U.S. Dollar as World's Currency

March 04, 1985

The article by Charles R. Morris (Opinion, Feb. 23), "Soaring Dollar: Up, Up . . . No One Knows Why," poses a number of paradoxes.

The dollar's strength flies in the face of runaway deficits, foreign trade imbalance and other phenomena, which historically have had the effect of dollar devaluation, and inflating the money supply. However, conventional economic wisdom no longer applies, according to Morris.

Not so, Mr. Morris. The same old principles still apply. Only now, the dollar has become the international currency, with Uncle Sam running the printing presses. As long as the world is willing to accept this state of affairs, we can probably coast along as we are, and count our blessings.

To illustrate, on a recent trip to Argentina, where inflation is fierce, I learned that real estate and auto sales are made in dollars, not pesos. Domestic bank loans are made in dollars; foreign transactions, of course, are made in dollars. The peso cannot be relied upon for any transactions where payments, over time, are involved. This is true in other countries where triple-digit inflation prevails. Oil, for instance, is universally traded in dollars.

So what has happened? The dollar has become, if not legal tender for the world, the tender of choice everywhere; not just for foreign trade, but also for internal trade in many foreign countries.

The dollar as legal tender, must be accepted for all debts, public and private (in the U.S.A.). Every dollar circulated becomes a due-bill on the American economy. Their only value ultimately to native Americans and to foreigners, is what they will buy in the American economy. Too many dollars in circulation, vis-a-vis available goods, services and land on the market diminishes the value of the dollar. We call it inflation.

The flow of new dollars into the economy is regulated by the Federal Reserve Board. This is done by keeping the growth in money supply within a targeted range, deemed by the Fed to be not unduly inflationary. The M-1 money supply is defined as the sum of cash in circulation, checking accounts and travelers checks; readily expendable money.

The reason we can sustain such a heavy budget deficit and foreign trade imbalance is that most of those dollars going abroad remain in the international economy, and do not come back to haunt us. If every dollar in foreign lands returned to assert their right as American legal tender, to compete for goods and services in the American economy, we would be swamped.

The dollars that do return are largely invested in real estate, securities and Treasury paper; hence they do not compete for goods and services, and do not enter the M-1 supply calculation. Thus the Fed can continue printing money while it makes its one-way trip into the world economy. And interest rates are held down because Uncle Sam's deficit is largely financed by foreign dollars, without having to compete in local money markets.

Herein lies the foundation of our present prosperity, the strong dollar, low interest rates and low inflation. Nobody planned it that way; not even President Reagan or Fed chairman Paul Volcker. We are simply lucky.

How long will it last? Just as long as people, worldwide, have confidence in the dollar. The basic weakness is that there are more dollars outstanding than the American economy can ever redeem.

We shouldn't allow present prosperity to lull us into complacency toward economic disciplines, such as deficit reduction, improvement of foreign trade effectiveness, and greater taxation, when prosperity will allow it. Unfortunately, we are at the mercy of politicians to take the lead, and austerity is an unpopular political stance.

It may take a painful economic reversal to bring us to our senses, and then it could be too late. Economic reversals usually come in panic bursts; a sudden erosion of confidence in the system. Panic can be triggered by a rash of bank failures, defaults on foreign debt, a stock market crash, or a stampede by foreign dollar holders to convert to gold, other currencies, or American goods.

While the politicians play in their Washington sandbox, perhaps our only hope is that the dollar will continue as the international currency because foreigners have no place else to go. But nothing is forever.


Pacific Palisades

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