In this week’s episode of Power and Consequences, we (Gary Gensler and Simon Johnson) talk about the past, present, and potential future of what is known as the “global dollar system.” U.S. dollar denominated assets are widely held around the world by governments and by private investors. This global preference for dollars confers major advantages on the U.S., as well as some downsides. Will it last?
This global system sometimes seems so stable and so much part of our modern world that is easy to imagine it as immutable. But if we look back 100 years, the world’s monetary and financial system was quite different - the dollar played a role in international transactions but not with the same importance as today. And if we examine carefully how the world’s financial system worked during the heyday of the Bretton Woods system, from the 1940s to the early 1970s, the dollar was regarded as an anchor but not like today.
It therefore seems reasonable to suppose that the global system will continue to evolve. Looking forward, will the dollar become more important, because the world is seen as unstable and investors (and central banks) value a “safe asset”. Or will the dollar soon be eclipsed, for example because the U.S. proves unable to get its fiscal house in order? And if the dollar does fall from grace, what asset or assets are likely to take its place?
If you would like to read further on this topic, you could start with this 2023 speech by Gary Gensler, “Exorbitant Privilege: Responsibilities and Challenges,” which emphasizes the role of investor protection in maintaining the global role of the dollar.
Also see these three essays from the CEPR Report, The Economic Consequences of the Second Trump Administration:
“The Financial Sector and Global Dollar System,” by Gary Gensler, Lev Menand, and Joshua Younger.
“Dollar Dominance and the Trump Administration,” by Steven Kamin.
“The Global Public Good,” by Barry Eichengreen.
If you’d like more historical background on the remarkable rise, fall, and rise again of the U.S. dollar, see “The End of Gold,” Chapter 2 in White House Burning: The Founding Fathers, Our National Debt, and Why it Matters to You, by Simon Johnson and James Kwak.
