The leadership of the American dollar

Prague, October 2017

The American currency has the privilege of being at the same time the leading currency for international trade. We have become so accustomed to this that the issue is not discussed and there is nothing and no one to oppose this reign that has lasted for more than a century. The dollar is the most effective symbol of the USA, more than its flag or its American English. This monetary hegemony has been imposed, due to the obvious need of the world economy for a universal currency. This is a monetary imperialism that has not bothered anyone so far, neither the Arabs nor the Russians who sell their oil in dollars. It is understandable that this situation provokes some envy and a desire to throw the ‘greenback’ off its pedestal. But neither the Chinese currency nor the euro can offer the advantages of the US dollar.

The facts

The International Clearing Bank in Basel (the bank of the world’s central banks) tells us that the USD is present in 88% of all daily monetary transactions, the volume of which moves between 3 and 7 trillion USD every day. The Euro, and much more the Chinese Renminbi are relegated to second and eighth place, respectively. The same applies to foreign exchange reserves: 63’% of all the world’s reserves registered with the International Monetary Fund are in USD, and only 20% in Euros.

The advantages of leadership for the USA

Between 50 and 66% of all the dollars in the world are outside the USA, so the American Government is in fact intervening in the world economy – whether it wants to or not – through its currency. Since it enjoys a lot of credit, it can borrow in dollars at lower interest rates. Thanks to the prestige of the dollar, large and small investments are preferably made in this currency. Thanks to this, the US can maintain a larger balance of payments deficit. On the other hand, American companies do not have to worry about monetary risks, in their operations abroad, because they always invoice in their own currency, saving themselves from monetary risk coverage operations.

Printing a $100 bill costs the FED 0.143 cents, but all other countries have to give equivalent assets to obtain them. In recent years, some 5 trillion USD have been printed, which have served in part to pay off the debts of the American state, and then to cover the overall demand for loans from banks.

Why the dollar is good for us

In his book ‘Exorbitant Privilege’ the American economist David Eichengreen gave a lapidary explanation of the rivalry between the USD and the Chinese currency: ‘The Euro is a stateless currency and the Renminbi is a currency with too much state’. The Chinese currency is administered with the utmost rigor, as it is in the best interest of its own economy and the interests of the Chinese state. It is also a manifestation of political power, because it forces all other states to count on the USD when they want to abandon their own currency with the risk of devaluation. It is easy to imagine what this means for Russia and the other countries. In the fight against Communism, the USD has certainly played its part, as is the case today in the economic sanctions against Russia, following the invasion and annexation of part of Ukraine.

Source:  The Neue Zuercher Z. and the book by David Eichengreen, quoted above