Replacing the Dollar: Counter Argument



Replacing the Dollar: Counter Argument

Currently, oil prices are hitting over $105 a barrel. Additionally, food prices are also reaching new highs. It, therefore, follows that countries would traditionally resort to the Federal Reserve in order to hedge against risks to investments. The waning position of the dollar as a pivotal currency to international trade has made investors drain their dollar reserves by an upwards of $36 billion in 2010. Similarly, silver, gold, and platinum have also experienced surging demands to hedge against inflation (Zhou 35). This represents both a pragmatic decision on the part of the trading nations and a political decision against the US’s dominant, “imperialistic” economic and political power in the world. This growing trend has been triggered by multiple economic, political and pragmatic concerns by trading nations.

This will not end soon since there is frequent economic instability. For example, the recent global economic crisis and subsequent recession that emanated from the US have threatened multiple economies across the world. This emanated from the reckless monetary and fiscal policies by the US government. The policies have effectively destabilized the value of the dollar to the disadvantage of nations with dollar reserves (Bakker & Herpt 291). The movements away from the dollar-based international trade have gained momentum with the emerging economies such as those of Russia and France among other leading economies. This questions the relevancy and legitimacy of Bretton Wood’s institutions in the modern economic and political environment. These are valid concerns and it is absolutely critical that structural and institutional reforms are carried out so that other countries do not have to foot the bill to extend America’s military and political muscle.


The countries designing new exchange order envisage breaking America’s military, political and economic domination by stripping it of the critical sources of financing. This is its enormous defense spending. It is both possible and reasonable to expect this especially with the adoption of special drawing rights (SDRs). It is also possible with the adoption of Euro, Yuan or other regional currencies. These possibilities do, however; overlook the practical and theoretical difficulties involved in possibly removing or replacing a reserve currency (Chinn & Frankel 74). The proposed move away from the dollar as the sole reserve currency has been motivated by a number of important concerns, both real and perceived.

While there have been considerable economic dissatisfactions with the dollar’s performance, intricate political factors are solely responsible for having accelerated the efforts by different nations to seek out an alternative reserve currency to the dollar. This movement towards a supranational currency or number of important currencies has important technical, economic and political implications both for the United States as well as other nations across the world, Fletcher, Alexander & Grillo (PAR 3). In addition, the US government uses the finances to project is political power and influence abroad. These military campaigns have had the effect of hurting the other regional powerhouses who perceive the US activities as aggression and imperialistic.

The US has come up against similar challenges and easily subdued them and remains a powerful player in the global economy, with a stable and powerful economy (Chinn & Franke 103). These are factors necessary for a reserve currency that cannot be easily be replicated by the nations looking to remove the dollar. In addition, while the US’s military deficits etc are inexcusable, it is equally important to notice that the global economy is dependent on the US economy for growth and development. The country exports crucial capital inputs to varied economies and its appetite for imports keeps exports dependent nations such as China growing and it is this important position in world trade that will keep the dollar relevant and important.

Much of the heated debate has been sparked by the rising dollar reserves by Asian nations in recent decades. This was in part due to the rising money/dollar supply by the issuer nation, but also because of the policies by most nations to peg their respective currencies against the dollar, which makes the countries’ foreign currency reserves completely endogenous, adjusting extremely passively to the alterations in both the supply and demand, as well as the changes in the payments balance.

Large scale currency diversifications result in varying targets between the exchange rate and level of foreign reserves, effectively imposing pressure on the domestic rates of exchange to rise. A rise in the rate of exchange would against the pegging policies and thus any assertions that the dollar can be abandoned as contemplated by the adoption of the Sucre etc are multiply overemphasized, not least because these nations already hold billions of dollars in reserves which cannot be abandoned easily.

However, this argument amounts to providing a wrong solution that may indeed work but really fails to address the right problem (Hudson). To begin with, the increasing demand of the global for American products as well as the increasing volume of foreign direct investments in the US is driven by real economic considerations as against mere structural and institutional factors (MacDonald & Al Faris 322). The rates of interest in the United States remain attractive to the investors who are free to take their investments elsewhere but still choose the United States.

In addition, the global demand for American made goods, which comprise important inputs for other economies’ industrial activities. In addition, the United States’ spending on other nations exports notably China, which is heavily reliant on the American consumers to keep up its massive growth rates among other factors, are what exactly lead to increase dollar supplies in foreign nations and in turn, force foreign countries to take their investments to the USA as against the alleged mechanical system.

The proposed formation of the special currency with the UN’s backing (Fletcher, Alexander & Grillo PAR 5) envisages the adoption of the SDRs proposed by the World Bank, which will effectively overhaul the Bretton Woods system, remove the US unfair advantage in international trade. The adoption of SDRs represents a practical way forward that will readily replace the dollar assets allowing global citizens to reap real returns from trade and economic liberalization. However, it is significant to note that SDRs or the idea of supranational currencies is hardly new in the world monetary systems, but the proposed system as indeed previous systems will barely dispense the dollar’s usage. Arguments about moving away from the dollar reserve are hardly new and it was in fact anticipated that the SDRs birth has resulted in the collapse of the dollar but it did not.

With floating exchange rate regimes, it is unnecessary for countries to have foreign exchange reserves and indeed no real need for a reserve currency, but the enormous risks presented by the high fluctuations in the Forex markets necessitate stockpiling of Forex in order to ensure intervention in the market and naturally, countries will always be drawn toward stable, liquid currencies of which the dollar fits the bill (Bakker & Herpt 163). As such China’s efforts to strike deals with its key trading partners to adopt the Yuan in the trade as well as a number of Latin American countries’ establishment of the Sucre (PAR 6) as well as Russia’s decision to commence Rubble denominated trade will not completely dispense with the dollar. In addition, while the adoption of the SDRs with all its technical difficulties is plausible, the adoption of regional currencies let alone the adoption of the Yuan will inevitably lead to failure (Weir PAR 3). The failure of the Euro is instructive here, while the adoption of China’s currency will only experience similar dollar associated difficulties if not worse.

These institutions which were formed in the wake of the Second World War were heavily tilted towards the victors of the war, Notably the US. The leadership of the World Bank, the WTO as well as the IMF is heavily influenced by the US and its close allies, which in turn has a bearing on the policies and decisions of the institutions that have a large impact on global trade and the economies. The IMF’s critical responsibility is to harmonize the global monetary policies to ensure growth and stability, a responsibility that has frequently been abused in forcing developing nations to pursue disastrous economic liberalization and other policies that have rightly or wrongly perceived as beneficial to the West/US.

Thus Fletcher, Alexander & Grillo PAR 10)’s argument that these institutions are mere surrogates of the US has a real or perceived foundation. Whether it is true that these institutions do America’s bidding or not is immaterial, the resentment across the world inspired by this perception is enough to drive efforts in finding an alternative currency and limiting the US’ domination in the global economy.

Hudson (2011) contribution asserts that a new monetary system will help in averting the need to finance the US’s military deficits, a view backed by Fletcher, Alexander & Grillo (2011) who argue that the US’s military campaigns across the globe represent an imperialistic attempt to project the US political and economic influence across the world, especially after failures in its economic muscle. In addition, Hedges (2009) assert that the intention of the China, Russia, and French, etc driven efforts is to break the US military domination by taking away a major structural advantage that allows it to run up massive deficits in financing the war. These arguments are particularly convincing in multiple respects. The US’s deficits on the current account stood at -7.3 in 2009 which represents a growing trend in the deficits.

The position of the US dollar as a global trade currency allows it to run up massive deficits and then increase its money supply without having to worry about the inflationary consequences on its or the global economy. Increasing the global dollar supply, the value of the local currencies will rise relative to the dollar and in order to avoid this, central banks must release more domestic currency by purchasing American dollars out of their economies.

This has twofold consequences (a) It  forces foreign nations to increase their demand of the US domestic assets in order to get rid of their dollar build up and (b) maintaining low exchange rates render exports relatively cheaper in the US, fueling the country’s insatiable appetite for imports (Hudson) This is what allows the US to effortlessly finance wars etc at the of other nations, and perhaps most importantly, permits it to extend its influence across the world, in a way that other players in the world, notably Russia, China, and France, etc are unable to (Chinn & Frankel 164).

The dollar’s position as a reserve currency has presented multiple difficulties accruing from the monetary policy mismanagement in the US. The excess of the US military pursuits in the alleged promotion of democracy, which is effectively being paid for by the rest of the world necessitates action (Zhou 86). However, these alternatives do gravely underestimate the technical and practical difficulties facing possible changes in the reserve currency. The institutional and structural changes necessary for the successful adoption of a reserve currency different from the dollar are enormous and perhaps critically, do not offer any solutions different from the ones already presented by the dollar.

As such, it would be more fruitful to concentrate on correcting the shortcomings presented by the reliance on the dollar rather than moving away from it. The US enormous military budget which is largely financed by the Federal Reserve merely increasing the global supply of dollars ends up passing the bill to the rest of the world.  Increased dollar supplies force foreign nations to increase their demand for American made goods in order to protect massive inflation.

Reforms in the global monetary system are necessary and it is a game open to all players in international trade and finance. The latter half of the last century saw multiple monetary conferences that culminated in the Bretton Woods conference that gave rise to the current monetary system, which was an efficient and adaptable system. It is, however, impossible to ignore the critical role played by politics in both economics as general as well as in the monetary systems applicable. The Bretton Woods institution were themselves political creations by the War victors, notably the US.

The US did as well abandoning the gold-backed dollar in order to finance the country’s cash problems (Bakker & Herpt 163). The country’s reliance on the privileged position of the dollar to finance wars across the world, allegedly to promote democratic governance has spurred movements to rid the world of the dollar as a reserve currency. It is these political forces that are difficult to counter since it is impossible to serve each individual nation’s unique geopolitical interests.

It is largely argued that since global finance has multiple characteristic network externalities, which gives room to a consequential global currency. It is beneficial to trading countries to use the same currencies in the trade as against utilizing national currencies. This limits the possibility of reducing customer confusion in price quotations and incredibly reduces the risks involved in foreign currency transactions for both exporters and importers. Having reserves in one liquid currency is equally beneficial to the central banks across the world. Dollar assets are liquid and given the difficult technical and practical difficulties with the proposed new reserve currencies, the dollar will for the near future, remain important in global trade.

This according to Weir is what has driven Russia’s determination against the dollar in order to protect its own geopolitical objectives (Fletcher, Alexander & Grillo PAR 10). This can never be overemphasized given the Revolution in Georgia and Ukraine that were backed, and perhaps financed by the US geared at undermining Russia traditional influence in the region. This perceived aggression by the United States on Russia’s “Near Abroad” forced Russia to pursue different foreign policy objectives and forge alliances with unlikely partners on a wide range of matters from reserve currencies to decisions on the UN Security Council, just to limit the US’s influence. This proves Weir’s point that the efforts to remove the dollar as a reserve currency are not entirely economical, but most importantly has political motivations.

Fletcher, Alexander & Grillo (2011) do, however, point out a  particularly critical point that illustrates the dire need for an alternative reserve currency i.e. America’s irresponsible monetary policies that unfairly eat into other nation’s central bank savings just to finance its reckless deficits. Economic liberalization policies imposed on developing nations have forced them to privatize their industries and major economic assets, which are almost always sold to foreigners.

However, the dollar returns accruing from such sales are hemorrhaged to the Federal Reserve in a desperate attempt by these nations to stabilize exchange rates and protect their economies from adverse effects as a result of US increasing dollar supplies that are not backed by gold reserves (Chinn & Frankel 164). This is what is behind the rise in the demand for gold. It also includes the efforts that have led to the establishment of the regional reserve currency. This is coupled with tentative efforts by China to exclusively denominate its trade activities in its domestic currency and given the massive and growing size of the country, this represents a significant development.

Fletcher, Alexander & Grillo (2011) correctly anticipate adverse consequences to the US’s economic and political influence in the world. Given its massive deficits, the country will no longer prey on other central banks’ savings and instead, government borrowing will increase. This will as well be coupled with increased privatization of infrastructure and state corporations as well a rising costs of living as a result of governments imposing charges on services and facilities that were initially subsidized or provided by the government without charge.

Property prices will plummet, not least because of the decline in foreign direct investments as well as the global demand for other American products. In addition, the reduced domestic money supply will lead to the tightening of lending regimes due to high-interest rates, which will come with other inevitable consequences of foreclosures, reduced growth, and increasing poverty. Perhaps the most devastating of all effects will be on the United States political, economic and cultural influence in the world, which will effectively be counterbalanced by other important players in the international community.


It is critical that structural and institutional reforms are carried out so that other countries do not have to foot the bill to extend America’s military and political muscle. The changing and complex geopolitical, national and international economic and political difficulties present a challenge to the stability of the proposed regional or global currencies. It is not unheard of, for nations to pull out of political and economic Unions, countries have been known to withdraw memberships or expelled from the IMF, World Bank, UN as well as regional economic blocs (Bennett 231). The alliances between Russia and China for instance, while formidable are transient and motivated by the international and territorial politics of the day, these do change.

This is perhaps best evidenced in Fred Weir’s contribution regarding Moscow’s changing attitude towards the US after Obama’s changes in the US’s foreign policy priorities. The inherent risk of the break-down of the alliances that are inspiring the movement away from the dollar will lead to the break of the proposed currencies and resort back to the dollar, which will most likely remain stable.


Works Cited

Bakker, Age & Herpt, Ingmar. Central Bank Reserve Management: New Trends, From Liquidity

To Return.  London: Edward Elgar Publishing, 2007.

Bennett, T. McCallum, “China, the U.S. Dollar, and Presentation at the Shadow Open Market

Committee, 2009, held at the Cato Institute, Washington, D. C.

Chinn, Menzie and Frankel, Jeffrey. Will the Euro Eventually Surpass the Dollar as the Leading

International Currency? Princeton University: New York, 2005 NBER Working    Paper no.11510 (August).

Craine, Roger and Vance, Martin. Interest Rate Conundrum,î B.E. Journal of Macroeconomics 9,

2009, pp.1-27.

Fletcher, Nicole, Alexander, Krystal & Grillo, Bridgette. Global Plans to Replace the Dollar.

Retrieved on 25th April 2010. Retrieved from <<>>

Hudson, Michael. “De-Dollarization: Dismantling America’s Financial-Military Empire: The

Yekaterinburg Turning Point,” Global Research, June 13, 2009, <<>>

MacDonald, Ronald & Al Faris, Abdulrazak. Currency Union and Exchange Rate Issues:

Lessons for the Gulf States. London:  Elgar Publishing, 2010

Weir, Fred. “Iran and Russia Nip at US Global Dominance” Christian Science Monitor, June 16,

2009, <<>>

Zhou, Xiaochuan, “Reform the International Monetary People’s Bank of China, March 3, 2009.

Available at <<>>




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