Although legitimacy narratives might seem extraneous to a technical subject like global finance, ostensibly based on only hard material realities like profits and production, nothing could be further from the truth. The decisions of investors that structure capitalism are not just based on hard numbers. They are also based on “imagined futures,” which in turn are derived from deep assumptions embedded in their worldviews that are not reducible to calculations on a balance sheet.³ Monetary systems are first and foremost political constructions. They reflect a specific constitutional settlement about the distribution of power and authority in society, and monetary authority rests as much on shared values and projects as any other type of authority does. The loss of American legitimacy will have a material effect on the world’s financial system.

Looking at the long arc of the dollar’s international role, it began life as an explicitly imperial project, but evolved into a hegemonic project after World War II when America successfully competed against the Soviet Union in the contest to develop the world economy. After a quiet period of American unipolar dominance, the rise of nationalism is creating turbulence and upending the previous settlement. The dollar system will undergo a dramatic shift as a result, as the foundations of American monetary hegemony—confidence in Treasury debt, the dollar’s link to stability, and the elite consensus behind U.S. leadership—break down. The contradictions of Trumpism have brought about this constitutional crisis in the global monetary system. MAGA (Make America Great Again) insists on dollar supremacy while undermining the institutions that made it viable in the past. In the short run, American workers might benefit, as President Trump attempts to transform the dollar system from a global public good into a protection racket. In the long run, these gains are only sustainable if the United States is willing to become significantly more vicious in its use of military force to keep former allies in a subordinate position, but the isolationist streak in Republican politics seems to rule that out. Ultimately, all MAGA is likely to achieve is generating enormous incentives for the world to try to move past the politically dysfunctional United States.

Signs of Autumn
Hints of that future already exist in the present. Consider, for example, three important phase changes in American finance and security. First, the historic link between American interest rates and exchange rates broke this past summer. In contrast to what for decades had been the case in the United States, when interest rates on government debt in emerging markets go up, that indicates trouble. Markets fear the government will default or inflate away the debt, causing global capital to flee that country, and the value of the currency to plummet. America has long operated according to a different pattern. A rise in our interest rates attracts global capital to invest in the safest assets in the world—up until recently, the U.S. Treasury bond—and our currency appreciates. However, after the imposition of President Trump’s “Liberation Day” tariffs, America’s debt and currency began acting more like an emerging market, with currency depreciation accompanying rising rates.⁴ Second, foreign central banks now own more gold than American Treasury securities.⁵ This shift has been driven by a historic surge in gold prices. Adjusted for inflation, the last time gold prices were this high was during the last major crisis of the dollar system in 1980.⁶ Worried about how to safely store value, the world is not fleeing to the dollar, as it had done since World War II, when the global dollar system replaced the gold standard. Instead, investors are fleeing into gold. Third, for the first time since the demobilization after World War I, the federal government is now paying more interest to its creditors (3.1 percent of gross domestic product [GDP]) than it is spending on defense (3 percent of GDP), an historic shift in priorities as expressed through the national budget.⁷

Looking at the long arc of the dollar’s international role, it began life as an explicitly imperial project, but evolved into a hegemonic project after World War II . . .

The last time the dollar system was in trouble, and it looked as if international markets might ditch the dollar in favor of some alternative commodity standard like gold, it was the result of inflation in the 1970s. Because of double-digit inflation, the dollar was no longer the safe store of value it had been up to that point. Trying to hold savings in the form of dollar-denominated assets meant losing purchasing power unless the financial returns on those assets exceeded inflation. The Federal Reserve raised interest rates to 19 percent under Paul Volcker, killing two birds with one stone: the economy crashed and inflation fell while interest rates remained elevated. Capital came flooding back into the United States, and the dollar system was secure for another thirty years. The current troubling signs for the system began in 2008, with the global financial crisis and the populist forces it unleashed. But before turning to the growing domestic opposition to global finance in the United States, a brief look into the origins and history of the global dollar will set the perspective for what it would mean to subject it to more intense executive control under a right-wing president.

Imperial Birth
The global dollar system began life as a peace project put forward by liberal imperialists. After the Spanish-American War (1898), the United States absorbed Puerto Rico and the Philippines and had to manage them. In Puerto Rico, American planners simply dollarized directly, imposing the mainland’s currency on the island. In the Philippines, they took a different approach, instead fixing the local currency’s exchange rate to the U.S. dollar. In order to fix the exchange rate, the Philippines bought gold and deposited it on Wall Street, a direct boon to the banks involved. Thus, the Philippines was not on the gold standard, but the “gold exchange standard,” meaning they held deposits denominated in dollars in a New York bank that they could ostensibly exchange into gold at will. That approach was sufficiently profitable for America that it became a blueprint for “dollar diplomacy.” American planners worried that Latin American governments were borrowing too heavily from London, Paris, and Berlin, and that a default on debt by those governments would provide the justification for Western European powers to invade and seek compensation. This would upend U.S. efforts to block European colonialism in the Western Hemisphere as articulated in the Monroe Doctrine. If Latin American governments borrowed from New York instead, then that doctrine would be easier to enforce. The State Department, Wall Street executives, and associated academic advisors took the Philippines formula on the road to a series of Caribbean countries, from Cuba to Venezuela, Nicaragua, and the Dominican Republic. To stabilize New York money markets and sweeten the arrangement, corporate reformers and financiers pressed for the creation of a U.S. central bank that could serve as lender of last resort. This would reassure countries holding gold reserves in New York that fixing their exchange rates to the dollar was safe. At the same time, they demanded the legalization of foreign branch banking so that American financial institutions could set up shop abroad. This dollar diplomacy, it was thought, could provide a cheaper, indeed profitable, alternative to military occupation of client states or confrontation with rival navies.⁸ As often happens with liberal imperialists’ peace projects, the outcome was less than hoped: the U.S. military occupied half a dozen Latin American countries for decades. Regular occupations of Cuba, Haiti, the Dominican Republic, Nicaragua, Panama, followed, as did incursions into Mexico.

The dollar system, initially confined to the Caribbean and America’s imperial holdings, blew up to global proportions during the World War I, activating the machinery of the Federal Reserve and international branch banking. Markets left vacant by European merchants and financiers, diverted by belligerence, were captured by Americans. More importantly, the United States transformed practically overnight from a debtor country, which had borrowed heavily from Europe to finance agricultural and industrial expansion, to a creditor country that owned a large chunk of the European war debt. The dollar had arrived in Europe. But roughly a decade later, when the Great Depression hit and waves of bank failures washed over America, then Austria, Germany, the United Kingdom, and France, the dollar system collapsed.⁹

International Hegemony
After a decade and a half in the dark, the world monetary order was resurrected at Bretton Woods, New Hampshire in 1944. Global elites from allied countries in Latin America, Europe, and Asia agreed to follow American leadership of the global monetary system. After the war, the Communist bloc broke away, while the Axis powers were incorporated. The “gold exchange standard,” a monetary regime previously reserved only for colonies or peripheral countries, was now universalized to cover the entire free world, from Paris to Tokyo.

At first, American hegemony was based on the brute realities of the postwar situation. America produced 50 percent of all industrial output, held nearly two-thirds of world gold reserves, and American armies occupied Europe and Japan.¹⁰ But other countries consented to this leadership. First, because the initial rules of the Bretton Woods system provided substantial room for developing countries to pursue catch-up growth policies, whether through capital controls or asymmetric protectionism favoring their own products at the expense of American exports.¹¹ Second, because it was assumed that even though each nation’s currency would be linked to the dollar, the dollar would be tethered to gold—meaning that the supply of liquid dollars would not turn into a flood and cause inflation. Third, because insofar as America did use its power to create money over and above what it needed for macroeconomic stability, the purpose would be to fight global communism and militant labor movements, promote globalization, and support global aggregate demand, goals fully within the elite consensus of capitalist nations. The United States has now broken all three of these hegemonic concessions.

The breakdown of these concessions first became visible in the 1960s, when U.S. fiscal and monetary policy could no longer reconcile domestic priorities with the international commitments of dollar hegemony. The Korean War (1950-1953) was paid for by taxes, but the military escalation in Vietnam after the Gulf of Tonkin (1965) followed the historic Kennedy-Johnson tax cuts (1964), and it was deficit financed. The Fed continuously raised interest rates through the 1960s to defend the dollar against inflation and international capital outflows. Nevertheless, pressure on the dollar kept mounting, as the number of dollars in circulation relative to the quantity of gold they ostensibly represented continued increasing. In 1971, Nixon gave in to this pressure and preemptively announced he was breaking the link between the dollar and gold. What followed was a decade of inflation—defying one of the preconditions for American monetary hegemony—following on two oil shocks, several bad harvests, and an unrecognized slowdown in productivity growth.¹² (See graph of inflation rate, above.) This was the last major crisis of the dollar, when even Federal Reserve officials worried that its global role would give way to a chaotic transition back to some kind of commodity standard, whether gold, tin, or otherwise.

Worried about how to safely store value, the world is not fleeing to the dollar, as it had done since World War II, when the global dollar system replaced the gold standard. Instead, investors are fleeing into gold.

To resolve it, President Carter appointed Paul Volcker to lead the Fed in 1979. Over the next four years, Volcker subjected the global monetary regime to a process of disinflation by hiking interest rates into the stratosphere and slowing the growth of the money supply. Although this episode is sometimes referred to as the “Volcker Shock,” that is an inappropriate name since it conveys the image of a one-time electric jolt that zapped the system back to life. In fact, Figure 3 (on page 48) suggests a better name would be the “Volcker Process,” since over four years monetary policy whip-sawed back-and-forth.

After the initial 1979 hike, Volcker caused a recession (virtually guaranteeing Carter’s loss to Reagan), and in 1980, he pulled back in the face of rising unemployment. This was not enough to break the inflationary expectations that had become endemic in the American economy: a major reason firms raise prices is that they expect everyone else to raise prices, and hence their own costs. The initial rate hike and recession were supposed to lower inflation and inflation expectations, and short circuit this cycle. But Volcker’s pullback only confirmed that the Fed was not sufficiently committed to fighting inflation—thus actually entrenching rather than removing expectations of price acceleration. It took three more years and a double-dip recession from mid-1981 to late-1982, and mass unemployment, to finally convince markets that the Fed was serious about disinflationary policy. This disinflation imposed an exorbitant burden, carried overwhelmingly by labor in the form of mass unemployment, even as capitalists profited from higher interest rates and lower wages. By exacting such a price, the Fed earned credibility as a central bank that would not let inflation get out of control again. When Volcker finally took the Fed’s boot off the neck of the American economy in 1983, it was just in time for Reagan to trumpet the labor, tax, and regulatory reforms he had made in the previous two years. As Volcker’s Fed became expansionary, the economy boomed, and it was “Morning in America.” Although Reagan did not deserve the credit, he won a landslide forty-nine states in the 1984 election, cementing the impression that the Reagan Revolution was here to stay. For the next thirty years, the credibility the Fed had earned during the Volcker Process was the basis for America’s low-inflation environment. Firms knew they could plan for an average inflation of 2 percent because any aggregate price rises beyond that would be disciplined by Fed rate hikes to reduce aggregate demand and lower upward price pressures. The Fed faded from popular consciousness as monetary policy became technical and opaque, and for the most part avoided major hiccups like large recessions or large inflationary episodes.

Figure 3. Source: https://fred.stlouisfed.org/series/DFF.

After the 2008 global financial crisis, however, the bailout operations of the Fed brought monetary policy back on the political agenda. It was put there by populist forces, from Occupy Wall Street’s complaint that it was insufficiently democratic to the Tea Party’s opposition to the Fed’s very existence. Establishment politicians continued to respect the hard-won credibility of the independent central bank, effectively canalizing populist forces into the margins like Ron Paul’s crank campaign to “End the Fed.” At the same time, the dollar’s centrality to the global payment system was increasingly exploited by the American security state. Initially, terrorists were the main target during the War on Terror. But a rising number of rogue states, such as Syria, Iran, and Venezuela, have been sanctioned and cut off from accessing the dollar system. This culminated in the decision to isolate Russia, a major economy, for its invasion of Ukraine, and to seize their reserves.

Nationalist Domination
When Donald Trump was elected, he began to slowly erode the norm of central bank independence, regularly attacking the Fed on Twitter for not lowering interest rates fast enough. During his second term, his plans have become much more ambitious. The Trump administration and its lead economic theorist, Stephen Miran, think the dollar system is costing non-elite Americans more than it is benefiting them. Ditto the burdens of providing other global public goods like the American security umbrella.¹³ They do not object to the dollar system as such. Indeed, they are avid fans of dollar dominance. Rather, they want to use that dominance to reconfigure the distribution of costs and benefits of the system. What they do not seem to realize is that their plans are so ham-fisted and aggressive that they would destroy the legitimacy of the system, undermining its long-term survival.

Miran’s more sophisticated argument goes as follows: making the dollar the center of the global financial system artificially raises its value. A strong dollar makes it easier to buy goods from abroad, therefore raising imports, and lowering exports. The end result is a shift of manufacturing out of the United States largely to poorer countries able to manufacture cheaper consumer products. The cost is borne by manufacturing workers, the benefits go mainly to the rich. It is a fair point about the historical evolution of the global trading system; the question is what to do about it? Miran has several ideas, which range from forcing our trading partners to accept a weaker dollar, to demands that they swap out their holding of short-term Treasury debt for securities that pay out over a longer time horizon, a “user fee” on any foreigners holding public debt, and tariffs. Although dollar dominance has in the past had negative effects for American workers, Miran argues, it provides the United States overall with sufficient net benefit that it is worth keeping around as long as we can shift some of the costs to other countries.

The existing MAGA program centers first and foremost on harnessing America’s position in the global trading system to rework it, extorting trade partners into offering up concessions and tribute. The Europeans have promised to buy $750 billion worth of U.S. energy and $600 billion worth of weapons from the American military-industrial complex, in exchange for the United States “only” putting a 15 percent tariff on trade with the European Union, rather than the threatened 50 percent. South Korea likewise promised $350 billion worth of investment in the United States plus $100 billion in energy purchases to lower their tariff rate from 25 percent to “only” 15 percent. Even prior to Liberation Day, Trump’s tariffs on Mexico and Columbia forced those countries to take action on immigration to the United States and alleged drug trafficking operations. The cost of extracting these concessions, however, has been a massive increase in the uncertainty businesses face when conducting international trade.

The process of revolutionizing global trade was always going to be turbulent and potentially harmful to growth as the kinks were worked out. Knowing this, the Trump administration’s agenda included from the beginning plans to keep the economy cruising at top speed through the revamp in order to maintain as much elite consensus as possible. The Big Beautiful Bill’s tax cuts were the next arrow in the quiver. But it was possible that an independent central bank would not accommodate the inflationary pressures of loose fiscal policy and tariffs, sabotaging fiscal stimulus with monetary tightening. So, the Trump team set to work as soon as they got into office on capturing the rest of the administrative state, with a special focus on the Federal Reserve, in order to keep interest rates low long enough to transform an economic expansion into a boom—perhaps even a bubble—to take them through the midterms with economic momentum behind them. In February 2025, Trump issued an executive order asserting his right to control the Federal Reserve’s regulatory powers over the financial system, tools that could be useful leverage over uncooperative banks on Wall Street. But that order explicitly left the interest rate tools of the Fed untouched, since it was legally dubious for Trump to seize them too. As the result of several court rulings on the status of “independent agencies,” however, stemming from Trump’s attempt to fire leadership at the National Labor Relations Board among others, the Supreme Court suggested the way for Trump to do just that. If Trump could find a legal reason to fire the Federal Reserve’s leadership, then he could replace them with personnel of his own. In August 2025, Trump asserted he had found a legally valid cause—mortgage fraud—as grounds to fire the Fed Board’s Lisa Cook. Meanwhile, he nominated his own candidate for another vacant seat on the Board: Stephen Miran. If pursued further, this strategy could very well result in Trump’s takeover of the previously independent Fed.

The combined results of tariff, tax, and central bank takeover have been the already-mentioned rise in inflation expectations and flight into gold. This comes on top of what was already an ongoing process of “stealth de-dollarization” in the world economy.¹⁵ Between 1999 and 2021, the dollar’s share in the central bank’s currency reserves had already declined from 71 to 59 percent. No major rival currency—the Euro, yen, or pound sterling—was responsible for that decline. Instead, it simply reflected a limited rise of China’s RMB (renminbi), on the one hand, and a smattering of smaller currencies that the world’s monetary authorities are diversifying into, such as the Canadian and Australian dollar or the Korean won. In other words, dollar dominance was eroding slowly before Trump’s second term accelerated the decline. As Ernest Hemingway’s Mike Campbell (a character from The Sun Also Rises) famously said, “There are two ways to go bankrupt: gradually, then suddenly.”

That is not to say that dollar dominance is about to disappear tomorrow. Global commodities are still principally priced in dollars, as are most flows on global capital markets. International corporations will not be issuing bonds and promising to pay them back in gold any time soon. Nor are any of the rival currencies prepared to play the dollar’s role. There simply is not enough public debt in Europe or China such that their equivalent to U.S. Treasury securities could substitute for American debt. But if Trump and his team really are set on diminishing the independence of the Fed to pursue an inflationary monetary policy and facilitate the weaponization of the dollar and trading systems, then there are extraordinarily strong incentives for investors to find some kind of alternative to dollars. And if there is one thing global capitalism is good at, it is responding to incentives for creative destruction.