Currently, the U.S. dollar is, to a certain extent, the world’s most popular reserve currency. It plays a vital role in facilitating world trade and global finance, enabling the United States to use it as a powerful weapon against those opposed to its foreign policy goals.

However, some people think weaponization of the dollar The exchange rate against Russia will hasten the demise of the dollar. They believe that countries at odds with Washington will start converting their reserves into other currencies. Combined with the long-term trend of a declining U.S. share of global output and trade, the dollar’s future looks bleak.

However, changing the makeup of your reserves is easier said than done.While the dollar’s appeal has waned, the shift to other currencies has been minimal – as the IMF’s latest Coverall Digital Display:

History offers some clues as to how things got out of trouble. As Goldman’s Cristina Tessari and Zach Pandl pointed out in a report last week, a country’s reserve currency status tends to outlast other aspects of its global dominance.

The Goldman Sachs report uses the example of the United Kingdom, from which the United States inherited the reserve currency crown. Here’s the backstory:

There are two main reasons for the pound’s dominance as an international currency in the late 19th century. First, Britain has an overwhelming dominance in world trade. In 1860 Britain absorbed more than 30 percent of the rest of the world’s exports, compared with 20 percent in 1890.

Furthermore, between 1860 and 1914, approximately 60% of world trade was invoiced and settled in British pounds. Although Britain had a merchandise trade deficit before World War I, net income from shipping, insurance, interest and dividends was enough to generate a sizeable current account surplus.

Closely related to these trade activities, British capital was also exported in large quantities to the rest of the world. Continued net capital exports between 1848 and 1913 brought Britain’s total foreign net assets to nearly £4 billion by 1913, or 166% of nominal GDP. Sterling is not only used to invoice, finance and settle trade-related transactions, but it is also used as a buffer against future demand, known as reserves.

In 1899, the share of sterling in foreign exchange holdings known to official institutions was more than double that of its next closest rivals, the franc and the mark, and much higher than that of the dollar.

The role of the dollar in global finance today sounds familiar, right? So what happens next?

Well, the decline in the UK’s economic clout didn’t immediately lead people to dump the pound. While Britain’s share of world trade began to decline in the 1920s, the pound remained the reserve currency of choice until it was finally replaced by the dollar in the second half of the 1950s.

Goldman Sachs believes that the dollar today faces many of the same challenges as the pound in the early 20th century. These include a small fraction of global trade volumes relative to currency dominance, a deteriorating net foreign asset position and unfavorable geopolitical trends.

At the same time, there are important differences—in which domestic economic conditions are not as dire as those faced by Britain in the 1950s. This leads to this conclusion:

If foreign investors become more reluctant to hold U.S. debt—for example, due to structural changes in world merchandise trade—the result could be a depreciation of the dollar and/or higher real interest rates to prevent or slow the depreciation of the dollar.

Alternatively, U.S. policymakers could take other steps to stabilize net foreign debt, including tightening fiscal policy. Ultimately, the dollar’s ability to maintain its status as the dominant reserve currency depends first and foremost on U.S. policy.

Policies that allow unsustainable current account deficits to persist, lead to large foreign debt accumulation, and/or lead to high U.S. inflation may help replace other reserve currencies.

Really fun.

However, we think there are other important differences between then and now that the notes do not mention. Mainly the issue of dollar substitutes.

The biggest threat to Washington’s military and economic dominance right now is Beijing. However, there is still a dearth of yuan-denominated assets that investors can buy.

It’s not necessarily that China needs to turn its current account surplus into a deficit and create a market comparable to the U.S. Treasury market. As Goldman Sachs rightly points out in the report, the UK has regularly run a current account surplus during periods when the pound was the world’s most popular currency.

However, it needs to open up access to its capital markets more than it has so far.for all talk end dollar hegemony, Beijing is simply making the renminbi more convertible on its own terms. This happens to be much slower than international investors would like.

Second, money is both an economic construct and a legal construct. The dollar’s dominance works because people largely trust things like New York law, and institutions like the Federal Reserve (please don’t snicker behind your back). The differences between them and the legal framework in England and Wales (and how the Bank of England works) are relatively small. Of course, when people object to Beijing’s decision-making process??.

However, that doesn’t mean the dollar’s dominance is completely unassailable. We imagine most people reading this would rather have the US act as the world financial policeman than China. But in places like India or Brazil, many in power may disagree.

The dollar’s reserve status reflects many things — including the willingness of other countries to align with U.S. foreign policy. How powerful are those countries that share Washington’s views on the global stage.

This leads us to conclude that, rather than trying to figure out whether the dollar will be overthrown, a more likely course of action may be to move to a multipolar world of two economic systems. One is that the U.S. dollar remains the bellwether, and the other is being replaced by the renminbi.