The Dollar as the World Reserve Currency

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The world’s main reserve currency is the U.S. dollar. This is less relevant than most hard-money writers think.

What they never mention is that the U.S. dollar is a more popular reserve currency today than it was in 1995. You can see the evidence here.

The U.S. dollar is not the only game in town. It is 60% of the game. There is also the euro. It is 27% of the game. The euro is in far worse shape than the dollar.

The other currencies are irrelevant.


The status of the U.S. dollar as a world reserve currency is economically crucial for most Americans in one area only: the domestic price of oil.

The United States is not an energy-independent nation. For as long as oil is the main source of transportation in the USA, we will remain energy-dependent. There is no way around this. The world consumes about 80 million barrels of oil a day. Of this, the United States consumes about 19 million. In other words, we consume 25% of the word’s oil. This is because we are the richest nation on earth. This is because we are the most productive nation on earth.

More output is generated by the USA than in any other nation. This output is consumed mostly in the USA. About 30% of the American economy is export-import related. In 2008, the trade sector of the economy was about $4.3 trillion. Total GDP in 2008 was about $14.5 trillion.

A common estimate of the money we spend for imported oil is $1 billion a day. This means under $400 billion a year. This is a lot of money. It accounts for about 20% of our total imports of $1.8 trillion. It is the largest expenditure for any commodity or good.

The reason for the dollar’s importance in the oil market is the decision of most OPEC member nations to accept dollars for oil. The oil-exporting nations then deposit this money in dollar-denominated bank accounts around the world.


The dollar is the currency of choice for other reasons than oil. The main reason is the complete dominance of export-driven mercantilism. While the older mercantilism of hiking tariffs and quotas against imports is, for the moment, not dominant politically, export-driven mercantilism is universal, especially in Asia. Central planners believe that exports should be subsidized. The main subsidy is to have the central bank create new money and then use this money to buy government IOU’s from importing nations or trade blocs, e.g., the European Union.

For as long as export mercantilism is dominant in the thinking of Asian politicians, the U.S. dollar will continue to be the reserve currency of choice.

The euro is clearly in trouble. Euro holdings by central banks account for 27% of foreign exchange holdings. All other non-dollar IOUs account for a minuscule 13%.

To abandon the U.S. dollar means replacing it with other nations’ IOUs. Which nations?

If anything, as the euro declines, central banks will add to their holdings of dollars. They could buy British pounds, but why? Great Britain’s banking system is as shaky as ours.

They can’t buy Swiss francs. There are not enough Swiss franc bonds to buy. There is not enough demand from Swiss domestic buyers of imported goods.

Here is the famous bottom line: the United States is the third most populous nation after China and India. Fourth is Indonesia. If we could count the European Union as a single trading bloc, which is reasonable, the United States is #4. The EU has 450 million people. But these people are not so wealthy as US residents are. Furthermore, the eurozone may break apart.

If you were an official at the People’s Bank of China or the Bank of Japan, why would you sell U.S. dollar-denominated debt? Because it pays such low interest? True, it does, but central bankers do not own the assets they control. They are merely trying to achieve domestic policy objectives. The rate of interest paid on foreign governments’ IOUs is hardly worth considering. What is worth considering is the domestic politicians’ demand that the currency be kept low.

The Swiss central bank has promised to keep down the value of the franc. This can be done only by inflating. So, the supposedly conservative Swiss are saying: “Nuts to stable money! Subsidize exports!”

It’s mercantilism. It’s beggar thy neighbor. It’s subsidize the tiny export sector. It’s destroy the currency a year at a time. It’s inflate or die.

Yet there are gold-promoting writers who think the U.S. dollar will be abandoned as a reserve currency.

Give me a break!

If OPEC decides to substitute yen for the dollar, that will be good for Japan. Japan must buy dollars to buy oil. The value of the dollar in relation to the yen would fall. The demand from Japan to buy dollars to buy oil would cease.

What other candidates does OPEC have?

WHO’S IN CHARGE HERE?Why haven’t OPEC countries done this? First, because of the U.S. weapons industry. We make planes. We sell the OPEC nations planes and missiles. Then they become dependent on spare parts.

Second, the USA is a powerful nation. It has an operational empire. Oil-exporting nations don’t pull the lion’s tail very hard. They yell at the lion. They say they will not be pushed around by the lion. They hike the price of oil when they can. But they accept payment in dollars only.

How well did Saddam’s tail-pulling work? How well did Ghadaffi’s resistance to borrowing from Western banks work? These people know who is in control. They aren’t. They serve at the discretion of the West’s politicians.

The so-called Arab spring has been a sprung trap. The rulers of Arab North Africa have been sent a message: “You have no defense against your own people unless the West backs you up.”

An empire cannot set the terms of trade for every good, but it can do so in crucial goods. Oil is the crucial good.

Do you think the House of Saud is going to switch to a different currency? Which currency? For how long?

The House of Saud is the 800-lb. Gorilla in the oil markets. What it says has enormous influence. What it says is clear: “Sell oil for dollars.”

The rest of the imports into the United States are marginal. If the dollar ever falls to, say, 30% of the reserves of central banks, this will increase the price of foreign goods. It will decrease these imports.

Asian central banks will not allow this unless there is a very good political reason to stop subsidizing the domestic export industry. That would mean a complete re-thinking of export mercantilism. There is not a whisper of any such re-thinking going on. Asian central bankers are still keeping their currencies from rising against the U.S. dollar.

Central bankers are central planners. They do not believe in stable money. They hate gold because it offered stable money prior to 1914. It restricted the ability of central banks to inflate. They are taught to hate gold in every Western university. Their best and brightest attended major Western universities. They were taught Keynesian economics. A few may have been taught monetarism. It makes no difference with respect to the hatred of gold.


When you hear that the dollar will fall in value in the U.S. because it will lose its world reserve currency status, look for the following:

1. A discussion of the superior currency2. Reasons why it will get even better3. A discussion of export mercantilist thought4. Reasons why Asian leaders will abandon it5. A discussion of imports from large nations6. Reasons why the USA will not remain in the top7. A discussion of Keynesian economics8. Reasons why Asian leaders will abandon it9. A discussion of the case for gold10. Reasons why central bankers will accept gold

I admit that, at the margin, there are reasons for substituting other assets for the dollar in central bank reserves. But these reasons applied just as well in 1995. The euro was substituted for non-dollar reserves. But, with respect to the dollar, no asset substitution has taken place. The dollar is a slightly larger component of foreign exchange reserves than it was in 1995.

Central banks are run by people who have no ownership of the assets. So, their motivation is to keep their jobs and the value of their pensions. Their jobs are based on following rules set by governments. These include the following:

1. Keep interest rates low2. Keep the currency from rising internationally3. Keep the economy out of a recession4. Keep the largest banks in business5. Keep the illusion of price stability

The only tasks related to the type of reserve asset in the bank are #1 and #2. The bank must buy government IOUs: first, domestic IOUs; second, foreign IOUs.

As I have argued so far, the trend has been to retain the percentage of dollar-denominated government IOUs in central bank portfolios. Second, the USA is the buyer of choice for domestic exporters, with only the EU giving it competition.


This could change. It will not change fast. It will not change by much. As economists say, the changes will be marginal.

With the single exception of pricing oil in terms of dollars, the changes will be imperceptible to most Americans. The changes will come over time.

The prices of imported goods supposedly will rise in the USA. This will create price inflation. No, it won’t.

Domestic price inflation is determined by the Federal Reserve System, not foreign central banks. If foreign central banks decide to sell Treasury IOUs and buy other IOUs, they will drive down the price of U.S. Treasury debt. This is another way of saying that this will drive up Treasury interest rates.

This will cause a U.S. recession unless the FED inflates. The effect of a recession is to lower retail prices, not raise them.

I read the articles by pro-gold authors, who insist that the decline of the dollar in international reserves is inflationary, and I wonder how they are reasoning. The FED is inflationary. It can inflate to offset rising Treasury interest rates. But without FED action, a reduction in the percentage of dollars in central bank portfolios is price deflationary.

If central bankers finally decide that the U.S. government’s IOUs are significantly less trustworthy than foreign governments of large importing nations — which might these be? — then they will switch. But then what will happen if they do this: higher T-debt rates. This will produce a fall in the value of the remaining IOUs still in their portfolios. It would raise U.S. interest rates. That would create a recession in the U.S. Imports into the U.S. would fall. That will create a crisis in the export sectors of the central banks.

Show me the senior central banker who stands up and says, “I will take the risk. I am selling U.S. Treasury debt. If my government doesn’t like it, tough.”

The next central banker to do this will be the first.


For my adult life, I have heard this one. It is the pot of fiat money at the end of the central banks’ rainbow. The suggestion comes from academic economists. No senior central banker ever presents a detailed plan.

It is really a silly idea. What basket of currencies? Which currencies? They never say. What percentages? They never say. This must be achieved by selling U.S. dollars. To whom? At what price (interest rate)? They never say.

Who will agree on which basket of currencies? The IMF. What authority does it possess? None.

Who will enforce this basket of currencies on the world’s central bankers? They never say.

Why would central bankers give up their national sovereignty to agree to a basket of currencies? They never say.

Why would a committee of international economists be better able to establish the correct ratio of currencies in the central banks’ portfolios than a committee in each central bank? They never say.

How would any central agency produce an agreement among the world’s 196 nations and 193 central banks? They never say.

This idea is the intellectual plaything of economists. It has no real-world plan that is being pursued actively by any groups with real authority.


The world is being led by politicians and central bankers who have no interest in the one viable solution to the world’s monetary problem: the closing of all central banks and the opening of all markets to free market coinage. This would mean getting government out of the money business.

They have no interest in re-establishing an international gold standard, with open coinage and free markets in money.

Politicians want to control money for their purposes. Senior officers of large banks want to control money for their purposes. Usually, their goals fit together well. They fit together because of the short-term effects (politically positive) of monetary inflation.

The present system of reserve currencies favors the United States government and American consumers. It is a subsidy to exports to the USA by way of holding down interest rates for U.S. government debt. Central banks inflate. They can buy any asset, but export mercantilism favors the U.S. dollar and the euro. The crisis in Europe favors the dollar.

There are lots of things to worry about, The loss of the dollar’s world reserve status is not high enough on the list to be of much concern.

September 15, 2011

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North