August 5, 1993
"Currency Choice - Various Economists have Estimated that Between Two-thirds
and Four-fifths of U.S. Currency is Circulating Abroad"
San Jose Mercury News
By Timothy Taylor
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THE WORLD economy is being dollarized. Buy a radio in Hong Kong, a hotel room
in Rio de Janeiro, or a candy bar in Moscow -- just about anywhere you shop, U.S.
dollars are not only acceptable, but welcomed.
Of course, the dollar isn't the only attractive mazuma in the world. German
marks, Swiss francs, and Japanese yen all have their allure. I personally have
never met a currency I disliked, at least not if the denomination was large enough.
But with the recent turmoil in European exchange rates, Europe's currencies
look somewhat less attractive. Historically, Japan has not been eager for its
currency to be used in other countries. At least for now, the good old U.S. greenback
is the world's gelt of choice.
In fact, various economists have estimated that between two-thirds and four-fifths
of U.S. currency is circulating abroad. Since the total outstanding U.S. currency
is about $300 billion, these estimates imply that from $200 billion to $240 billion
is in foreign hands.
For the developing economies of Latin America, eastern Europe, and Asia, dollarization
offers a useful economic stability, at a price.
Many of these countries have experienced on-and-off hyperinflation. In this
setting, businesses and workers can't focus on productivity or efficiency, and
no one can plan for the long term. When inflation is reducing the buying power
of currency by, say, 40 percent a month, that quickly becomes the only important
issue in day-to-day economic life.
A stable currency is the grease that lubricates the economic machinery; relying
on the stability of U.S. dollars makes it easier for these economies to function.
In fact, Argentina has managed to reduce its inflation rate from 84 percent to
12 percent in the last two years by officially tying its currency to the dollar,
according to a report on dollarization in Business Week.
But using another nation's money doesn't come free. These dollars circulating
abroad once were used by Americans to buy something: perhaps something as everyday
as a cab ride or house cleaning services; perhaps something more illegal or exotic.
But at least so far, this means that foreign countries have provided goods or
services to the U.S. in exchange for pieces of paper.
Of course, at some point in the future, those dollars may be used to purchase
American products. There's an economic term for the situation where you receive
something from someone, but have to pay it back in the future: It's called a loan.
In effect, the rest of the world has loaned $200 billion or so in goods and services
to the United States.
Nor do matters stop there. When the foreign circulation of the world's other
major currencies is added up -- Japanese yen, German marks, Swiss francs, and
so on -- the total loan from the developing nations to the industrialized countries
of the world may climb as high as $800 billion.
Here's the kicker: The industrialized countries of the world need not pay any
interest on this loan they have received from the poorer nations of the world.
If the relevant interest rate is, say, 8 percent, then this interest- free loan
of $800 billion is worth something like $64 billion each year to the First World
Dollarization confers other benefits on the U.S. economy as well. Just as American
firms have something of an advantage because their home language, English, is
generally the language of international business -- or just as American firms
suffer to some extent because their home market insists on using an idiosyncratic
and peculiar system of weights and measures, rather than converting to the metric
system used everywhere else -- having a globally acceptable currency simplifies
business life considerably.
Since American businesses and consumers have the luxury of operating within
the world's largest unified market, they tend not to think about its benefits.
But imagine for a moment the inefficiency and complexity of the U.S. economy if
every state had its own unpredictably fluctuating currency. Even simple transactions
like taking a trip to Seattle or ordering from L.L. Bean would take on new levels
of complexity; businesses that buy and sell in different states would have to
devote teams of analysts to analyzing the fluctuations of 50 currencies.
Serving as the world's currency brings a certain amount of confusion and added
responsibility, along with its benefits. When policy makers speak today of controlling
the U.S. "money supply," they are no longer actually referring to coin
of the realm. After all, the overwhelming majority of U.S. currency is outside
America's boundaries and control.
Instead, the "money supply" usually refers to a statement about the
willingness of banks and the financial system to make credit available to borrowers.
In fact, the Federal Reserve announced recently that it was no longer going to
set a certain goal for the growth of the money supply, and will focus instead
on assuring that interest rates stay at certain levels.
As the world's largest economy, and the strongest supporter of free and open
markets, the United States has long been the linchpin of the world economic growth.
As dollarization proceeds, the United States becomes the keeper of the world economy
in yet another way.
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