Currency Crisis

The dollar's unique status as the world's main reserve currency has been of enormous value to the United States. The dollar is the currency used in setting prices in international commodity markets and the one most commonly held in foreign exchange reserves by other nations and by large companies and institutions. Historically, it has represented not just an acknowledgment of massive U.S. economic power but an implicit faith in the strength of the U.S. economy and the competence of the U.S. government. This faith has allowed the U.S. government to inexpensively finance its debt through the sale of trillions of dollars of Treasury bills and other securities.

This faith in the United States is now on the wane, and the consequences could be severe. Leaders of China, India, Russia and Brazil want to use an index reflecting several nations' currencies as the default reserve currency.

To be sure, there is an element of deja vu in this debate. During past economic downturns, attacks on the dollar were common. In the early, more optimistic years of the European Union, many European leaders said it was time the euro moved to the fore.

Nevertheless, the argument that is used most to dismiss the current criticism of the dollar isn't exactly heartening. It holds that other nations hold such vast sums of dollars that ultimately they would never do anything to lessen the value of their holdings.

That's not very reassuring — and it ignores what happened to the dollar's predecessor as the world's dominant currency.

As economist Nouriel Roubini notes, "The British Empire declined — and the pound lost its status as the main global reserve currency - when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time."

In 1949 and thereafter, there was a bitter U.S. political debate over "who lost China," centered on which party bore the blame for the victory of communists in China's civil war. In coming years, we may see a similar debate over who lost the dollar, who doomed its pre-eminent global status.

The more that President Barack Obama blithely urges Congress to add trillions of dollars to our national debt, the more likely it is that he will be the single individual most blamed.

But the sad truth is that the dollar's demise is only one of many nightmares that await if the U.S. government goes on the immense borrowing binge its leaders are now contemplating. Nothing in history — nothing — suggests such a binge will end well.

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