FinancialEdge: Do Americans Get A Discount On Everything?

Though some readers may remember the days when the British pound was the global reserve currency of choice, that position has been held by the United States dollar for quite a while now. One question, though, is the extent to which the U.S. economy and its participants benefit from that status. While there are certain undeniable advantages to having the world adopt your currency as the reserve currency of choice, Americans do not necessarily enjoy the windfall profits and advantages that some outside of the United States suggest. (Learn how the Bretton Woods system got the ball rolling for world trade. See Global Trade And The Currency Market.)

Paying a Little Less for Commodities?As the preeminent global reserve currency, many international commodities are priced and traded in dollars - including oil and gold. That means that foreign buyers have to exchange their euros, yen or yuan to dollars before buying those commodities, and that represents an added cost that Americans do not have to pay. Although currency exchange rates can be significant at the small scale (a small company doing business overseas, or an individual traveler exchanging money), they are not nearly so significant any more for large international concerns and the added cost is relatively minor.

There is a less-appreciated source of profits that America does enjoy, though. America profits from the issuance of its currency to nonresidents, something referred to as seigniorage. In other words, the U.S. quite literally gets paid for its currency. That is perhaps not so surprising to those who've traveled overseas and encountered merchants happy to take U.S. dollars outright (and sometimes at better exchange rates than the "official" rates) or seen TV footage of narco-busts with piles and piles of U.S. currency sitting in trucks or warehouses around the world. Even though the estimated profits from this are modest (perhaps $10 billion), it is almost literally free money, and an extra $32 per head in national income does not hurt.


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