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Does the U.S. Dollar’s Role as Major International Currency Explain Persistent U.S. Current-Account Deficits?

Here’s a letter to the Washington Post:

Robert Samuelson rightly criticizes Pres. Trump’s obsession with trade deficits (“Getting schooled on trade,” May 28). But Mr. Samuelson’s own explanation of persistent U.S. trade deficits misses the mark. While it’s true that the dollar’s role as the major international currency does contribute to U.S. trade deficits, it’s not true – contrary to Mr. Samuelson’s claim – that this role of the dollar is the chief cause of U.S. trade (or, more generally, current-account) deficits.

The most fundamental reason that the U.S. runs persistent current-account deficits is that America remains a relatively attractive place to invest. And so to accumulate the dollars that they invest here, foreigners buy fewer American exports than otherwise, thus increasing U.S. current-account deficits (and, don’t forget, thereby increasing U.S. capital-account surpluses). Even if the dollar were not the major international currency, the U.S. economy’s vast size, openness, and governance by the rule of law would still attract such a large amount of foreign investment to our shores that we’d likely continue to run current-account deficits year after year.

For historical evidence, consider the thirty years from 1849 through 1878. During this period the U.S. ran persistent current-account deficits* yet the major international currency back then was the British pound and not the U.S. dollar.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Robert E. Lipsey, “U.S. Foreign Trade and the Balance of Payments, 1800-1913” NBER (April 1994), table 4.