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Opinion | Krugman Asks: Does the U.S. Dollar’s Dominance Really Matter?

This article is a wonky edition of Paul Krugman’s free newsletter. You can sign up here to receive it.

Cryptocurrency was supposed to replace government-issued fiat currency in our daily lives. It hasn’t. But one thing I’m still hearing from the faithful is that Bitcoin, or Ethereum, or maybe some crypto asset introduced by the Chinese, will soon replace the dollar as the global currency of choice.

That’s also very unlikely to happen, since it’s very hard for a currency to function as global money unless it functions as ordinary money first. But still, it’s definitely conceivable that one of these days something will displace the dollar from its current dominance. I used to think the euro might be a contender, although Europe’s troubles now make that seem like a distant prospect. Still, nothing monetary is forever.

But does it matter? My old teacher Charles Kindleberger used to say that anyone who spends too much time thinking about international money goes a little mad. What he meant, I think, was that something like the dollar’s dominance sounds as if it must be very important — a pillar of America’s power in the world. So it’s very hard for people — especially people who aren’t specialists in the field — to wrap their minds around the reality that it’s a fairly trivial issue.

First things first: Dollar dominance is real. These days America accounts for less than a quarter of world G.D.P. at market prices; less than that if you adjust for national differences in the cost of living. Yet U.S. dollars dominate currency trading: When a bank wants to exchange Malaysian ringgit for Peruvian sol, it normally trades ringgit for dollars, then dollars for sol. A lot of world trade is also invoiced in dollars — that is, the contract is written in dollars and the settlement is also in dollars. And dollars account for about 60 percent of official foreign exchange reserves: assets in foreign currencies that governments hold mainly so they can intervene to stabilize markets if necessary.

As I said, this sounds like a big deal. The dollar is, in a sense, the world’s money, and it’s natural to assume that this gives the United States what a French finance minister once called “exorbitant privilege” — the ability to buy stuff simply by printing dollars the world has to take. Every once in a while I see news articles asserting that the special role of the dollar gives America the unique ability to run trade deficits year after year, an option denied to other nations.

Except that this just isn’t true. Here are the current account balances — trade balances, broadly defined — of a few English-speaking countries over the years, measured as a percentage of their G.D.P.:

Yes, America has consistently run deficits. Australia has consistently run even bigger deficits; the U.K. has fluctuated around, but has also run big deficits on average. We’re not special in this regard.

Still, can’t we borrow money more cheaply because the dollar is top dog? If so, it’s a pretty subtle effect. As I write this, 10-year U.S. bonds are yielding 1.6 percent; British 10-years 0.8 percent; Japanese 10-years 0.07 percent. Lots of factors affect borrowing costs, but if the fact that neither the pound nor the yen are major global currencies is a major liability, it’s not obvious in the data.

Now, the pound used to be a major international currency. It wasn’t overtaken by the dollar as a reserve currency until 1955. It was still a major player into the late 1960s. But then its role quickly evaporated. By 1975 the pound was basically just a normal advanced-country currency, used domestically but not outside the country.

So did the value of the pound take a big hit when that happened? No. Here’s the real pound-dollar exchange rate — the number of dollars per pound, adjusted for differential inflation — since the early 1960s:

There have been some big fluctuations over time, reflecting things like Margaret Thatcher’s tight-money policy and Ronald Reagan’s mix of tight money and deficit spending. But the pound has in general been much stronger since it stopped being a global currency than it was before. That’s not a big mystery: It probably reflects London’s continuing role as a global financial hub in an era of financial globalization. But again, it’s hard to see evidence that losing global currency status made much difference.

So is the dollar’s status completely irrelevant? No. The dollar’s popularity does give America a unique export industry — namely, dollars themselves. Or more specifically, Benjamins — $100 bills, which bear the portrait of Benjamin Franklin.

These days the ordinary business of life is largely digital; many Americans rarely use cash. Even the sidewalk fruit and vegetable kiosks in New York often take Venmo. Given that lived reality, it’s jarring to learn just how much currency is in circulation: more than $2 trillion, or more than $6000 for every U.S. resident.

What’s all that cash being used for? One important clue is the denomination of the notes out there:

Yep, it’s mainly Benjamins, which by and large can’t even be used in stores. They are used for payments people don’t want easily traced, usually because they’re doing something illicit.

And here’s where the dollar plays a special role: We have a lot more large-denomination notes in circulation, relative to the size of our economy, than other countries. In 2016, the value of large-denomination U.S. notes in circulation was more than 6 percent of G.D.P.; the corresponding figure for Canada was only a third as much. The main reason for the difference, almost surely, is that a lot of $100 bills are being held outside the U.S.

This willingness of foreigners to hold American cash means, in effect, that the world has lent the U.S. a substantial amount of money — maybe on the order of $1 trillion — at zero interest. That’s not a big deal when interest rates are as low as they are now, but in the past it has been worth more — maybe as much as one quarter percent of G.D.P.

America does, then, get some advantage from the special role of the dollar. But it’s hardly a major pillar of U.S. power. And being the world’s primary supplier of assets used in illegal activity isn’t exactly a role filled with glory.

So is it possible that the dollar will eventually lose its dominance? Yes. Will it matter? Not so you’d notice.


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