Recently China, Russia, Brazil and other nations with large U.S. dollar investments have called for eliminating the dollar’s pre-eminent position as the world’s reserve currency. This sentiment was supported by a United Nations’ panel, and some oil-producing countries have also started moving away from the greenback. The Organization of Petroleum Exporting Countries is discussing a general retreat from the dollar as the principle currency for international oil commerce.
World Bank President Robert B. Zoellick, a former U.S. Treasury official, has warned that the dollar’s place in the global economy cannot be taken for granted. These developments should be of grave concern to U.S. policymakers. Printing the world’s currency of choice delivers substantial benefits to America, and losing that status would cause serious harm. Most fundamentally, diminishing the dollar’s importance is a threat to American national security.
Currently, the U.S. dollar is the de facto gold standard. Countries around the world value their goods and services, and even their own currencies, in reference to it. In many countries it is still accepted as a form of payment, sometimes to the exclusion of the local currency. In Russia, for instance, homes are often purchased with dollars, both as cash and as mortgage loans. Even many countries find that investors demand they pay their bonds in U.S. dollars instead of the local currency.
The equivalence between American currency and gold provides substantial benefits. When the United States needs more money (i.e., when running a budget deficit), it issues Treasury bonds. As the bonds promise payment in dollars, printed at will by the Treasury, the United States can never actually default. But this can last only as long as the world has faith in the dollar. Many things can shake that faith, ranging from long-term budget deficits to economic weakness to dissatisfaction with U.S. foreign policy. There is no permanent reason the world has to prefer the dollar.
Losing the dollar’s leading role would have profound implications for the United States. It would be much more difficult to borrow money, and interest rates would have to rise. Foreign governments would sell dollars to buy other currencies or assets. America would likewise need other currencies to buy critical resources like oil and iron ore. This would further drive down value and increase inflation.
These changes would likely occur over time, but losing the dollar’s status would immediately place America in a vulnerable position. If the world no longer relied on the dollar, other nations could try to intentionally destroy its value. The results of an attack on the dollar would be disastrous.
The U.S. budget, which currently operates by running a $12 trillion debt, would have to radically shrink. Unable to meet our obligations, funding for basic services would be slashed and entitlements like Social Security would go unpaid. Most significant, the United States military would be unable to support its operations on anything close to current levels. America would lose the flexibility it has to fund a military with a global presence. Not coincidentally, the foremost competitors to the United States are also the biggest proponents of slashing the dollar’s role. China, Russia and Iran are among the leading advocates for replacing the dollar.
China, in particular, would find its global position enhanced by a move away from the dollar. Currently, it is America’s largest foreign creditor, and its ability to advocate a weaker dollar is hindered by its own financial stake. But China clearly recognizes this fact and has been actively diversifying its holdings. Without question, China seeks to maximize its ability to affect the dollar’s value with impunity.
The ability to cripple the U.S. economy by massively devaluing the dollar is the type of “asymmetric warfare” that the People’s Liberation Army has discussed openly in recent years. This is not to suggest that the People’s Republic wants to destroy the dollar, nor that doing so would come without cost. But such power would clearly give China tremendous leverage.
The ability to avoid such a precarious situation lies entirely with U.S. policymakers. The United States must grow the economy while avoiding long-term deficits in order to reassure the world that the greenback is a sound investment. The consequences of losing the dollar’s status are too great to be ignored. The dollar must be treated as a national security priority.
Gregory Zerzan was deputy assistant secretary and acting assistant secretary of the Treasury in the administration of President George W. Bush.