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To End Forever War, Keep the Dollar Globally Dominant

The U.S. has misused its "exorbitant" financial privilege, but American leaders should transform it, not abandon it.

An Iraqi man counts money in his currency exchange bureau in Baghdad on April 11, 2012. Ali Al-Saadi/AF/Getty Images

In early 2016, Obama Treasury Secretary Jack Lew cautioned that the dollar’s dominance as a global currency rested, in part, on the U.S. government’s reluctance to fully weaponize it. If foreign markets and governments “feel that we will deploy sanctions without sufficient justification or for inappropriate reasons,” he warned, “we should not be surprised if they look for ways to avoid doing business in the United States or in U.S. dollars.” Lew’s case stemmed from the more fundamental view that the dollar’s international role is “a source of tremendous strength for our economy, a benefit for U.S. companies and a driver of U.S. global leadership”—in other words, a role worth keeping. This view is emblematic of American financial governance since the Second World War. U.S. economic analysts, especially at the Treasury, have jealously guarded the dollar’s role and the many benefits it offers: the ability to run large deficits at low cost and disproportionate influence over the structure of the global economy, among others.

Yet in their recent article in The New Republic, David Adler and Daniel Bessner argue the U.S. should abandon these advantages. In their view, the dollar’s role has encouraged American militarism and should be relinquished to curb such behavior. Dollar hegemony is not without cost, but to renounce it would be a profound mistake. Adler and Bessner’s view neglects the sizable economic benefits the dollar’s role confers on the U.S., as well as its possible use as an antidote to military adventurism. It ignores the enormous good that can be done with deficit spending, much of which has gone to the American military but could instead fund progressive programs. And it elides the inability of the U.S. and its global trading partners to shift away from dollar dominance without creating worldwide financial distress. Adler and Bessner are right that the U.S. has misused its privilege, but Washington should not abandon it; rather, American leaders should seek to transform it.

Generations of American policymakers have been right to protect the dollar’s key currency role for economic reasons. Most notably, dollar hegemony affords the U.S. the ability to run large and prolonged budget and balance-of-payments deficits. The dollar represents 62 percent of allocated foreign exchange reserves, is used to invoice and settle roughly half of world trade, and accounts for 42 percent of global payments. Because governments, banks, and businesses worldwide need lots of dollars, the world market always stands ready to absorb new U.S.-dollar-denominated debt without charging higher interest rates.

Adler and Bessner correctly point out that the rest of the world considers the dollar’s role as the world’s reserve currency to be an “exorbitant privilege,” a term coined in the 1960s by then French Finance Minister Valéry Giscard D’Estaing. The ability to spend beyond its means has enabled the U.S. to fund its impressive military might, whether one views that power as the fountainhead of Pax Americana or the source of illegitimate military adventurism.

But these economic benefits go beyond just deficits. The demand for dollars also pushes up the dollar’s value against other currencies, enhancing American purchasing power and offering consumers access to imports on the cheap. The dollar’s role also means American firms rarely need to do business in foreign currencies, reducing transaction costs and exchange-rate risks.

More broadly, America’s central economic role gives it outsize influence at crucial moments. At the height of the financial crisis that began in 2008, the Federal Reserve was able to inject vital liquidity into the global financial system by selectively offering dollar swap lines to trusted foreign central banks. Dollar hegemony enabled the U.S. to act swiftly, effectively, and on its own terms.

In addition, the dollar’s role offers a potent alternative to kinetic military action as a means of pursuing foreign policy objectives. The dollar’s broad use means access to dollar liquidity—which in turn requires access to the U.S. financial system—is essential for foreign governments and businesses. For foreign banks, especially, being cut off from dollar access is essentially a death sentence. That makes sanctions that do so a powerful tool in the international arena.

In 2005, for example, the U.S. used the dollar to strike a devastating blow against North Korea without firing a single shot or even formally enacting sanctions. Using authority provided by Section 311 of the Patriot Act, the Department of the Treasury crippled Banco Delta Asia, a bank accused of facilitating illegal activity by the North Korean government, by merely threatening to cut off its access to the American financial system. Deposit outflows began within days; within weeks the bank was placed under government administration to avoid a full collapse. Pyongyang was hit hard, as other banks ceased their business with it to avoid meeting the same fate.

Similarly, though the Trump administration has worked hard to undo it, the Joint Comprehensive Plan of Action with Iran to limit the development of nuclear weapons was made possible, in part, by painful dollar sanctions that brought Iran to the table. Far from being a proximate cause of military conflict, the dollar’s central global role has often been used to contain adversaries without military intervention.

Still, skeptics are right to point out that the dollar’s role has indirectly funded American interventionism and that dollar sanctions have been overused, provoking the ire of American allies. But these facts suggest we should use our dollar power to forge a more progressive U.S. order, not abandon the advantage altogether. America’s exorbitant privilege need not fund warships and missiles: The same low-interest borrowing could be used to fund a new universal health care system, expand access to higher education, or pursue any number of large-scale social policy objectives, including financing global public goods that no other country or consortium of countries is prepared to fund, such as climate change mitigation.

Domestically, the chief argument against the dollar’s role is that the same overvaluation that makes imports cheap also makes exports expensive, contributing to the hollowing-out of the American manufacturing sector. But again, dollar deficit-spending could be used to address this economic hazard by covering the costs of relocation, job training, or even paying salaries through a federal work program. Calling out military adventurism as a reason to abandon dollar hegemony is like saying you should lose your credit card for racking up charges on junk food. The better solution is to change your diet, not cut off your access to credit.

It isn’t even clear that the U.S. could “end” the dollar’s dominance, even if it wanted to. The dollar’s use in trade and payments reflects the decisions of many global actors, including but not limited to foreign governments. Companies and financial institutions overwhelmingly choose to use dollars because of the unrivaled depth and liquidity of the dollar financial market; at present, no other currency is ready to play this role. The only way the U.S. could change this would be to dramatically contract its borrowing, which would likely cause a global recession.

Adler and Bessner’s argument gets at a dilemma at the heart of international monetary politics. Since Bretton Woods, the dollar has played two roles that sometimes end up at cross-purposes: It is the domestic money for the U.S. and the international unit of account for the globalized economy. No other country has been willing to allow its currency to be used in this way (or issued a currency capable of it). But without some currency playing this role, economic globalization as we know it cannot continue.

Leaders in Russia, Venezuela, and other nations have spoken with bravado about ending the petrodollar for years but are no closer to making that change a reality. Iran’s Oil Bourse has accomplished little: OPEC still prices its members’ oil in dollars. The petroyuan lacks the market liquidity to compete with the petrodollar. Notorious opacity of Chinese financial markets aside, the capitalization of U.S. equity and debt markets is more than four times that of their Chinese counterparts. De-dollarization is more rhetoric than reality, as it has been for decades. A more multipolar currency system may offer greater stability decades down the road if the U.S. share of global economic output continues to shrink, but we aren’t there yet.

I recently traveled to Beijing and Tokyo to speak with finance officials on exactly this issue. All agreed that for the foreseeable future, getting off the dollar is essentially impossible. In the words of Sun Tianqi, chief accountant of China’s State Administration of Foreign Exchange, which manages China’s dollar reserves, “the role of [a] currency is mostly determined by markets, not governments. Governments cannot simply choose to end [the] dollar’s role.”

The U.S. cannot end the dollar’s dominance, and it shouldn’t want to. Ending forever wars does not require renouncing an exorbitant privilege that, if used properly, could be the source of so much good.