First Principles May 2007

When the Buck Stops

The age of the dollar has been great for America—but it may end soon.

On a trip to Guangzhou, China, in the early 1990s, I couldn’t help but notice that the accessory of the moment for stylish young men was a cell-phone holster. In those days, a typical holster only sometimes contained an actual cell phone—but it almost always contained a dollar bill, tucked behind the plastic window, folded carefully so that George Washington could gaze out on capitalism with Chinese characteristics.

U.S. greenbacks may not be fashion statements in many places (I doubt they’re hip in Guangzhou any longer), but almost wherever you travel, people are glad to accept foreign cash so long as it bears the graven image of an American president.

The dollar’s status as the global currency confers more advantages on the United States and its citizens than you might think—advantages far beyond convenience for international travelers (though let us not underestimate that). The dollar’s popularity has moved real resources from the rest of the world to the United States. And on a much larger scale, through an economic sleight of hand in global financial markets, it has allowed the country to sustain an otherwise impossible standard of living. These wonderful tricks, unfortunately, may not work much longer. When they start to fail, as they eventually must, the dollar’s peculiar global role will suddenly become a focus of attention. You don’t know what you’ve got till it’s gone.

There is a difference—known as seigniorage—between what dollar bills cost to manufacture (pennies) and what those same dollar bills can buy once they’re in circulation. The government does not distribute dollars by dropping them from helicopters; in effect, it spends them on things such as hours worked or goods procured. Merely by printing a dollar bill, the government grants itself a claim on a dollar’s worth of real things.

Essentially, the Chinese youth sporting a dollar bill on his belt has surrendered in exchange—possibly through a long chain of intermediaries—a dollar’s worth of real stuff to the United States. The more people there are around the world who are willing to hold the currency that America prints, and the greater the quantity of dollars they wish to keep, the larger this transfer of real wealth will be. So it matters to the United States that your cab driver in São Paulo is pleased to accept dollars, or that your cocaine connection in Medellín actually prefers greenbacks to pesos. When those deals go down, we all get a piece of the action.

Altogether some $750 billion in paper money and coins is in circulation today, and most of that is reckoned to be held abroad. As they say where I come from, that’s a nice little earner. Alas, the connection to crime is apparent: Even nowadays, crime is a cash business, comparatively speaking, and a portable, reliable, and above all anonymous store of value has great utility if you are up to no good. No one knows for sure, but I’d guess most of the $100 notes in circulation (the largest denomination currently issued) are oiling the wheels of criminal enterprise. The European Union clearly wants a share of the international seigniorage business for its currency, and it has issued 500-euro notes (worth around $660 each) to secure its competitive advantage in the sector. One wonders—the European Central Bank hasn’t said—what legal transactions require notes of that denomination. Even in Frankfurt, cab fare rarely runs that high.

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