The phrase 'Dollar is our currency, it is your problem' is often attributed to John Connally, US Treasury Secretary under President Nixon in the early 1970s. Though its exact origin is debated, the phrase succinctly captures the asymmetry and complexity of the global financial system, where US dollar reigns supreme. This dominance allows US to yield disproportionate influence over global economics, often with unintended or even harmful consequences for other nations. The narrative needs to be explored on how it functions.
We need to travel back to understand how US dollar became the linchpin of the international financial system. It was 1944, the year in which Bretton Woods Agreement came into existence. This agreement established a new global monetary order, where US dollar was pegged to gold and other currencies were pegged to US dollar. This system effectively made US dollar the world's reserve currency.
Even after President Nixon ended the convertibility of the dollar to gold in 1971, thus dismantling the Bretton Woods system, US retained its central position. Its entrenched role in global finance was further solidified by its use in international trade, especially in commodities like oil, which started to be priced predominantly in US dollar.
US dollar's use in international trade is one of the primary reasons for its dominance. Most global commodities, such as oil, gold, and agricultural products, are priced and traded in US dollar. This creates a persistent demand for the currency. Countries need US dollar not only to trade with US but also with each other, even when neither party is American. This phenomenon is known as the 'network effect,' where the utility of a currency increases as more people use it. After World War II, US emerged as a global economic powerhouse. In the 1970s, deals between US and major oil producing countries like Saudi Arabia led to oil being priced and sold in US dollar. These agreements helped solidify the 'petrodollar' system.
US dollar comprises about 60 percent of global foreign exchange reserves held by central banks. This status as the world's reserve currency means that other countries hold large quantities of US dollar to stabilize their own currencies and ensure liquidity in times of economic turmoil. In times of crisis, such as during the 2008 financial meltdown or the COVID-19 pandemic, global investors flock to dollar denominated assets as a 'safe haven,' reinforcing its value and utility.
A significant portion of global debt is denominated in US dollar. Emerging markets, in particular, often borrow in US dollar to attract foreign investment due to the stability and liquidity of the currency. However, this creates a dependency. When the Federal Reserve raises interest rates, it strengthens US dollar and increases the cost of servicing this debt for other countries, often leading to economic stress in those regions.
The global reliance on US dollar provides US with what is known as an 'exorbitant privilege.' This term, coined by French economist Valéry Giscard d'Estaing, refers to the unique advantages US enjoys due to US dollar's central role in global finance.
Because there is a constant demand for US Treasury securities, US can borrow at lower interest rates. This allows for sustained fiscal deficits without the immediate risk of currency devaluation or inflation, which would typically plague other nations in similar situations. US can run persistent trade deficits because other countries are willing to hold its currency. In essence, US can import more than it exports and pay for it with its own currency, a luxury few other nations can afford. US dollar's dominance grants US enormous geopolitical power. Sanctions imposed by US can have global ramifications simply by restricting access to dollar-based financial system. Countries like Iran, Venezuela, and Russia have felt the sting of these measures, which can cripple economies without the use of military force.
While dollar system offers stability and predictability, it also creates vulnerabilities for countries outside US. Federal Reserve sets monetary policy based on domestic considerations, such as inflation and unemployment within US. However, these decisions can have outsized impacts globally. For example, a rate hike can lead to capital outflows from emerging markets, currency depreciation, and inflation. The global financial system becomes more volatile as countries need to respond to US policy changes. Sudden shifts in investors' sentiment can cause financial crises in otherwise stable economies, simply because of their exposure to dollar-denominated debt or dependence on dollar-based trade. To maintain investor confidence and ensure access to US dollar funding, countries often adopt conservative fiscal and monetary policies. This can include austerity measures, even during economic downturns, limiting their ability to stimulate growth or invest in social programs.
US dollar dependency is risky, it is well recognized. Several nations and regions have made efforts to reduce their reliance on the greenback. Efforts are on to find solutions for bypassing US dollar. Countries like China and Russia are reported to have signed bilateral agreements to trade in their own currencies. Central banks have also established currency swap lines to provide liquidity in times of need without resorting to US dollar. The European Union has pushed for greater use of the euro in international trade, while China has promoted yuan through initiatives like the belt and road initiative and the development of its currency in digital form.
SWIFT is a messaging system controlled by US payment ecosystem, CHIPS. Many countries have developed alternative financial messaging systems. Examples can be cited: Russia's SPFS and China's CIPS aim to reduce dependency on SWIFT infrastructure. Despite these efforts, US dollar remains deeply entrenched in global finance. Its liquidity, transparency, legal protections, and the sheer size of US financial markets make it difficult for any single currency to replace it in the near future. Moreover, trust plays a critical role. The US financial system, for all its flaws, is still viewed as more stable and secure compared to many alternatives. Replacing US dollar is not just technical solutions but also requires a global consensus and a shift in economic trust and confidence. This is a monumental task, impossible to implement.
The narrative 'Dollar is our currency, it is your problem' is more than a witty remark. It encapsulates a structural imbalance in the global economic order. US benefits immensely from its currency's dominance; gaining economic stability, cheap capital, and geopolitical leverage. In the meantime, other nations are forced to navigate a complex web of dependencies, often at the cost of economic autonomy and stability. While there is a growing desire to challenge this status quo, meaningful change remains elusive. Until a viable alternative emerges - one that matches US dollar in trust, scale, and usability - the world will continue to sing songs to the tune of US monetary policy, whether it likes it or not. As such, US dollar is definitely American currency, but its consequences are undeniable globally.
The concept of 'my currency, your problem' is expected to continue until a new global payments ecosystem is evolved. The dominant role of the currency provides its issuer exorbitant privilege. The country can buy out of nothing from other economies. Despite the privilege with the support of a currency as a weapon, US declared tariff war. Does it mean that dollar issuer wants to make the narrative rephrased, 'we produce outputs, it is your problem'?
