Early in his EconTalk interview with Douglas Irwin, Russ Roberts says:
But I just want to pose the question: Suppose they didn’t come back. Suppose foreigners sold us cars and all kinds of things, and we sent them dollars. Americans sent them dollars. And the foreigners really liked the way the dollars looked, so they put them up on their wall as wallpaper, and never bought American goods and services or invested in American assets. Would that be bad for America? I mean, we’re stimulating their economy, but they’re not stimulating ours. That’s so unfair.
Irwin answers:
Well, in some sense what we’re doing is printing up worthless pieces of paper; they’re giving us goods in exchange for them; and then there’s no liability associated with that. They don’t have to make a claim on our assets or our goods as a result of that; they’ll just keep it down there.
In fact, actually there are a lot of dollars circulating in the world, so that’s true to some extent. In Latin American countries–you go to Argentina, dollars sort of circulate because they don’t trust the domestic currency. And, elsewhere around the world. So, there’s a big stock of dollars out there in the world. But, compared to the yearly flows, I think it’s not huge. But, once again, it’s not necessarily a problem if they never redeem those dollars as a claim on U.S. assets or goods or services.
That’s a good answer, but a little off. The pieces of paper are not close to being worthless. They’re worth a lot. That’s why other people accept them.
I think that what Doug meant to say is not that they’re worthless but that they’re almost costless to produce.
The cost of to the U.S. government of printing a $100 bill is about 10 cents. When we Americans spend a Benjamin, we Americans get $100 worth of stuff. And actually, the worth is higher than $100; we get some consumer surplus or else we wouldn’t bother spending.
To people who worry that then those Benjamins won’t circulate in this economy, I say something similar to what Jay Leno said in an ad for Doritos: “Go ahead and keep them; we’ll make more.
READER COMMENTS
Tyler Watts
May 9 2025 at 9:35am
David,
Great post, and I think this whole concept is underappreciated.
Isn’t this just a version of “float,” but on a national scale? A savvy financial manager will collect a firm’s receivables ASAP, but delay paying out its payables (liabilities) as long as it can without getting in too much trouble (either legally or reputationally). This maximizes its cash or current assets, on which it can earn interest. Or you could think of a bank “funding” its assets (loans) by issuing deposit liabilities. If those liabilities are just held (i.e. payment is not demanded), the bank gets a low-cost source of funding for its assets. In free banking, banknotes typically paid zero interest; today checkable deposits pay approximately zero interest in most cases.
The USA can “float” a large quantity of dollars abroad when we import goods; many of these dollars won’t get “redeemed” for US goods or assets, because as you noted, the US dollar is quite valuable as a medium of exchange–a preferred currency. Nothing at all wrong with this–indeed it’s a benefit for the US as long as the dollar retains its relative strength. This is the benefit of having the “reserve currency” and I believe a big part of the explanation as to why the US government can run such large deficits without being punished by higher interest rates–so far, at least (fingers crossed) 🙂
David Henderson
May 9 2025 at 10:58am
Thanks, Tyler.
I agree with your point. The one thing I would add, which was probably implicit in your statement, is that the “float” can go on for years.
I don’t know if you recall, but in, I believe, 1998, when the Russian banking system collapsed, many observers worried at first about a collapse in the Russian economy. But so many Russians held U.S. dollars that the result was a relatively blip. (I’m going from memory here.)
Ashis Roy
May 9 2025 at 1:39pm
When a country like India says that it has $704 Billion dollar reserve, does she have all those in actual greenbacks, or is it in some e-ledger in the US Treasury with a line item entry of $704 Billion dollar? Ellen Brown, in her book, ‘Web of Debt’ seems to suggest the latter. What is true?
David Henderson
May 9 2025 at 2:55pm
It’s almost certainly the latter.
The actual Benjamins are held by regular people and, let’s face it, drug dealers.
Warren Platts
May 11 2025 at 11:01am
You all might consider this nitpicking, but if the foreigners decide to keep the Benjamins, those Benjamins are themselves U.S. assets that they choose to invest in. As such, they would count as a liability on the net international investment position (NIIP).