Why Is American Money Used Around the World?

now held outside of the United States. That's up from only thirty percent back in The steep rise in the number of one hundred dollar bills held overseas close to two c notes for every person on the planet is a signal that people around the world recognize the US dollar as the de facto global currency. They have confidence that if their local currency goes belly up, the dollar

will hold steady. And it's not only individuals who are saving American currency for a rainy day, it's foreign governments to the governments don't stockpile physical dollars in their central banks, but they do buy up loads of U S Treasury bonds and T bills, which are valued in dollars. As of January twenty, Japan and China each owned more than one trillion dollars in US Treasury securities, followed by the United Kingdom with three d and seventy two billion dollars

and Brazil with two hundred and eighty three billion. According to the International Monetary Fund, more than sixty of the world's cash reserves are held in dollars. The Bureau is in far second place. At when even an economic powerhouse like China holds a trillion U S. Dollars in reserve, that's a good sign that the dollar is still considered the mightiest of the global currencies. But the dollar wasn't always the world's de facto currency. So what changed? Before

World War Two? All global currencies were backed by gold, and each government guaranteed that its money was good for a certain amount of gold. Then came the Breton Woods Agreement of ninety four, which created the World Bank and the International Monetary Fund, and also established the U. S. Dollar as the new gold Because the US held most of the world's gold supply, the dollar continued to dominate

during the post World War two boom years. But we spoke with Jonathan David Kirshner, a professor of political science and international studies at Boston College who co edited a book called The Future of the Dollar. He explained that the rise of the dollar order was built on four pillars. The robustness of the U. S. Economy, the widespread belief in the American model of finance, the wealth of US

financial institutions, and America's leading role in international affairs. Kirshner said most of the world's monetary relations were orchestrated between the US and its political allies and military dependencies, it was natural to be conducted in dollars. The Breton Woods fixed exchange rate scheme collapsed in the nineteen seventies when Richard Nixon took the dollar off the gold standard during a period of domestic inflation, and many industrialized economies chose

to float their currencies on the open market. It At that time, some economists began to predict the downfall of the dollar, not that it would lose value, but that it would lose its dominance as the world's de facto currency. Over the decades, most of those pillars that made the

dollar king of the postwar economy have been toppled. Recessions, stock market bubbles, and the global financial crisis have revealed cracks in the American financial model, and the US has lost some of its political dominance, with many governments and corporations choosing to do business with China or Europe instead. Yet the numbers show that the dollar is still the currency that nations and individuals turned to as a safe

harbor in economic storms. The Kirshner said, the ultimate reason is a simple one, the lack of a plausible alternative. If not the dollar, then what. There have been periodic calls to shift more reserve holdings to the Euro, the Chinese R and B, or even back to gold, but the dollars still reigns supreme. When countries shop for a reserve currency that stay bill secure and liquid, that is easy to convert back to local money, the dollar is

still the default. In fact, some countries such as Panama and El Salvador use the US dollar as their own legal tender. The US government doesn't have to give approval for another country to use the dollar as its official currency. So what about a one world currency. I'm not going to happen, Kirschner says. The first reason is political. There's simply no political will to have one world government or

one world currency. The second reason we won't see an Earth dollar anytime soon, or the whole world using the US dollar for their official currency for that matter, has to do with an economic theory called optimal currency area that states that a single currency only operates effectively over a relatively small geographic area of the size of a country, for example, not a continent or the world. That's because different regions might be experiencing very different economic conditions at

the same time. One country might be in recession while another there is booming. Kirshner said, if you only have one money in the whole world, then you only have one monetary authority, which means you only have one monetary policy. In reality, different regions or countries would need monetary policies more tailored to their individual needs. That's one of the reasons why the Euro hasn't supplanted the dollar as the de facto global currency. The European Union itself is not

an optimal currency area. It's too spread out, which means that EU authorities have to enact monetary policies that somehow serve economies in very different financial conditions, like Germany and Greece. Today's episode was written by Dave Ruse and produced by Tyler Clang. For more on this and lots of other viable topics, visit House to Works dot com. Brain Stuff

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