While talking to my dad this Father’s Day, I heard a few alerts on his phone. After a few beeps, he pulled his phone out of his pocket and showed me the messages. Four alerts by different publications expressed the same concern, “the future of the US dollar?” This article will briefly discuss where the dollar has been and where it might go.
According to Investopedia, during WW2, the US was the main supplier of the allies’ weapons. Most countries paid in gold, making the US the owner of most of the world’s gold by the end of the war. This made a return to the gold standard impossible for the countries that depleted their reserves. This led to the 1944 Bretton Woods Agreement, which directed that the world›s currencies would no longer be linked to gold. Currencies would instead be linked to the US dollar, which was linked to gold. Countries then stored their dollars in safe US Treasury securities (How the US Dollar Became the World’s Reserve Currency – investopedia.com).
Funding the Vietnam War and domestic programs led to deficits and concerns about the stability of the dollar. Richard Nixon then delinked the dollar from the gold reserve, using a floating rate for more flexibility. Thus, the US dollar remained the world’s currency.
The dollar’s status as the leading currency was deemed an “exorbitant privilege” by French Finance Minister Valery Giscard d’Estaing in the 1960s. The French and other governments thought the US dollar provided cheap investment financing abroad. However, Ben Bernanke said in 2016 that with the rising competition and other currencies like the Euro and the Yen, as well as the declining share of the global economy, the dollar’s “exorbitant privilege” is eroding (The Dollar: The World’s Currency | Council on Foreign Relations (cfr.org)).
In addition to lower financing for assets abroad, political power through sanctions is another “exorbitant privilege” the US holds. Currently, the US is able to sanction many governments that deviate from US-backed policies. For example, In 2015, the French bank BNP Paribas was given a record penalty of nearly $9 billion for violating US sanctions by processing dollar payments from Cuba, Iran, and Sudan. Council on foreign relations Brad W. Setser started, “There’s no doubt that if the dollar were not so widely used, the reach of sanctions would be reduced.” Aggressive sanctions force US allies and other countries to seek a dollar-free system.
The dollar’s “exorbitant privilege’ does come at a cost. The heightened demand for the dollar increases its value. This is great for travel and investing abroad. However, an overvalued dollar can lead to the loss of exports and jobs in the US. Also, other countries can use currency manipulation to increase their competitiveness in foreign trade. According to the US treasury department, China is an example of this phenomenon.
In short, the US holds many “privileges” while having the world’s leading currency, and there are tradeoffs. Even so, other countries want their currency to replace the dollar. With better policy and less misuse of sanctions, it is possible for the US to manage the risks that come with its currency’s “exorbitant privilege.”
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