ENCINITAS, Californa — Americans benefit greatly from the dollar being used as a world currency. Those safety deposit boxes abroad stuffed with $100 bills are interest-free loans to the US. Foreign business firms that need working balances in dollars have a similar consequence, and also provide good business for American banks. New York is the world’s largest financial center in no small part because of the world role of the dollar. Exchanging the dollar into other currencies is easily accomplished, which benefits American business and all Americans when going abroad.
Importantly, when the US government needs to borrow money to cover our budget deficit, we do it by issuing dollar bonds regardless of our balance-of-payments with other countries and how much we have to borrow from them. The US can never run out of dollars to pay our foreign creditors because the government can always create new dollars to pay them. The US Government can never go bankrupt regardless of how irresponsible we are. This is a gigantic advantage. Just think of the trials of Greece and Argentina who don’t have this privilege.
Is this a permanent privilege enjoyed by the United States? Can it be taken away or lost? History tells us that the dominant role of the dollar is not immutable. The British pound sterling was once the world’s currency when Britain was the world’s largest economy and the City of London was its financial center. Its role was lost to the US dollar. The US economy overtook Britain (and others) and the lead was reinforced by the consequence of World War II. Hence the dollar became the world’s currency without a close competitor. The US hold is strong. Our economy is still the largest, our financial institutions are strong and well regulated, and our legal tradition means that business disputes can be settled peaceably in an American court of law.
Ironically, the US itself can weaken the world role of the dollar by unrestrained budget deficits (although the mechanism is uncertain) and certainly by overusing economic sanctions as a form of warfare. Sanctions involve ending a country’s direct links with the US economy, and indirectly by limiting its use of the dollar. We can cut off its use of US financial institutions and urge foreign banks to do the same by threatening their access to US financial facilities. Our weakening of the Iranian economy indicates that economic sanctions can be quite effective.
The natural way for a sanctioned country to respond is to seek other currencies with which to do business and use financial institutions without links to the US. If the US does a lot of this, a critical mass of “sanctioned” countries might find a common new currency for their international transactions. The Chinese Remindbi comes to mind. The dollar’s world role would be greatly reduced.
How effective is the threat of US economic sanctions on other countries? President Trump has threatened their use on Turkey quite recently. If imposed fully (with a secondary boycott against any firm doing business with Turkey)-then their economy would truly suffer mightily and force them out of NATO.-It should be noted that Turkey has moderated its policy in Syria.
American presidents have several tools to influence events abroad. They include moral suasion, diplomatic engagement, military force, and economic sanctions. Every president impacts the effectiveness of these tools by the skill and wisdom of how he (or she) uses them. History is the ultimate judge as to whether they have been used wisely.
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Lawrence Krause is a professor emeritus of international economics at UC San Diego. He received his doctorate from Harvard, taught at Johns Hopkins and Yale, researched and published under the aegis of the Brookings Institution in Washington, DC, and also served on President Lyndon B. Johnson’s Council of Economic Advisers.