What It Would Take for the U.S. Dollar to Collapse
What It Would Take for the U.S. Dollar to Collapse
By Sean Ross Updated March 23, 2022 Reviewed By Thomas Brock Fact Checked By Suzanne Kvilhaug
Ever since the launch of quantitative easing (QE), worried investors have asked: "Will the U.S. dollar collapse?" It is an interesting question that might superficially appear plausible, but a currency crisis in the United States is unlikely.
Why Currencies Collapse
History is full of sudden currency collapses. Argentina, Hungary, Ukraine, Iceland, Venezuela, Zimbabwe and Germany have all experienced terrible currency crises since 1900. Depending on the definition of "collapse," the Russian currency calamity during 2014 could be considered another example.
The root of any collapse stems from a lack of faith in the stability or usefulness of money to serve as an effective store of value or medium of exchange. As soon as users stop believing that a currency is useful, that currency is in trouble. This can be brought about through improper valuations or pegging, chronic low growth, or inflation.
Currency collapses are caused by a lack of faith in the stability or usefulness of money—either as a way to store value or as a medium of exchange.
Strengths of the U.S. Dollar
Ever since the Bretton Woods Agreement in 1944, other major governments and central banks have relied on the U.S. dollar to back up the value of their own currencies.1 Through its reserve currency status, the dollar receives extra legitimacy in the eyes of domestic users, currency traders, and participants in international transactions.
The U.S. dollar is not the only reserve currency in the world, though it is the most prevalent. As of March 2022, the International Monetary Fund (IMF) approved four other reserve currencies: the euro, British pound sterling, Japanese yen, and Chinese yuan.2 It is important that the dollar has competitors as an international reserve currency because it creates a theoretical alternative for the rest of the world in case American policymakers lead the dollar down a damaging path.
Finally, the American economy is still the largest and most important economy in the world. Even though growth has slowed significantly since 2001, the American economy still regularly outperforms its peers in Europe and Japan.34 The dollar is backed up by the productivity of American workers, or at least so long as American workers continue to use the dollar almost exclusively.
Weaknesses of the U.S. Dollar