The Dollar Privilege

The dollar is the world’s primary reserve currency, accounting for $6.7 trillion in foreign reserves. This has given the United States what some have called “an exorbitant privilege,” allowing it to borrow easily and to levy painful sanctions. But could it lose this status?

February 18, 2021 — 35:40 min
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Gabrielle Sierra

Podcast Host and Producer Full Bio

Episode Guests

Roger W. Ferguson Jr.

Steven A. Tananbaum Distinguished Fellow for International Economics

Sebastian Mallaby

Paul A. Volcker Senior Fellow for International Economics

Show Notes

In 1944, representatives from forty-four nations devised a new global financial system, anointing the U.S. dollar as the leading international reserve currency. Since then, the dollar has enjoyed the immense privilege of being the currency of choice for international trade and global reserves. This status allows it to borrow money easily, bounce back quickly from financial crises, and levy painful sanctions against other countries.  

In this episode, an economist and a former vice chairman for the U.S. Federal Reserve break down the real and symbolic benefits of the dollar’s status. They also assess the potential for competitors, such as the Chinese renminbi, the euro, and even cryptocurrency, to displace it. 


CFR Resources


The Dollar: The World’s Currency,” Anshu Siripurapu


The National Debt Dilemma,” James McBride, Andrew Chatzky, and Anshu Siripurapu


Good News! The Federal Reserve Is Surviving the Trump Era,” Sebastian Mallaby


The Dangerous Myth We Still Believe About the Lehman Brothers Bust,” Sebastian Mallaby


Tracking Currency Manipulation,” Brad W. Setser and Dylan Yalbir


Weaker Dollar Means More Dollar Reserves,” Brad W. Setser


From Roger Ferguson


What Ex-Fed Governor Roger Ferguson Learned on 9/11,” Fortune


Read More


The dollar’s international role: An ‘exorbitant privilege’?” Brookings Institution


US debt to China: how big is it and why is it important?South China Morning Post


Will bitcoin end the dollar’s reign?Financial Times


Dollar Hegemony Is Under Fire From China’s Rapid Growth Recovery,” Bloomberg


GameStop Stock Jumps to New Record,” Wall Street Journal 


Massachusetts regulator says GameStop speculation is a danger to the whole market, as TD Ameritrade restricts trading,” CNBC


Does Trump Have the Legal Authority to Demote the Federal Reserve Chairman?New York Times


Watch and Listen


The Dollar At The Center Of The World,” Planet Money


TIAA’s Roger Ferguson on Avoiding a Double-Dip Recession,” Leadership Next



If you travel often, you’ve probably used a lot of different currencies. Pesos, yen, pounds and euros. But there is one currency that is desirable pretty much anywhere you go - the U.S. dollar. 

Dollars have a near universal value, and in a pinch, a vendor in a New Dehli market or a waiter in Spain will likely accept one as payment. But behind the scenes the dollar is playing another, more important global role, one that many of us find confusing. It’s a reserve currency.

For almost a century, countries have been buying dollars as a kind of insurance policy. As a result, around $6.7 trillion U.S. dollars are held in reserve around the world.     

The fact that the dollar is the world’s main reserve currency has given the United States significant economic power. It allows the United States to borrow easily, to recover quickly from economic shocks, and to impose sanctions on adversaries. But power like that comes with some drawbacks, and there is no guarantee that the dollar will keep its status forever. 

I’m Gabrielle Sierra, and this is Why It Matters. Today how the U.S. dollar shapes the world, and what that means for Americans. 

CBS This Morning: 0:02 “The Federal Reserve is taking sweeping action to try to protect the economy from the coronavirus. Fed Chairman Jerome Powell announced the interest rate will be drastically cut in one of the biggest Fed moves since the 2008 financial crisis.”

ABC World News: 0:12 “China has a huge invested interest in the American economy because it holds almost 25 percent of all foreign-owned U.S. debts.”

DW News: 0:00 “U.S. sanctions against Iran over its nuclear program were reintroduced... Iran’s economy in a free fall, soaring inflation.”

Al Jazeera: 0:29 “If push comes to shove, it’s all.. It's the world reserve currency.”

SIERRA: So to start off, what is a reserve currency and why does it matter?

Sebastian MALLABY: So, Gabby, I think the first thing is to explain what a currency is before we get to reserve currency.

This is Sebastian Mallaby, a senior fellow for international economics at the Council. You may remember him from our episode on the economic side of the COVID pandemic. 

MALLABY: A currency has a few different uses. One is that it's a unit of account. It's a way of putting a measure on what something might be worth. The second is, once you've decided what it's worth, that you should be able to transact. So transactions are the second idea that you can go off and buy stuff,  with the currency. And a third idea, is that you can use money as a store of value. Before you transact, you can save up this currency, and then transact in the future. 

So for those keeping track at home, money does three basic things. It lets us agree on prices, it lets us buy things, and it lets us save up so we can buy other things later.  

Now, the same three things that currency does for people, reserve currencies do for entire countries: pricing, buying, and saving. 

MALLABY: So literally, a reserve currency is the currency you hold in reserves. So it's very linked to the last idea I mentioned of the store of value-

SIERRA: Mm-hmm (affirmative).

MALLABY: And in particular, we think of reserve banks,I mean, central banks, global central banks, which hold, currencies and reserve to protect their economies against various kinds of financial or economic shock. So a reserve currency really has a couple of different functions. One is to cover the need for future imports. If a country, for example, doesn't have its own energy supply, needs to import oil, you might want to hold dollars in reserve to make sure that you can buy the oil you need in the future. The second reason central banks hold foreign currency reserves is because of the possibility of a financial crisis. And there again, dollars are very useful because most institutions borrow in dollars. So in a financial crisis, they're going to need dollars to help them pay back what they owe.

Central banks have the unique power to print money, but in many other ways they are kinda like a scaled-up version of an ordinary bank. Your local bank needs to have enough money to lend to people if they want to buy a home, or if things get bad and they need to take some out. A central bank needs to be able to do this too, but for an entire country. In order to be prepared for the future, they need to store up a significant amount of cash that they can trust. Foreign currencies are often a safer bet than the local currency, especially in countries with weak or unstable economies. The safest bet of all is...the U.S. dollar. 

SIERRA: What role does the US dollar serve in the global reserve system?

Roger FERGUSON: Well, the U.S. dollar now is the largest single reserve currency. Economists estimate that approximately 60 percent of foreign reserves around the world are in US dollars. 

This is Roger Ferguson he is the President and CEO of TIAA, which manages over $1 trillion in retirement funds for more than 5 million teachers, government workers and, well, me it turns out. Roger was also Vice Chairman of the Board of Governors of the Federal Reserve from 1999 to 2006. This means he helped determine the supply of U.S. dollars to the country, and the world. 

FERGUSON: The euro is about 20 percent the yen, the Japanese currency is about 5 or 6 percent the British pound also, about 5 or 6 percent. And so the US, by far away, is the most important reserve currency but it's not the only currency that's held in reserve by other economies. The Chinese, I think, would like to see their currency, the renminbi, become a larger currency in terms of its holdings as a reserve currency around the world. And yet, you know, in terms of reserves, they are number four, number five when the list had only about 2 percent.

SIERRA: I can definitely remember going to Europe at a time when the Euro was way up and my money didn't go as far. And you're just like, "Damn, I, I timed (laughs) this really poorly," Are other countries literally buying dollars? The way that I exchange currency when I visit a country and where do they buy them from? 

MALLABY: It's not quite the same because they're not collecting lots of $5 bills to put into the wallet in their belt.

SIERRA: Right.

MALLABY: They’re holding huge amounts. And so they, what they do is they own US treasury bonds or other kinds of easily traded dollar-denominated bonds. And that could be mortgage bonds as well. But you know, US government debt is the most popular instrument to hold.

SIERRA: And how do US treasury bonds work?

MALLABY: Well, the government in the United States wants to borrow money to finance the U.S. government deficit. So, the Treasury sells these bonds, which are promises to pay back in ten or thirty years, or however long the duration of the bond is. And those bonds are sold in U.S. capital markets and anybody can buy these bonds and hold the bonds either in a sort of custodial bank in America or in another country. 

A treasury bond is essentially a loan to the U.S. government. The agreement is that you will get your money back with interest in a set time. The returns aren’t very high, but they are considered one of the safest possible investments in the world. And that safety has led to them being held more often than all other government bonds in the world combined. 

But it hasn’t always been that way.

SIERRA: So how did the U.S. dollar earn its place as the world's reserve currency or the biggest, I guess, most prominent reserve currency?

FERGUSON: All of this started at the very end of the Second World War, when in fact, we were much more dominant and the world's economies needed a reserve currency that they could all trust. They didn't want to use the gold standard anymore for a variety of reasons. And so, you know, 44 countries got together here in the United States and said, we are going to anoint the U.S. dollar as a reserve currency and we are going fix the value of our currencies to the U.S. dollar. And so it's a real reflection of the fact that at the end of the Second World War, the world needed the U.S. dollar as a reserve currency and that has continued now, since 1944 to this very day.

SIERRA: Hmm. And the dollar is a lot lighter to carry around in your pocket, you know, from like a gold bar.

FERGUSON: Than an ounce of gold. (laughter) Yes, it is.

1944 Bretton Woods International Monetary Conference: 0:04 “At Bretton Woods, New Hampshire, delegates from 44 allies and associate countries arrived for the opening of the United Nations’ monetary and financial conference. Invited by President Roosevelt, for the first major world financial meeting since the London conference in 1933, they will work in the seclusion of this white mountain resort.”

IMF: 1:12 “The fund is essential for winning and preserving peace. That is why the representatives are taking steps to prevent a repetition of the currency chaos which is usually followed in the wake of war.”

SIERRA: And what helps us maintain this position now?

MALLABY: I think the first thing to understand is that there are very strong network effects with the dollar. In other words, the more people use the dollar, the more other people would also like to use the dollar as well. It's a little bit like the English language, the more people around the world who speak English, the more it's worth your while to go take English lessons, if you are a pupil at a high school in Indonesia.

And so it's almost the case that, you know, the dollar status isn't simply linked to what's going on inside the United States. It's also linked to the fact that people in other countries, whether it's in Latin America or in Asia, or where have you, are happy to think in dollars, transact in dollars, borrow in dollars, use dollar capital markets. All of that stuff is an incredibly powerful network effect.

Network effects are fascinating. So think of social media platforms, for example. You may not like Facebook or Instagram, personally, but you may still feel an incentive to remain on them because all your friends and family are there too. If you delete your account, you won’t see their pictures, and they won’t see yours.  Everyone else uses them, and that keeps you on, and new users coming in. 

In part, dollars retain their value because everyone else expects them to. A company, or a country, that decided to ignore the dollar would find itself out in the cold. 

Still, network effects are not the only factor. 

FERGUSON: So, the United States doesn't just have the impression of power. It is actually the largest single economy in the world. And so, you know, power resides where the economy itself resides, so to speak. And the United States is the engine of growth globally, well, along with China and a few others. And so, you know, it's not just the impression that people think we are powerful; we actually are powerful because we do have the world's largest economy.

We're also powerful because so many transactions are denominated in dollars, about half the world's trade. And so, if the United States decided, for example, to put sanctions on an economy or not allow them to have bank accounts in the United States or freeze those bank accounts, it can have a very detrimental impact on that other economy. And so there is a reason that people worry about U.S. sanctions, and the reason is that we are a powerful country, and not just simply the appearance of power, but there's an actuality of power underneath it as well. 

MALLABY: I think even more important is the credibility of the legal system,  the independence of the courts, the sense that if you are a foreigner and you buy a U.S. bond, it's not as though a U.S. court will say, " you don't deserve to be paid back".

Another very important thing is whether the United States avoids inflation.  Obviously, if you are lending money in dollars, you're going to be paid back with future dollars. And if there's future dollars that devalued by inflation, you won't be happy with that. So I think a credible independent Federal Reserve is extremely important to the status of the dollar as a reserve currency.

The Federal Reserve has a lot of leeway, and does a very good job of keeping the dollar safe and stable. They have the power to increase and decrease the supply of dollars, even when the public or a sitting president do not want them to.  As a result of this independence, transactions in dollars are seen as the safest around. 

Take a country like Argentina, which has had huge fluctuations in the value of its currency over the years. Let’s say Argentina wants to borrow 10,000 pesos from you. And you love Argentina, so you decide to do it. There’s just one problem, what will those 10,000 pesos be worth when Argentina gives them back?  In 2001 that might have been enough to buy a car, but a decade earlier, during one of the country’s financial crises, it would have been worth a whole lot less.    

There’s an easy solution. Ask Argentina to price the loan in dollars instead. Now you can be confident you’ll be getting the same amount of money back. 

This plays out all over the world, all the time, whether for loans, barrels of oil, or shipping containers full of TVs.  And all of that trading and saving in U.S. dollars has an enormous effect on the U.S. economy at home. 

SIERRA: So let's look at what our reserve status does for our own economy. What are the good sides?

MALLABY: Well, the good sides are that the U.S. dollar will be stronger than it would otherwise be. And so U.S. citizens who have dollars and get paid in dollars can go on vacation in Europe, and it would be cheaper than it might otherwise have been, notwithstanding your own, Gabby, and your poor timing.

SIERRA: (laughs)

MALLABY: ... (laughs) Try it again, come to Europe another time-


MALLABY: ... you'll, you'll have a nice vacation.

SIERRA: (laughs)

MALLABY: So, U.S. citizens get to go abroad on vacation a bit more cheaply. They can also buy imports from stores in the United Stated a bit cheaper than they would otherwise have been, if the dollar had been weaker. 

That last one is a biggie. As much as American politicians like to insist on the importance of restoring American manufacturing, Americans really, really like to buy cheap foreign goods. When you go to Best Buy, you expect to be able to get a pretty good flat screen TV for about $500. Without our reserve status, that TV might cost hundreds, if not thousands more.

MALLABY: And then the other one is that the United States gets to borrow more cheaply from foreigners because there is this desire to hold U.S. assets; foreigners are more willing to lend money to the United States at lower interest rates than they would demand otherwise, because they're getting this sort of safety advantage. And so the United States can borrow more cheaply from other countries.

It is, as the French president Valéry Giscard d'Estaing once said, "an exorbitant privilege." The risks in the privileges that if you ever overuse it and borrow too much, you end up with a national debt one day that proves very difficult to sustain, but we haven't reached that day yet.

One of the strangest parts of this is that during times of tension, when most countries and individuals would have a hard time getting a loan, it becomes even easier for the United States to do so. 

MALLABY: When you are in a crisis, you want to hold the safest asset and the dollar is perceived as the safest asset. And in some sense that perception is self-fulfilling. People expect the dollar to retain its value in a crisis. And therefore, it does retain its value in a crisis because money floods into dollar assets as being safer than the alternatives.

SIERRA: So at times like 9/11 or the 2008 financial crisis, people are looking for dollars.

MALLABY: That's right. And in fact, that leads to a sort of interesting paradox, which says something about the nature of U.S. power in the world. You can have moments of geopolitical crisis, like after 9/11, leading up to the preparations for the Iraq war, where much of the world is not supportive of U.S. policy; that was true of the Iraq war, for example.

SIERRA: Mm-hmm (affirmative).

MALLABY: And they are voting against the United States at the UN Security Council. And yet at the same time, they are buying U.S. dollars because that's a time of instability and there's a flight to safety phenomenon in currency markets. So whilst opposing the U.S. policy in Iraq, they are in a sense lending money to the United States to go and conduct that conflict.

MALLABY: And so the United States gets to borrow even from allies or other countries that are critical of its policies.

Roger Ferguson was vice chairman of the Federal Reserve on Sept 11th, and he had to deal with this issue first hand. 

FERGUSON: That was obviously a moment of phenomenal tragedy in terms of loss of life in New York and Washington and in a field in Pennsylvania. It was also a time when the reserve currency status in the United States was both a strength and a problem. It was a strength, because as always occurs during a crisis, people tend to go to the U.S. markets and in particular, the U.S. treasury securities as the safe investment; so- called Safe Haven. 

What we did see, though, was the fact that so many debts around the world are denominated in dollars, and so much trade is denominated in the dollars. That we found many other central banks wanted to come to us and have access to dollars. And so we had to put in place what's called a swap arrangement with the ECB and the Bank of England, and we had to renew one with Canada. And the same thing I believe has been happening during the 2020 pandemic as well. 

If you have a reserve currency during moments of crisis, you may find your central bank being called upon to be the global banker and provide your currency through loans or through swap arrangements, as they're called, to others around the world.

As Roger noted a few minutes ago, our reserve status doesn’t just let us support allies in moments of crisis, it also lets us impose painful sanctions on adversaries. 

MALLABY: Because of the dollar’s incredibly central role in global finance, global financial institutions, even if they are, let's say a Swiss bank, or a Japanese bank, they will have an operation in the United States. It's difficult to be a big international financial institution and not operate in the United States and not operate with dollars. And that means that the United States has leverage over pretty much every big financial institution in the world. And if it says, for example, financial institutions should not lend to Iran or should not lend to Russia, or should not facilitate trade finance with Iran or Russia, or payments for oil trade, or what have you. It can pretty much freeze those pariah economies out of global commerce and really exert powerful sanctions, that would otherwise be difficult to enforce. So that is another aspect of U.S. power that derives from the dollar status as a reserve currency.

Our reserve status may be an “exorbitant privilege”, as that former French president said. It makes foreign goods inexpensive, it allows us to bounce back quickly in times of crisis, and it empowers us to levy sanctions that have serious consequences. But there are some pretty important downsides too. 

MALLABY: The main disadvantage is sort of linked to the advantage. You know, a strong US dollar is nice for U.S. consumers who get to buy foreign stuff more cheaply, but not so nice for U.S. producers that they have to sell their goods competing against foreign countries, which have a sort of cost advantage in production, if the U.S. dollar is strong; that will hurt US exporters.

Here’s the flip side of that $500 TV. If you want to start a business making TVs in the United States, you are going to have a rough time. A strong dollar means that you will have to compete with foreign goods and services that are cheaper than they otherwise would be. 

FERGUSON: It may well be that our ability to run these deficits, very low-interest rates, has ultimately led to the fact that we are now willing to import more goods in particular from overseas. Particularly from the Chinese, but not just from the Chinese. And some people say, well, gee, the lack of manufacturing in the United States may be due to the fact that it's been so easy for us to import goods from other countries, and that has created some imbalances in our own economy. 

SIERRA: So, what's the connection between the dollar as reserve currency and our 23.3 trillion dollars in national debt?

FERGUSON: Well, the link is indirect, but many people think it's quite real. Treasury notes, treasury bills, treasury bonds - those are all debts of the United States government that we promise to pay back at some point. So, the concern is that the fact that we have this ready supply of lenders, folks who have dollars and want to lend it back to us, means it's easier for us to run this deficit. And the deficit has gotten larger and larger, without actually having a big increase in interest rates.

And this is pretty unusual. And many people think it's the reserve currency status that has allowed us to be, you know, sort of profligate, borrowing more than we should, living a little bit beyond our means, perhaps. Not taxing to pay for the things that the U.S. government wants to spend on. The concern is, obviously, over time, not my generation, but other generations at some point, will have to pay for this debt that's outstanding.And that could have a pretty detrimental impact on our own quality of life here in the United States eventually.

From this perspective the United States is a bit like a person with a very good credit score who has a lot of credit card debt at a very low interest rate. Some economists feel that it has worked well for many decades and will continue to do so. Others tend to think a debt is a debt, and that it will eventually hurt us to keep borrowing so much money. Amid this debate, there’s one country that comes up time and again, China. 

SIERRA: So, China owns more US debt than any other country, right? So, some people express a lot of alarm about this. What's the real story there?

FERGUSON: The real story is more complicated than, uh-

SIERRA: Shocking (laughter).

FERGUSON: I know. It's a stunning thought that the story's more complicated than the headlines. So, the reason that China has come to have so much of U.S. dollar-denominated securities, particularly treasury bonds and bills, is that their economy depends very much on exporting goods to the United States. And so, we are in what one might call a symbiotic relationship. Both sides sort of benefit from this relationship. The Chinese have been able to build up their economy, mainly through manufacturing, taking many hundreds of millions, if not billions, of Chinese out of abject poverty.

And the United States has been able to benefit, if one thinks of that, by getting, you know, relatively inexpensive, relatively high-quality goods made in China and paying for them with dollars that we can print as many as we want, and the Chinese are willing to hold them. The other concern, by the way, is a fear that at some point the Chinese, because we have, again, a complex relationship with them, may decide, well, we don't want to keep buying all these government securities, this debt that the United States is pumping out every year. And then, you know, there's some anxiety that that will affect the market for U.S. treasury securities. And, you know, effectively, the concern is that the Chinese can use their reserves in a way that can be quite adversarial to U.S. interests. But people ignore that; if they were gonna do that, the value of the debt that they themselves hold, the Chinese hold, would go down,  and so they would suffer some of the pain as well.

SIERRA: So when someone says China could call in our debt tomorrow and ruin us, that doesn't strike you as a particularly accurate way of looking at it?

FERGUSON: It's not a completely accurate way of looking at it because, you know, they are holding a debt for their own good (laughs) reasons. Which is it allows them to maintain this export-oriented manufacturing sector that has been so central to their financial success, and economic success over the last thirty or forty years.

Yes, we’ve grown dependent on China buying our treasuries, but China also depends on us to buy their goods. It’s not a situation that either country can pull out of without doing harm to itself. 

But things do change with time. For millennia, gold was the most reliable currency across the world. As empires came and went, so did their currencies. If you asked a British citizen about the pound in the 19th century, they might have thought that it would remain the world’s currency forever. 

SIERRA: When we look to the future of reserve currencies, do you think the dollar could ever lose ground on its status? 

FERGUSON: So, the answer is the dollar could certainly lose ground on its status, the way you phrase it. In fact, we have over time lost ground.

Notice that I said that now about 60 percent of foreign reserves are held in U.S. dollars. Well, back in the 40s and the 50s, that number was clearly much higher. So the answer is, yes, we already have lost some of our positioning as a reserve currency. And I would expect over time that that was likely to continue. 

The United States is slowly losing ground, but most economists think that its position is likely to continue for the foreseeable future. Still, that hasn’t stopped many from speculating about the potential for another currency to displace the U.S. dollar. And some of these theorists think that it won’t be another national currency at all, but rather cryptocurrency - digital assets like Bitcoin. 

Al Jazeera: 0:39 “It’s bitcoin season again; at the time of the year when the world’s most famous and least understood currency explodes in value seemingly for no reasons at all.”

CNN: 0:07 “The world’s richest man now investing 1.5 billion dollars worth of his company’s money in the cryptocurrency.”

Kitco News: 0:06 “A former Canadian prime minister Steven Hart recently said that he sees a potential for the crypto to become a reserve currency.”

MALLABY: Yes. Going back, there's been two kinds of money, really. There's been money created by national governments, but there's also been commodities, notably gold, a little bit silver. And through history, there have been periods when people have lost faith in governments issuing money, and they've bought gold as a protection against government-created currencies going wrong.

Bitcoin is sort of the new version of that. It's a non-government kind of currency. The argument of the Bitcoin enthusiasts is that it's not safe to keep your money in dollars because there might be inflation and you never know the dollar might be devalued by inflation. Therefore, you want some alternative asset that is absolutely going to retain its value. And they say, well, Bitcoin could be that asset because it's supply is algorithmically capped. You can't have more than a certain amount of Bitcoin, and therefore you can't print tons of it and destroy its value. Now, for various reasons, this Bitcoin proposition doesn't quite convince everybody, not least me. I'm trying to be tactful about this.

SIERRA: (laughs)

MALLABY: You know, if you're trying to argue that the dollar's value might be unstable and you're saying, well, Bitcoin is better. The fact that you've had these incredible bubbles and crashes in Bitcoin in the last five years is not encouraging to that thesis. And although the supply of Bitcoin is algorithmically capped, most algorithmic systems have been susceptible to hacking in the past. And I'm not sure that I trust some anonymously created code more than I trust the Federal Reserve Bank of the United States. 

Most of the enthusiasm for Bitcoin is people who just basically don't trust the government. But there could be another type of enthusiasm, which is people who don't like the U.S. dominance of the system. They're more about being anti-American than being anti-government.So, that sort of resentment of the dollar, which you see today in countries like Russia, which are the object of U.S. sanctions, and those sanctions are very much made more powerful by the dollar’s global status. You see pushes to create alternatives to the dollar from countries that don't like U.S. power, and indeed, the Chinese efforts to advance the renminbi as an international currency are very much linked to a sense that the United States just has too much power in the system because of the dollar status as the global reserves currency.

Which brings us to the other currency that some think could eventually eclipse the dollar: the Chinese Renminbi. 

MALLABY: In order to have a reserve currency, one thing you've got to provide is the ability for foreigners to easily buy bonds in your currency, and to feel confident that having bought those bonds, they can sell them and get a fair price for them. And they won't be subject to all kinds of restraints and controls. And China's capital markets simply are not free enough and open enough yet for that to be the case. It is moving in that direction in the last few years; China has gone quite a way to creating an impressive, corporate bond market, for example. And that's a step in the direction of having a credible claim on being a reserve currency, but there is quite a long road for China to go. 

FERGUSON: It is certainly true that the Chinese, I think, would like to see their currency, the renminbi, become a larger currency in terms of its holdings as a reserve currency around the world. I think that for them creates a sense of belonging in the international community, and frankly, a sense of prestige. After all, they are by many measures the second largest economy in the world. And so there is, I think, bragging rights as far as they're concerned.  I think, more importantly, the real question is whether or not, you know, trading partners, others believe that it's very important to maintain, you know, good relationships with China and whether or not they see that as being a question of maintaining relationships with China versus the United States, or China in addition to the United States. And so I think this whole issue of reserve currency status is a little bit in the eyes of the Chinese, a sign of prestige, and it's a sign of being respected as an important part of the global system.

From the standpoint of the United States, I think, we would very much like to understand how China wants to participate in the global economy. And I would observe that we want to make sure that they want to participate in a way that's respectful of the values of others, respectful, frankly, of democracy.

China certainly has the economic heft to challenge the United States on reserve currency status, but it may lack some of the other elements that lead to trust in a currency. One problem is that as an authoritarian nation, China doesn’t always play by the same rules as the Western world. China has been accused of dumping products, manipulating the value of its currency, and exerting strict controls over foreign investments. Taken together, these factors make investors worry that Beijing will prioritize its own goals over the safety of their investment.

SIERRA: So Do you think that the power of our reserve status comes with a sort of, you know, global responsibility? I guess what I'm trying to ask is whether it makes us a kind of caretaker for the global economy.

MALLABY: Yes, we are. The Federal Reserve proved after 2008 how important it was to stabilize not just the U.S. financial system, but other countries as well, because those other countries use dollars so much. It's important that the Federal Reserve be ready to provide emergency infusions of dollars when they're needed. And that's what the Fed did,  with its so-called swap lines in 2009. And that readiness is an aspect of sort of the U.S. continued guardianship of the global system.

FERGUSON: So, you know, there are people who think we have the obligation, because we have a reserve currency, to be a bit of a caretaker for the global economy. My view is the most important thing we can do for the global economy is to make sure that our economy is functioning smoothly, that we keep inflation under control, that we grow our potential,  that we maintain maximum employment. That is, I think, the ultimate obligation that we have here in the United States, and then everything else will, I think,  fall into place over time.

SIERRA: So last question, and it's a little bit of a toughie, but as a normal person, just going about minding my own business and trying to make it in the world today, how does the dollar as a reserve affect my life?

MALLABY: For a regular U.S. citizen, the U.S. dollar status as a reserve currency  means one thing for you, which is the dollars that you earn are more valuable in the world, and you can buy more foreign staff and go on more foreign vacations.

And secondly, it means that your country is more secure and more powerful because that dollar status means that in a crunch, the United States can borrow the money it needs. It means that in a geopolitical standoff, the United States can impose sanctions on other countries and they will have more force. And just the sheer importance of the dollar in the global system gives the United States diplomatic clout that is of valuable asset for the nation.


For resources used in this episode and more information, visit and take a look at the show notes.

Have a question or some feedback? Just feel like saying hey? Send us an email at [email protected]

Subscribe to the show on Apple Podcasts, Spotify, Stitcher, or wherever you get your audio. And, please please, if you are a fan of the show, show us some love! Give us five stars and leave a review on Apple Podcasts. It means so much to us, and it really does help us to get noticed.

Why It Matters is a production of the Council on Foreign Relations. The show is created and produced by Jeremy Sherlick, Asher Ross, and me, Gabrielle Sierra. Our sound designer is Markus Zakaria. 

Robert McMahon is our Managing Editor, and Doug Halsey is our Chief Digital Officer. Our intern for this semester is Zoe Han. 

Original music is composed by Ceiri Torjussen. Additional research and extra help were provided by Elena Tchainikova and James McBride. Special thanks go to Richard Haass and Jeff Reinke. 

For Why It Matters this is Gabrielle Sierra signing off. See you soon!

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