No One Wants to be the Reserve Currency
For decades, economists and policymakers have framed the dollar’s global dominance as America’s “exorbitant privilege” — a crown jewel of American power that grants the United States unparalleled economic advantages on the world stage. We’re told that other nations jealously eye this position, plotting to dethrone the dollar and seize its privileged status for themselves.
Yet reality tells a different story. The truth is far more counterintuitive and nuanced: while parts of the United States economy — particularly financial institutions and capital markets — benefit enormously from reserve currency status, these gains are highly concentrated while the costs are distributed broadly across the nation. This structural imbalance makes the reserve currency role inherently unsustainable over time, regardless of who holds it. What appears as privilege reveals itself, upon closer inspection, to be a gilded cage — offering advantages that come with crippling structural costs.
The Hidden Burden of Reserve Status
The fundamental problem of reserve currency status is captured in what economists call the Triffin Dilemma, named after Belgian economist Robert Triffin who identified it in the 1960s. At its core, the dilemma presents an irreconcilable conflict: to supply the world with sufficient dollars for international trade and reserves, the United States must run persistent trade deficits, essentially exporting dollars in exchange for goods.
These deficits, while necessary for global monetary stability, progressively undermine domestic manufacturing, job markets, and the very economic foundation that made the dollar attractive in the first place. The reserve issuer becomes trapped in a contradiction between domestic and international priorities that cannot be permanently resolved — only managed at increasing cost.
The most visible consequence has been the dramatic hollowing out of American manufacturing. Since the dollar’s rise to unchallenged reserve status following the collapse of Bretton Woods in 1971, the U.S. has experienced a profound industrial transformation. Manufacturing as a percentage of GDP has declined from approximately 25% in the 1960s to below 12% today. Entire regions once dedicated to production have hollowed out, creating the infamous “Rust Belt” and the profound social dislocations that accompanied this shift.
What’s less recognized is how this transformation represents not a policy failure but the inevitable structural consequence of the dollar’s global role. When a nation’s currency serves as the world’s primary reserve asset, that nation must, by mathematical necessity, consume more than it produces and import more than it exports. The result is a slow-motion deindustrialization disguised as consumer prosperity.
The Export Powers’ Calculation
From the outside, it’s often assumed that export powerhouses like Germany, Japan, and China would eagerly seize reserve currency status if given the opportunity. Their economic strategies have centered around export-driven growth, accumulating massive trade surpluses and foreign exchange reserves. Surely they would want their currencies to occupy the dollar’s privileged position?
Yet these nations have consistently demonstrated a curious reluctance to promote their currencies as true alternatives to the dollar. Even when China speaks of internationalizing the yuan, its actual policies remain cautious and limited in scope.
This reluctance isn’t accidental — it reflects a clear-eyed understanding of the costs involved. For export-oriented economies, reserve currency status would be economically devastating. The increased demand for their currency would drive its value higher, making exports more expensive and imports cheaper. The resulting trade deficits would undermine the very export-driven model that fueled their economic development.
Japan’s experience in the 1980s offers a cautionary tale. As the yen began to internationalize and appreciate, Japanese policymakers recoiled from the implications for their export sector. The Plaza Accord of 1985, which led to the yen’s sharp appreciation, contributed to the end of Japan’s economic miracle and the beginning of its “lost decades.” China, observing this history closely, has been understandably reluctant to follow the same path.
For these nations, the current arrangement offers a far better deal: they can maintain undervalued currencies to boost exports while investing their dollar surpluses back into U.S. Treasuries, effectively lending Americans the money to buy their products. This recycling of dollars allows them to maintain export advantages while financing the U.S. consumption that drives their growth.
Meanwhile, they’re spared the burdens of providing global liquidity, managing international financial crises, or navigating the contradiction between domestic needs and international responsibilities. They get the benefits of the dollar system without its costs.
America’s Growing Reluctance
Perhaps the most telling evidence that reserve currency status isn’t the prize it’s portrayed to be comes from America itself. Increasingly, U.S. policymakers across the political spectrum question whether the “exorbitant privilege” is worth its domestic costs.
The Trump administration has made this shift explicit. Trump’s tariff policies, renewed with even greater force in his second term, directly challenge the arrangements that have sustained dollar hegemony. By imposing broad tariffs — 10% on all imports with higher rates for specific countries — the administration is effectively saying that America is no longer willing to sacrifice its industrial base on the altar of reserve currency status.
When Trump declared that “tariff is the most beautiful word in the dictionary,” he was signaling a profound shift in American priorities. The aim is clear: reduce trade deficits, even at the cost of disrupting the mechanisms that maintain dollar dominance.
This isn’t merely a Trumpian aberration. Trade skepticism has become increasingly bipartisan, with prominent voices across the political spectrum questioning free trade orthodoxy and its impact on American workers. The decades-long consensus that maintaining dollar hegemony justified domestic deindustrialization is crumbling from both right and left.
The Asymmetric Benefits
To understand why the current system persists despite no one wanting to occupy the central role, we must recognize the asymmetric benefits it creates for different participants.
For emerging economies, the dollar system offers a proven development pathway. By maintaining undervalued currencies and focusing on exports, nations from South Korea to Vietnam have bootstrapped their industrial development. Manufacturing jobs create the foundation for a growing middle class, while technology transfer accelerates modernization. These nations happily accept dollar dominance as the price of admission to this development model.
For financial centers like Switzerland, Singapore, and the United Kingdom, the dollar system creates lucrative opportunities without the full burden of reserve status. They can participate in global dollar markets, provide financial services to dollar flows, and capture significant value without suffering the manufacturing decline that comes with being the primary reserve issuer.
Meanwhile, for the United States, the costs have been partially obscured by the consumer benefits. Americans enjoy lower prices on imported goods, easy access to credit, and lower interest rates than would otherwise be possible. The financial sector, centered in New York, captures enormous value from managing global dollar flows. These visible benefits have historically outweighed the less visible but profound costs of industrial hollowing.
The Inevitable Transition
History teaches us that no reserve currency lasts forever. From the Portuguese real to the Dutch guilder to the British pound, each global currency has eventually ceded its position as the economic fundamentals supporting it eroded. The dollar’s current predicament suggests this historical pattern continues.
The unique aspect of our current moment is that no single nation appears eager to assume the mantle. China, the most frequently cited potential successor, has shown remarkable hesitance to fully internationalize the yuan. Europe’s euro project remains incomplete without fiscal union. Japan and the UK lack the necessary economic scale.
This collective reluctance creates an unprecedented situation: the primary reserve currency is showing signs of withdrawing from its role, but no obvious replacement stands ready.
Trump’s aggressive tariff policy may accelerate this transition. By prioritizing domestic industry over international financial arrangements, the administration is effectively saying that America will no longer accept the structural trade deficits required of a reserve currency issuer. Yet without these deficits, the world faces a potential dollar shortage that could severely constrain global trade and finance.
Finding a New Equilibrium
If the current reserve currency arrangement has become unsustainable, what comes next? And more importantly, how messy would this transition be?
We should acknowledge that moving from one global monetary order to another has historically been chaotic, often accompanied by financial crises, political upheaval, and sometimes war. The shift from the British pound to the US dollar wasn’t planned or orderly — it emerged through the chaos of two world wars and the Great Depression. We should expect no less turbulence in any future transition unless we deliberately design for stability.
The most commonly discussed alternative is a multipolar currency system where several major currencies share reserve status. This would distribute both benefits and burdens across several economies, potentially reducing the pressure on any single nation to maintain excessive deficits.
However, multipolar systems create their own challenges. Fragmented liquidity would increase transaction costs and complicate crisis response. The coordination problem between competing monetary authorities would intensify during financial stress. Most importantly, this approach merely transfers the Triffin Dilemma to multiple shoulders rather than resolving the fundamental contradiction at its core.
The Principles of an Ideal Alternative
Rather than focusing on specific implementations, let’s consider the principles that would govern an ideal reserve system and the transition to it — one that could resolve the central paradox where reserve currency status imposes costs that no nation rationally wants to bear.
1. Collective Governance Without Unilateral Control
The fundamental problem with national currencies serving as reserve assets is the inevitable conflict between domestic needs and international responsibilities. An ideal system would separate these functions while allowing nations to remain stakeholders in the system’s governance.
This doesn’t mean countries would become powerless — quite the opposite. They would gain more meaningful collective influence over a system that directly serves their shared interests, rather than being subject to the domestic political pressures of a single nation. Neutrality doesn’t mean abandoning state participation; it means transforming how that participation functions.
2. Principled Supply Management
The current system actually contains a crucial feature worth preserving: the ability to expand monetary stock and export it to meet global needs. This expansion capability is essential for a functioning global economy. What’s problematic isn’t expansion itself but who bears the costs of that expansion and how it’s governed.
An ideal system would maintain this expansionary capability while adding something the current system lacks: symmetrical ability to contract when appropriate. This balanced approach would preserve what works in today’s system while addressing its structural weaknesses.
This isn’t about inventing entirely new mechanisms, but rather about implementing principles that have been understood for decades yet remain unimplemented due to political constraints.
3. Absorptive Transition Rather Than Displacement
Perhaps the most important principle is that any viable alternative must absorb rather than attack the current system. The approximately $36 trillion of US Treasuries held by entities cannot simply be abandoned without causing catastrophic damage to the global economy.
An ideal system would create sustained demand for these assets during transition, allowing for gradual evolution rather than disruptive revolution. This isn’t about undermining any nation’s interests but about ensuring continuity while the system evolves.
The current reserve currency’s issuer (the United States) would actually benefit from this approach — gaining the ability to rebalance its economy toward production without triggering a debt market collapse that would harm everyone.
4. Crisis Resilience By Design
Financial crises are inevitable. What matters is how systems respond to them. The current arrangement relies heavily on discretionary intervention by central banks, particularly the Federal Reserve, with political considerations often influencing timing and scale.
An ideal alternative would incorporate predetermined, transparent mechanisms for market stabilization during stress periods — providing emergency liquidity, preventing panic cascades, and ensuring critical markets remain functional even when individual self-interest might drive destructive behaviors.
Importantly, this approach doesn’t eliminate discretionary crisis response at the national level. Sovereign currencies would maintain their full crisis management toolkit — individual central banks could still conduct emergency operations, implement unconventional monetary policy, or address domestic financial stress as needed. The difference is that the international reserve layer would operate with more predictable, rule-based mechanisms, reducing dependence on a single nation’s decision-making for global stability. This creates a complementary two-tier system: predictable international coordination alongside flexible national response, each operating in its appropriate domain.
5. Managed Appreciation Trajectory
It’s worth noting that a steadily but manageably appreciating reserve asset provides certain benefits to the overall system. It would create natural incentives for central banks to gradually increase their holdings while still allowing export-driven economies to function. Since these export economies already manage their currencies against the dollar, they could continue this practice with a new reserve asset.
The Path Through Transition
The most dangerous period in any monetary evolution is the transition phase. Here, designing for stability is paramount. The shift would likely progress through several distinct stages:
Initial Adoption: Beginning with complementary coexistence rather than replacement, the new system would establish credibility while minimizing disruption.
Reserve Diversification: Institutions, then central banks, would gradually incorporate the new asset into their reserves, reducing dollar concentration without triggering market panic.
Settlement Function Development: As liquidity and adoption increase, the system could increasingly serve settlement functions for international trade.
Mature Equilibrium: Eventually, a new balance would emerge with national currencies maintaining their domestic roles while international functions shift toward the more neutral system.
Throughout this process, the dollar would remain important — just gradually relieved of the impossible burden of simultaneously serving domestic and international needs. This represents evolution, not revolution.
The Transition Challenge
Regardless of how well-designed a theoretical alternative might be, the transition from the current dollar-centric system presents enormous challenges. The dollar remains deeply embedded in global trade, financial markets, and central bank reserves. Sudden changes could trigger currency crises, debt defaults, and market dysfunction with devastating human consequences.
A responsible transition requires mechanisms that build bridges between systems rather than burning them down. Revolutionary approaches that cheer for dollar collapse risk creating precisely the economic devastation that monetary systems should prevent. However flawed the current arrangement, billions of people depend on its continued functioning even as alternatives develop.
The most viable path forward involves gradual evolution rather than abrupt revolution. New systems must demonstrate their advantages through practical utility rather than ideology, gaining adoption through positive incentives rather than forced disruption.
Prosperity Considerations
The ultimate measure of any monetary system is not its ideological purity but its practical impact on human prosperity. The current reserve currency arrangement creates asymmetric benefits and burdens that increasingly appear unsustainable. A well-designed alternative could potentially create more balanced prosperity by:
- Allowing the United States to rebalance toward production without currency crisis
- Providing export nations more predictable monetary conditions without political complications
- Giving emerging markets protection from the collateral damage of policies designed for other economies
- Reducing the geopolitical tensions created by financial weaponization
The prosperity question ultimately revolves around balancing stability, adaptability, and fairness — creating a system that provides sufficient predictability for long-term planning while remaining responsive to changing conditions and distributing benefits more equitably than the current arrangement.
Conclusion: The Burden No Nation Can Bear Alone
The truth about reserve currency status contains important nuances. It’s not that literally no one wants it — parts of the financial sector certainly benefit and therefore support it. Rather, it’s that the benefits are concentrated while the costs are distributed across the broader economy. This inherent structural imbalance makes it unsustainable over time, regardless of which nation bears the burden.
Trump’s policies signal that America may no longer be willing to accept these distributed costs to maintain this global role. Yet the system persists because, despite its flaws, everyone depends on someone performing these functions.
The historical irony may be that after decades of other nations being accused of “manipulating” their currencies to avoid the dollar’s role, America itself may be the one to finally step away from the burden of reserve currency status. This creates both danger and opportunity — the danger of disorderly transition and the opportunity to design something fundamentally better.
The challenge before us is not merely technical but philosophical — redesigning the foundation of global finance to serve human prosperity rather than national interests. If we succeed, we might finally resolve the paradox where essential global monetary functions cannot be sustainably provided by any single nation alone.
