Tydskrif vir Geesteswetenskappe
Print version ISSN 0041-4751
WESSELS, Buks. The use of the USA dollar as international key currency and its benefits to the USA. Tydskr. geesteswet. [online]. 2011, vol.51, n.2, pp. 161-177. ISSN 0041-4751.
The US dollar occupied a supreme position during the past sixty years and more amongst all other international currency units. At no stage could any other international currency of repute, not even the euro, closely match the prominence of the dollar. The dollar evolved into the common global exchange medium that facilitates international trade and investment in a relatively safe environment. The mutually beneficial interaction between its functions of medium of exchange, unit of account and store of value in both private and public capacity ensured its uncontested and almost monopolistic position. This was supported by the US's unsurpassable economic, strategic, diplomatic and political position and its acknowledgement by other countries as the world's economic locomotive and political leader. These were also confirmed by the fact that the dollar satisfi ed the required underlying determinants for acquiring key currency status better than any other currency. Of particular importance are the US's global dominance in world gross domestic product (GDP); world trade; currency confidence and stability; foreign direct investment fl ows; global capital flows and its unmatched deep, broad, liquid and resilient financial markets. Moreover, the dollar's key monetary functions and the US's economic and political milieu roles were in a mutually beneficial interaction. Similar to its predecessor, Britain, the US's global dominance bestowed on it the power to apply its political power to enhance and broaden its economic reign, and vice versa. Its political dominance opened the way for US financial and industrial enterprises to follow the flag, which in turn procured the financial means with which to finance and expand its political presence. The foregoing economic driving forces were and are still powerfully complemented by structural factors such as network externalities and inertia. The former stems from the lowering of transaction cost and the increase in liquidity caused by the increased use of the dollar as key currency, which subsequently draws in more and more users. This becomes a self-enhancing feature of the increase in its use. These network externalities sideline other contesting currencies aspiring for key currency status and in so doing introduce an almost monopolistic tendency in the key currency status of the dollar. The conservativeness of central banks in their management of international reserves together with the vested interests and tradition-bound attitudes of private and public key currency holders also contribute to a substantial inertia in key currency holdings. Becoming a key currency is therefore more difficult than remaining one. This perpetuates the dominance of the dollar. The paper attests that the supreme position of the dollar in the global currency arena brings substantial benefits and privileges to the US. Dollar hegemony bestows on the US a much greater flexibility in managing its current account deficits. Countries that hold dollars and dollar denominated assets as the main component of their international reserves do not withdraw their dollar-based investments, thus cheaply providing short- term funds to the US with which to finance its current account and budget deficits. This allows the US not only to borrow short and lend long, but also enables it to invest the low-cost foreign funds in high-yielding foreign assets. Empirical studies show that in so doing the US reaps a considerable net international gain despite its growing international indebtedness and deficits. The foregoing enables the US during various occasions to prevent a major deterioration in its net international investment position despite the fact that its foreign liabilities increasingly exceed its foreign assets. Moreover, the US is not seriously affected by a depreciation in the exchange rate of the dollar since the majority of its foreign liabilities are in its own currency and are thus not affected, whereas its foreign assets are largely in other currencies that yield a valuation gain when the exchange rate of the dollar depreciates. This benevolent situation together with the seigniorage benefits generated from dollar notes circulating outside the US, allow the US to live significantly above its means. Despite the indebtedness of the US to Far Eastern countries and its reliance on them for its fi nancing needs, the US still acquires a higher welfare level than it would otherwise have obtained. It also assists the US in funding its foreign diplomatic and military ventures. The latter in turn feeds back into promoting fi nancial and economic ventures that benefit the US financial markets.
Keywords : dollar; dollar supremacy; USA hegemony; key currency status; international monetary unit.