24 THE BiG DROP
the International Monetary Fund (IMF) and the development
lending of the World Bank. All of these countries are clear
about their desire to break free of U.S. dollar dominance.
Sterling faced a single rival in 1914, the U.S. dollar. Today,
the dollar faces a host of rivals — China, Russia, India, Brazil,
South Africa, Iran and many others. In addition, there is the
world super-money, the special drawing right (SDR), which I ex-
pect will also be used to diminish the role of the dollar. The U.S.
is playing into the hands of these rivals by running trade deficits,
budget deficits and a huge external debt. What are the implica-
tions for your portfolio? Once again, history is highly instructive.
During the glory years of sterling as a global reserve cur-
rency, the exchange value of sterling was remarkably stable.
In 2006, the U.K. House of Commons produced a 255-year
price index for sterling that covered the period 1750–2005.The index had a value of 5.1 in 1751. There were fluctua-
tions due to the Napoleonic Wars and the First World War, but
even as late as 1934, the index was at only 15.8, meaning that
prices had only tripled in 185 years.Inflation Exploded After the Sterling Lost Its Lead Reserve Role
800
700
600
500
400
300
200
100
0
1750 1800 1850 1900 1950 2000
Source: Inflation: The Value of the Pound, 1750–2005, Research Paper 06/09, Feb. 13, 2006, U.K.
House of Commons