Dear Editor,
The US dollar has been the world’s principal reserve currency since the end of WWII and is the most widely used currency for international trade.
The International Monetary Fund, the body responsible for monitoring the international monetary system, recognizes eight major reserve currencies. The US dollar is the most commonly held, making up just over 58% of global foreign exchange reserves in Q4 of 2022, a significant decrease from more than 70% in 1999.
The dollar has been the currency of choice for international trade, in part, because oil and most commodities are priced and traded in US dollars.
Today, our national debt is more than $34 trillion. To that point, JP Morgan Chairman and CEO Jamie Dimon was quoted as saying, “This is unsustainable... We’re driving toward a cliff as debt snowballs.” Expanding on that sentiment, FedEx founder and Executive Chairman Fred Smith stated that in order to avoid a catastrophic fiscal crisis, “I fervently hope that next year our political process produces leaders who recognize the extreme and unprecedented dangers we face in terms of our political and financial instability, not to mention military challenges around the world, which require a grand compromise and resolution to these problems.”
For years, high global demand for dollars has allowed the US to borrow money at a lower cost and use currency as a tool of diplomacy, but this comes with drawbacks. As the US dollar is increasingly losing purchasing power, many nations are looking for alternatives to the dollar to reduce their dependence on the US.
Geopolitical risks have accelerated the trend to move away from the dollar. Calls for de-dollarization increased when the US put a freeze on Russia’s foreign currency reserves after Moscow invaded Ukraine in February 2022 and imposed multiple sanctions, which forced Russia to switch trading to other currencies.
The Chinese yuan has since replaced the dollar as the most traded currency in Russia. Now, other countries that might disagree with US foreign policy see a risk in having their assets confiscated or frozen and are becoming open to trade in other currencies.
The BRIC’s alliance (Brazil, Russia, India, and China) seems intentional in its efforts to dethrone the dollar. If that happens, the standards of living in the US that we have known may become a thing of the past. Especially in the face of existing global supply chain instability, if the dollar were to lose its reserve status, the US would lose the capacity to borrow quickly and, in turn, would damage our ability to fund both our industrial policy (government efforts to support industries that are considered strategically important, i.e. semiconductors) and social welfare programs.
For some time, there has been a heated debate over industrial policy as it relates to a long-standing controversy over the role of free markets and the role of government in the economy. We find ourselves living in an age of inflation, partly due to the government’s issuance of vast amounts of paper money done in the name of the national interest. Nevertheless, an increase in money supply decreases the value of the dollar in comparison to other currencies.
I see value in the concept of free trade, which reduces barriers to goods and services being bought and sold internationally with little or no tariffs, subsidies, quotas, or prohibitions inhibiting their exchange. This can result in a reduction in prices and increased economic growth.
I also sometimes wonder what would happen if, in the name of monetary freedom, legal tender laws were eliminated along with the Federal Reserve System, and the marketplace - comprised of producers and consumers - was allowed to decide which commodities are the most advantageous mediums of exchange. Now, who doesn’t like sugar?
Peter Wibell, Rutledge