw net purchases of 289 tonnes, up 62% year on year. Source: World Gold Council.
What gold has: it is nobody's liability. It cannot be frozen if held domestically, cannot be inflated by a foreign central bank, has no counterparty, and has functioned as a monetary asset for four thousand years. The RBI has quietly repatriated over 100 tonnes of India's gold from the Bank of England since 2022, bringing the domestically held share above half for the first time in decades — a small act with a large meaning.
What gold lacks: you cannot pay a supplier in Rotterdam with a bar in a vault. It is not a medium of exchange, earns no yield, costs money to store, and the total above-ground stock is worth a fraction of global financial assets. It cannot be the transactional currency of a $110 trillion world economy.
Verdict: gold is not replacing the dollar as a medium of exchange. It is already replacing it, at the margin, as a store of value for central banks. That is a partial de-dollarisation that is actually happening, and it deserves far more attention than the BRICS currency debate.
2. The BRICS currency
Discussed since 2022, and as of 2026 there is no announced release date, no agreed institutional design, no central bank, and no unified fiscal backing. What has genuinely advanced is a payments agenda: BRICS Pay linking national systems (CIPS, UPI, Pix, SPFS, Mir), local currency settlement in specific corridors, and the New Development Bank's target of 30 per cent local currency lending.
The obstacles are structural, not administrative. India and China have an unresolved border dispute and are strategic rivals. Brazil, India and South Africa all run deficits with China, so a common currency would mean persistent transfers to Beijing. Russia is under sanctions, which makes it a liability rather than an asset to any shared institution. A currency requires a common central bank, common fiscal rules and mutual trust — the eurozone had all three in far greater measure and still nearly broke apart in 2012.
Claim: "BRICS is launching a gold-backed currency to replace the dollar."
Reality: No such currency has been announced, designed or scheduled. What exists is bilateral local-currency settlement and payment-system interoperability. Indian officials, including the External Affairs Minister, have stated publicly on several occasions that India has no interest in a common BRICS currency and is not pursuing de-dollarisation as a policy. India's actual position is to internationalise the rupee — which is a competing objective, not a complementary one.
The gold-backing claim is even weaker: a gold-backed currency reintroduces every constraint of Chapter 7, including the requirement that deficit countries deflate. Russia and China have not committed one gram of reserves to such a scheme.
3. Special Drawing Rights (SDRs)
The IMF's reserve asset, created in 1969 and effectively Keynes's bancor in miniature. Its value is a basket: about 43% dollar, 29% euro, 12% renminbi, 8% yen, 7% sterling.
Its problem is size and usability. Total SDR allocations are roughly $940 billion against global reserves of about $12 trillion — under 3 per cent. SDRs cannot be used by private parties, cannot buy anything directly, and must be exchanged for real currency through a voluntary arrangement among members. Expanding them requires an 85 per cent majority at the IMF, and the United States holds about 16.5 per cent of the votes — a permanent, deliberate veto.
4. Bitcoin and cryptocurrencies
What Bitcoin solves: it is genuinely censorship-resistant, has a hard supply cap, and no state can freeze a properly self-custodied holding. For an individual escaping capital controls or hyperinflation, this is not trivial.
Why it cannot be a reserve currency: volatility of 50–80 per cent annually makes it unusable as a unit of account — no central bank can hold an asset that may fall 40 per cent in a quarter. Throughput of roughly 7 transactions per second against Visa's tens of thousands. A fixed supply is a bug, not a feature, for a world economy: it guarantees deflation, which is exactly the gold standard's failure mode. And in practice, the dominant crypto settlement asset is not Bitcoin at all — it is dollar stablecoins.
5. Stablecoins — the dollar's Trojan horse
This deserves emphasis because it is usually filed under "de-dollarisation" when it is the opposite. Over 95 per cent of stablecoin value is pegged to the US dollar. Their reserves are held substantially in US Treasury bills, making the largest issuers among the world's larger holders of short-dated US government debt.
The practical effect is that a citizen in Argentina, Nigeria, Turkey or Lebanon can now hold dollars on a phone, without a US bank account, without permission, in a country whose government would prefer they did not. Crypto has not de-dollarised the world; it has dollarised the parts of it that were previously out of reach.
6. Central bank digital currencies and mBridge
CBDCs are the most credible near-term change, but not as national currencies competing head to head. The threat to the dollar's position comes from interlinked CBDC platforms that let two countries settle directly without correspondent banks and without dollar clearing — which means without American visibility or veto.
mBridge is the live example: China, Hong Kong, Thailand, the UAE and Saudi Arabia, over $55 billion of cumulative transactions by February 2026. India's own e₹ pilot is running in retail and wholesale form, and UPI has been linked to fast-payment systems in Singapore, the UAE, France, Sri Lanka, Mauritius, Nepal, Bhutan and others.
Table 22.1 — Scoring the alternatives
| Candidate | Store of value | Medium of exchange | Unit of account | Scale | Realistic role by 2040 |
|---|---|---|---|---|---|
| Gold | Strong | No | No | Medium | Growing reserve asset; already happening |
| Euro | Good | Good | Good | Medium | Permanent, stable number two |
| Renminbi | Weak | Improving | Regional | Large | Dominant in a China-facing bloc |
| BRICS unit | n/a | n/a | n/a | n/a | Payment interoperability only; no currency |
| SDR | Good | No | Partial | Tiny | Marginal unless the US allows expansion |
| Bitcoin | Volatile | Poor | No | Small | Individual hedge, not a reserve asset |
| USD stablecoins | Strong | Strong | Strong | Growing | Extends dollar reach |
| Linked CBDCs | n/a | Strong | n/a | Growing | The most credible genuine erosion channel |