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The Future of the Dollar: Currency Challenges in a Globalized World

Author: Benn Steil, Senior Fellow and Director of International Economics
Winter 2009
Harvard International Review


“They get our oil and give us a worthless piece of paper,” exclaimed Mahmoud Ahmadinejad at an OPEC summit in November 2007. Unkind words about the American currency from an Iranian president could normally be dismissed as political bluster, but in this case it was bluster with a disturbing kernel of truth to it. Over the course of 2007, states with large dollar holdings were becoming increasingly fearful about the dollar’s long-term global purchasing power, but they simply had less incentive to sound the alarm about it.

A dollar was once redeemable for a fixed amount of precious metal, but has for four decades now been redeemable only for near-worthless metal - pennies, nickels, dimes, and quarters. It is valuable only to the extent that vast numbers of people believe that vast numbers of other people will continue, of their own volition, to exchange intrinsically valuable things for it. Should this confidence evaporate, the dollar is truly just “a worthless piece of paper.”

It is hard to imagine that this confidence could be fatally undermined any time soon. History, however, does not provide kind testimony to the durability of national monies. Many dozens of them lost more than half of their purchasing power between 1950 and 1975 alone - including the dollar, which lost 57 percent.

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