France, Germany, China, and Russia are actively promoting the replacement of the U.S. dollar with an International Monetary Fund basket of currencies -- known as the Special Drawing Rights (SDRs) -- as the global reserve currency. The United States is resisting. Both sides have their arguments backward.
The SDR should indeed replace the dollar as the dominant reserve currency if we want to eliminate the tremendous global trade and capital imbalances that have characterized the world for much of the past 100 years. This will not happen, however, until the United States forces the issue -- which it seems unwilling to do, perhaps for fear that it would signal a relative decline in the power of the U.S. economy.
But the United States should, in fact, support doing away with the dollar. For all the excited talk of politicians, journalists, and generals, a world without the dollar would mean faster growth and less debt for the United States, though at the expense of slower growth for parts of the rest of the world, especially Asia.
A French economist once told me that too often when policymakers think they are talking about economics they are actually talking about politics. A case in point, perhaps, is the claim first made in 1965 by Valéry Giscard d'Estaing, then France's finance minister, that the dollar's dominance as the global reserve currency gave the United States an "exorbitant privilege."
Giscard may have thought he was discussing economic privilege, but while during the Cold War there may well have been political advantages to the use of the dollar as the dominant reserve currency, economically it held little benefits to the United States. If anything, it forced upon the United States an exorbitant cost.
According to most political commentators, there are two main privileges accruing to the United States as a function of the dollar's reserve status. First, it allows the United States to consume and borrow beyond its means as foreigners acquire U.S. dollars. Second, because foreign governments must buy U.S. government bonds to hold as reserves, this additional source of demand for Treasury bonds lowers U.S. interest rates.
Both claims are muddled. Take the first. It may be correct to say that the role of the dollar allows Americans to consume beyond their means, but it is just as correct, and probably more so, to say that foreign accumulations of dollars force Americans to consume beyond their means.