WEBVTT - Why Is American Money Used Around the World?

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<v Speaker 1>Welcome to brain Stuff production of iHeart Radio. Hey brain Stuff,

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<v Speaker 1>Lauren Vogel Bomb here. When economic times are uncertain, people

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<v Speaker 1>want to put their money in something solid. That helps

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<v Speaker 1>explain why of all one dollar bills in circulation are

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<v Speaker 1>now held outside of the United States. That's up from

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<v Speaker 1>only thirty percent back in The steep rise in the

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<v Speaker 1>number of one hundred dollar bills held overseas close to

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<v Speaker 1>two c notes for every person on the planet is

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<v Speaker 1>a signal that people around the world recognize the US

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<v Speaker 1>dollar as the de facto global currency. They have confidence

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<v Speaker 1>that if their local currency goes belly up, the dollar

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<v Speaker 1>will hold steady. And it's not only individuals who are

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<v Speaker 1>saving American currency for a rainy day, it's foreign governments

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<v Speaker 1>to the governments don't stockpile physical dollars in their central banks,

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<v Speaker 1>but they do buy up loads of U S Treasury

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<v Speaker 1>bonds and T bills, which are valued in dollars. As

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<v Speaker 1>of January twenty, Japan and China each owned more than

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<v Speaker 1>one trillion dollars in US Treasury securities, followed by the

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<v Speaker 1>United Kingdom with three d and seventy two billion dollars

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<v Speaker 1>and Brazil with two hundred and eighty three billion. According

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<v Speaker 1>to the International Monetary Fund, more than sixty of the

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<v Speaker 1>world's cash reserves are held in dollars. The Bureau is

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<v Speaker 1>in far second place. At when even an economic powerhouse

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<v Speaker 1>like China holds a trillion U S. Dollars in reserve,

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<v Speaker 1>that's a good sign that the dollar is still considered

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<v Speaker 1>the mightiest of the global currencies. But the dollar wasn't

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<v Speaker 1>always the world's de facto currency. So what changed? Before

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<v Speaker 1>World War Two? All global currencies were backed by gold,

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<v Speaker 1>and each government guaranteed that its money was good for

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<v Speaker 1>a certain amount of gold. Then came the Breton Woods

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<v Speaker 1>Agreement of ninety four, which created the World Bank and

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<v Speaker 1>the International Monetary Fund, and also established the U. S.

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<v Speaker 1>Dollar as the new gold Because the US held most

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<v Speaker 1>of the world's gold supply, the dollar continued to dominate

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<v Speaker 1>during the post World War two boom years. But we

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<v Speaker 1>spoke with Jonathan David Kirshner, a professor of political science

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<v Speaker 1>and international studies at Boston College who co edited a

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<v Speaker 1>book called The Future of the Dollar. He explained that

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<v Speaker 1>the rise of the dollar order was built on four pillars.

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<v Speaker 1>The robustness of the U. S. Economy, the widespread belief

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<v Speaker 1>in the American model of finance, the wealth of US

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<v Speaker 1>financial institutions, and America's leading role in international affairs. Kirshner

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<v Speaker 1>said most of the world's monetary relations were orchestrated between

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<v Speaker 1>the US and its political allies and military dependencies, it

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<v Speaker 1>was natural to be conducted in dollars. The Breton Woods

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<v Speaker 1>fixed exchange rate scheme collapsed in the nineteen seventies when

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<v Speaker 1>Richard Nixon took the dollar off the gold standard during

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<v Speaker 1>a period of domestic inflation, and many industrialized economies chose

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<v Speaker 1>to float their currencies on the open market. It At

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<v Speaker 1>that time, some economists began to predict the downfall of

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<v Speaker 1>the dollar, not that it would lose value, but that

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<v Speaker 1>it would lose its dominance as the world's de facto currency.

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<v Speaker 1>Over the decades, most of those pillars that made the

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<v Speaker 1>dollar king of the postwar economy have been toppled. Recessions,

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<v Speaker 1>stock market bubbles, and the global financial crisis have revealed

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<v Speaker 1>cracks in the American financial model, and the US has

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<v Speaker 1>lost some of its political dominance, with many governments and

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<v Speaker 1>corporations choosing to do business with China or Europe instead.

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<v Speaker 1>Yet the numbers show that the dollar is still the

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<v Speaker 1>currency that nations and individuals turned to as a safe

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<v Speaker 1>harbor in economic storms. The Kirshner said, the ultimate reason

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<v Speaker 1>is a simple one, the lack of a plausible alternative.

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<v Speaker 1>If not the dollar, then what. There have been periodic

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<v Speaker 1>calls to shift more reserve holdings to the Euro, the

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<v Speaker 1>Chinese R and B, or even back to gold, but

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<v Speaker 1>the dollars still reigns supreme. When countries shop for a

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<v Speaker 1>reserve currency that stay bill secure and liquid, that is

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<v Speaker 1>easy to convert back to local money, the dollar is

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<v Speaker 1>still the default. In fact, some countries such as Panama

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<v Speaker 1>and El Salvador use the US dollar as their own

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<v Speaker 1>legal tender. The US government doesn't have to give approval

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<v Speaker 1>for another country to use the dollar as its official currency.

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<v Speaker 1>So what about a one world currency. I'm not going

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<v Speaker 1>to happen, Kirschner says. The first reason is political. There's

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<v Speaker 1>simply no political will to have one world government or

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<v Speaker 1>one world currency. The second reason we won't see an

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<v Speaker 1>Earth dollar anytime soon, or the whole world using the

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<v Speaker 1>US dollar for their official currency for that matter, has

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<v Speaker 1>to do with an economic theory called optimal currency area

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<v Speaker 1>that states that a single currency only operates effectively over

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<v Speaker 1>a relatively small geographic area of the size of a country,

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<v Speaker 1>for example, not a continent or the world. That's because

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<v Speaker 1>different regions might be experiencing very different economic conditions at

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<v Speaker 1>the same time. One country might be in recession while

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<v Speaker 1>another there is booming. Kirshner said, if you only have

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<v Speaker 1>one money in the whole world, then you only have

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<v Speaker 1>one monetary authority, which means you only have one monetary policy.

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<v Speaker 1>In reality, different regions or countries would need monetary policies

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<v Speaker 1>more tailored to their individual needs. That's one of the

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<v Speaker 1>reasons why the Euro hasn't supplanted the dollar as the

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<v Speaker 1>de facto global currency. The European Union itself is not

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<v Speaker 1>an optimal currency area. It's too spread out, which means

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<v Speaker 1>that EU authorities have to enact monetary policies that somehow

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<v Speaker 1>serve economies in very different financial conditions, like Germany and Greece.

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<v Speaker 1>Today's episode was written by Dave Ruse and produced by

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<v Speaker 1>Tyler Clang. For more on this and lots of other

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<v Speaker 1>viable topics, visit House to Works dot com. Brain Stuff

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<v Speaker 1>is a production of iHeart Radio. For more podcasts for

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