The challenges to challenging the dollar.

With de-dollarisation increasingly a theme if not yet entirely a fact, the real question is what sits behind a currency to make it valuable?

Jun 22, 2025

At the very peak of the Weimar hyperinflation in Germany in late 1923, over 5,800 types of local ‘emergency’ money were in circulation alongside the official Reichsmark. Firms, municipalities, states, as well as public and private institutions were issuing money in order to keep the economy functioning. Given the rate at which the mark was depreciating (3.7 billion marks to the US dollar on 15th October 1923, falling to 4.2 trillion by the 20th November), it clearly wasn’t working1.

Something had to be done, in part because credible alternatives to the Reichsmark were starting to emerge, and political necessity demanded the state stay in control of the money system.

One of the proposals was the Roggenmark (or rye-mark), a money backed by the value of Germany’s national agricultural crop. Although a potentially sensible idea, it was not acceptable to the political left as it was seen as giving too much power to conservative landowners2.

The idea that was eventually successfully implemented was the Rentenmark (or lease-mark), a money backed by all the land rents in Germany, which were in turn theoretically mortgaged against Germany’s remaining gold reserves. Although conceptually difficult to understand, the important thing was that something ‘real’ was behind the new money, thus giving it value.

In addition to being valuable, what really made the new money work was an end to excessive central bank money printing and credit creation, as well as the alignment of key German politicians and financiers (notably Chancellor Gustav Stresemann and Reichsbank chief Hjalmar Schacht) with Britain and America, culminating in foreign subscriptions to a new German gold discount bank3.

Money, including domestic savings which had fled, started to flow back into Germany. The hyperinflation was over. What had changed was that the new money was backed by something tangible (rents, then gold), and this gave it real value.

The master alchemist - Reichsbank chief Herr Schacht was the key figure in restabilising Germany’s money in 1923 (Photo source: McGill Int’l Review).

Why should we care about such a remote and extreme story? First, extreme events in economics tend to reveal hard truths - no equations needed, as the facts speak for themselves. Secondly, the Overton window, or the range of policy options acceptable in public discourse, is clearly changing with respect to the idea of the dollar as the world’s reserve currency and what might - or could - replace it.

Talking about reserve currency status is a little like talking about religion or politics at dinner parties - something one just doesn’t do in polite company. Yet in the last week, several articles have appeared in the Financial Times (FT), the global financial paper of record, on exactly this topic, and from senior officials in positions of power rather than just market commentators.

No less a figure than Christine Lagarde, President of the ECB, opined in the FT in favour of the euro gaining ‘global prominence’4. Her argument shows how the euro shares many of the characteristics backing the dollar. These include liquidity, especially from the central bank itself in the form of of swap lines, popularity in global trading, and soon the backing of ‘hard power’, mirroring the idea that the dollar gets its value in part from the extension of America’s military capabilities.

Yet she also acknowledges Europe’s lack of growth and its fragmented political and capital market set up, both of which clearly mark the euro out as currently inferior to the dollar. When the euro launched in 1999, many hoped it would rival if not supersede the dollar. 26 years and counting, and we are still listening to arguments from Ms Lagarde and others about needing ‘more Europe’ to make the plan really work.

Pan Gongsheng and the yuan in a multi-polar world (Photo source: New York Times).

Only a day after Ms Lagarde’s op-ed, the FT reported Pan Gongsheng, governor of the Chinese central bank (PBOC), taking a different approach to the ECB President on the dollar issue . Rather than talking as Ms Lagarde did about a global euro to challenge the dollar, Pan spoke of “a pattern in which a few sovereign currencies coexist, compete with each other, and check and balance each other”5. The article goes on to say:

Pan also noted discussions around greater use of SDRs — a basket of currencies defined and maintained by the IMF — as a potential alternative that could help “overcome the inherent problems of a single sovereign currency as the dominant international currency”.

The last time the global monetary system wasn’t dominated by a single sovereign currency was before the First World War - an era of free trade effected by the movement of gold to balance trading flows. Whether or not this is what Pan had in mind is unclear, the BRICS currency project notwithstanding, but it is certainly interesting in the context of China’s ongoing central bank gold purchases and declining US Treasury balances.

Ms Lagarde’s op-ed also mentions the rising global demand for gold, and this is where the history lessons of Weimar and its crazy monetary story start to resonate. The FT is no fan of gold or of goldbugs in general, but nonetheless ran a full-page article on how the barbarous relic is making a comeback, particularly in that it has overtaken the euro as the second largest reserve asset held by central banks.

The graphic above from the FT doesn’t just show a ramp-up in gold purchases by central banks since the Russian invasion of Ukraine in 2022 (when Russia’s foreign currency assets were seized), but also that the gold buying started all the way back in 2010 after the global financial crisis6.

While the article rightly focuses on Trump, tariffs, and geopolitical and economic uncertainty as a key catalyst to the rising gold price in 2025, the full story seems to be a much older one, starting with the huge US bank bailouts after the financial crisis of 2008.

The question then wasn’t so much about the dollar as the currency of the world trade, but of US treasuries as the reserve asset behind the dollar. With the bailouts and the start of quantitative easing (QE), the stock of treasuries, the anchor behind the currency, was likely to increase rapidly, undermining their value. It is perhaps no coincidence then that China began calling for a new reserve currency asset all the way back in 20097.

In 1923, the disastrous effects of excessive deficit financing (of over 60% of government spending at one stage) and massive private-sector credit creation meant any new currency in Germany had to have credible backing in order to halt the inflationary slide into anarchy.

The 2025 story in the US clearly isn’t in the same ballpark - it’s not even the same game at this stage. Yet the extreme example of Weimar highlights the end of a road that hopefully we never reach. At that point the question arises of what, if anything, backs a country’s currency to render it valuable.

Worries about deficit financing, the confiscation of assets, the withdrawal of dollar swap lines for geopolitical reasons as well as the spectre of war are all fuelling the de-dollarisation and multipolarity debate. In a letter to the FT, Vishnu R Nair neatly summarises the dark turn the world seems to be taking as it considers gold rather than the dollar as a reserve asset:

“When central banks abandon productive dollar assets for sterile metal, they signal something darker than portfolio diversification. They’re preparing for a world where international co-operation no longer exists. The frozen Russian reserves weren’t just a sanction imposed on Moscow. They were a declaration that money itself had become a weapon. Every finance minister now faces an impossible choice: maintain efficient reserves that could vanish overnight, or hoard gold like a medieval king.”8.

With President Trump increasingly ‘owning’ the Ukraine conflict in the way Nixon ended up owning Vietnam, and with the US being dragged more openly into Israel’s conflict with Iran, it may be hard for investors to look beyond the trend in gold as a sign of the times and a refuge from instability.

Yet reading between the lines from PBOC Governor Pan’s recent comments, one might conclude a multi-polar world without a single dominant national currency might be one where gold has an important role to play as a neutral reserve asset. Contra to Mr Nair’s letter quoted above, this might not be all bad. If not gold, perhaps bitcoin could do the job. If we end up with money backed with rye or land-rents, we know things are bad.

Market Depth

Discussion about this post