The Dollar Is Not Doomed

The dollar's strengths still outweigh its weaknesses.

Last week, Carl reminded us of his disdain for discussions of alternative currencies. I share his skepticism of that subject, but have found I’m developing a broader pet peeve: questions about the end of the dollar’s status as a reserve currency.

Recent anxiety has been kindled by short term arrangements in which countries seek to exchange more directly with one another in their own currencies. China has established quite a few of these agreements over the past year. But broader concerns about the U.S. dollar center on the high level of U.S. debt and the seeming inability of the Congress to do anything about it. The risk that the currency will be debased to make that debt manageable comes up often in conversations.

Is the end of the dollar’s reign is upon us? The prospect is worrisome to Americans. The dollar’s leading status has conferred “exorbitant privilege” to the U.S. in all matters of international trade. U.S. businesses and consumers have benefitted from cheap imports and ease of transacting when the world caters to our currency; reliable demand for U.S. Treasuries has allowed the nation to run deficits at little cost.

The dollar’s primacy was an outcome of the United States’ economic dominance and international power in the wake of World War II. Previously, the U.K.’s mercantile fleet led the world, while Germany was also ascending, but the war left both nations in shambles. The transition illustrates an important point: changes in reserve status often occur as the result of geopolitical upheaval, as opposed to a slow accumulation of contributing factors.