Lloyd Blankfein, the Goldman Sachs chief executive, is worried that the U.S. dollar's reserve status may be at risk. Having no dominant currency would hark back to the 18th century, when silver pieces of eight competed with many other coins and currencies.
Mr. Blankfein said on Monday that the higher taxes and spending cuts that will kick in suddenly on Jan. 1 if the U.S. Congress doesn't act first – the so-called fiscal cliff – could jeopardize the dollar's primacy. So could any alternative fiscal path that fails to cut U.S. deficits and slow federal borrowing. With the euro zone set to be in recovery mode for some time, Japan burdened by excessive debt and China's yuan not yet freely convertible, it's easy to imagine a new order in which no single currency reigns for global trade and investing.
The world has not operated without obvious leading currencies for several centuries. Even between the world wars there were only two serious alternatives: sterling, which was losing its pre-eminent status, and the U.S. dollar, which was rising to take the pound's place. Before the rise of sterling in the late 18th century, however, the picture was very different.
Spanish silver coins known as pieces of eight circulated widely in the American colonies, while silver Thalers (the origin of the word dollar) minted by Austrian Empress Maria Theresa served as a reserve currency throughout German-speaking Europe and elsewhere. Parts of Africa and the Middle East, including Saudi Arabia, used Thalers from outside Austria into the 19th and 20th centuries. These co-existed with national currencies.
A new iteration of this environment could involve a mix of currencies. Exchange costs and hedging would make finance more expensive. And countries could adopt different approaches. The Swiss government, say, might choose conservative policies so as to boost the franc's traditional reputation as a reliable store of value, catering to asset-rich investors.
Conversely, other countries might adopt fiscal and monetary policies that tend to devalue currencies, attracting borrowers. Others could follow a balanced path to corner cross-border trade flows. Originating countries would derive some benefit, or seigniorage, from the use of their currencies internationally. New regional blocs could emerge, as might artificial currency units like the International Monetary Fund's special drawing rights.
A new gold standard might even develop to cut through the confusion. Whatever the future holds, Mr. Blankfein's remarks are a timely reminder that the greenback's supremacy may not last.