Past and Present: Preserving Dollar Dominance and the Reserve Currency Status

Abstract

This study examines the influence of political events on the development of economic power pertaining to international currency usage and reserve currency usage. It considers the conceptual framework underpinning predominant empirical models for quantifying international currency usage and reserve currency usage. We point to literature on historical international currencies that indicate large shifts in international currency usage and reserve usage historically occurred due to broad shifts in economic and geopolitical dominance. Marginal shifts can also occur in connection with various empirical factors which are covered extensively by literature, but we discuss literature on the initial formation of U.S. hegemony that indicates shifts on the margin are also impacted by qualitative political and geopolitical factors. We examine some of these factors and gather them into a framework we term doctrinal enforcement. We argue that the existing empirical models considered successfully incorporate empirical factors to quantify economic dominance, but they fail to fully quantify doctrinal enforcement, which includes additional qualitative factors that do not lend themselves readily to quantification. Using doctrinal enforcement as a general framework, however, could aid in identifying the impacts of specific modern policy decisions in terms of whether they positively or negatively affect dollar dominance and the doctrinal enforcement abilities of the United States.