Ethics & Public Policy Center

The Curse of Being a Reserve Currency

Published in The Wall Street Journal on January 4, 1993


The European monetary system is breaking down for the same reason the gold-exchange standard in 1931 and the Bretton Woods system in 1971 collapsed: the use of domestic currencies as international reserves.  To describe the problem simply:  For other countries to increase their foreign exchange reserves, the reserve currency country must purchase more wealth abroad than it sells–i.e., run a balance-of-payments deficit.  This demand for wealth without a matching supply causes inflation of either goods or securiteis prices–usually both in succession.

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