NBER WORKING PAPER SERIES

DOLLAR RIVALS

Jeffrey A. Frankel

Working Paper 31476

http://www.nber.org/papers/w31476

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue
Cambridge, MA 02138
July 2023

This paper was written for a session titled, “Can the Dollar-Based System Be Improved or
Replaced?” for a conference on 50 Years of Floating, held at the Peterson Institute for
International Economics, Washington DC, March 24, 2023. It is forthcoming in a book edited by
Doug Irwin and Maurice Obstfeld. The author would like to thank Obstfeld and Angelo Melino
for useful suggestions. The opinions expressed in this paper are those of the authors alone and do
not reflect the views of the National Bureau of Economic Research

The author has disclosed additional relationships of potential relevance for this research. Further
information is available online at http://www.nber.org/papers/w31476

NBER working papers are circulated for discussion and comment purposes. They have not been
peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies
official NBER publications.

© 2023 by Jeffrey A. Frankel. All rights reserved. Short sections of text, not to exceed two
paragraphs, may be quoted without explicit permission provided that full credit, including ©
notice, is given to the source.
Dollar Rivals
Jeffrey A. Frankel
NBER Working Paper No. 31476
July 2023
JEL No. F33

ABSTRACT

Written on the 50th anniversary of floating exchange rates, this paper deals with possible
alternatives to a unipolar dollar-based system. It considers (1) measures of international currency
use; (2) potential challengers to the dollar; (3) network externalities; and (4) the plausibility of
gold and digital currencies, as alternatives to regular currencies. On the one hand, network
externalities operate in favor of the status quo: the dollar as the single leading international
currency. On the other hand, the danger of abuse of exorbitant privilege – for example, by
debasing the currency or repeated use of sanctions – operates in favor of challengers. A good
guess is that the dollar will continue to lose market share slowly to others, but will remain in the
lead.

Jeffrey A. Frankel
Harvard Kennedy School
79 JFK Street
Cambridge, MA 02138
and NBER
jeffrey_frankel@harvard.edu
 The ques�on of the interna�onal currency status of the dollar versus its poten�al rivals is
not new, but has been accorded an unusual amount of aten�on in the last few years, among
scholars and non-scholars alike. With more data available than ever before, it is a good �me to
take stock.
The topic of the last session of the PIIE conference in March 2023 was possible alterna�ves
to a unipolar dollar-based system. Consider four sub-topics: (1) measures of interna�onal
currency use; (2) poten�al challengers to the dollar; (3) the ques�on whether a mul�-polar
currency system is consistent with the existence of network externali�es; and (4) the plausibility
of gold and digital currencies, as alterna�ves to regular currencies.

1. Measures of interna�onal currency use

There is a list of uses to which an interna�onal currency like the dollar is put. Some familiar
func�ons include: a currency in which central banks and sovereign wealth funds hold
interna�onal reserves; an anchor currency to which smaller countries’ currencies can peg; a
currency to use in denomina�ng or invoicing trade and financial transac�ons; and a vehicle
currency for foreign exchange trading. A standard linguis�c analogy can help explain.1 Filipinos
are unlikely to speak Portuguese and Brazilians are unlikely to speak Tagalog. If a Brazilian
wants to communicate with a Filipino, they are likely to find it more convenient to do so via
some third language like English or Spanish. Similarly, if one of them wishes to do business with
the other country, they will find it more convenient to transact via some third currency like
dollars or euros (the vehicle currency), than to try to find someone who wants to take the other
side of a peso-real trade.
A two-by-three table lays out these interna�onal uses, as either private or public instances
of the classic three func�ons of money: 2
Table 1. Roles of an International Currency
Function of money Governments Private actors
Store of value International reserves held Currency substitution
by central banks (private dollarization)
Medium of exchange Vehicle currency for foreign Vehicle currency for private
exchange intervention foreign exchange trading
Unit of account Anchor for pegging smaller Denominating trade and
currencies financial transactions

1 Kindleberger (1967).

2The schematic table began with Cohen (1971) and was adopted with slight modifications by
Kenen (1983) and Frankel (1992), among others.

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 The first criterion is the most salient, perhaps because the data on central banks’ reserve
holdings are readily available. The dollar’s share of foreign exchange reserves has been declining
gradually since the turn of the century. In 1999, when the newborn euro took the place of the
French franc and German mark 3, the dollar cons�tuted 71 % of allocated holdings. By the end of
2022 its share had declined to 58 %. 4 That is a rate of decline of about ½ percentage points per
year. But the share of the dollar remains far ahead of the share of the second-place
interna�onal currency, the euro, which is 20 % and not gaining. If the dollar’s share were to
con�nue declining at the same rate, it would take another 70 years for it to fall to the euro’s
share.5 The euro is in turn well ahead of the yen, which remains in third place. The yen is
followed by pound sterling in fourth. The much-ballyhooed renminbi has moved into fi�h place
only rela�vely recently, having passed the Canadian dollar and Australian dollar.
Each use of the currencies interna�onally6 is highly correlated with the other uses, both
causally and sta�s�cally. Causally, Gopinath and Stein (2018, 2021), for example, show that
interna�onal use of a currency to invoice trade (unit of account) is bi-direc�onally related to use
of the currency financially (store of value, par�cularly in the case of a currency with safe-haven
proper�es, like the dollar and yen). Sta�s�cally, a correla�on is evident as well. The ranking is
similar by different measures: the dollar remains number one, not only by the criterion of
reserve holdings, but also by the criteria of denomina�ng or invoicing trade 7, as well as
denomina�on of interna�onal debt and loans, foreign exchange turnover, 8 and global
payments. According to an overall measure of interna�onal currency use computed at the

3
Before that, Mathieson and Eichengreen (2000) characterize the currency composi�on of
reserves as stable in the 1980s and 1990s. But the dollar share in fact declined a�er 1977, in
tandem with the value of the dollar, and only recovered in the late 1990s.
4 This is as a share of allocated foreign exchange reserves reported by the IMF’s COFER site
($6,471 billion / $ 11,089 billion). Prasad (2019) points out that the unallocated propor�on of
global reserves has become less of a limita�on of the COFER sta�s�cs since China began to
share the currency breakdown of its reserves with the IMF, phased in over 2014-18.

5This calcula�on assumes that the euro’s share remains unchanged. If central banks switched
out of dollars into euros, the catch-up date would be correspondingly sooner.

6 Aiyar, et al (2023).
7 Engel (2006), Goldberg and Tille (2008), Gopinath (2015), and Boz et al (2020).

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BIS (December 2022). As of April 2022, the dollar is used in almost three �mes as many
foreign exchange transac�ons as the euro, its nearest compe�tor, whether measured by simple
spot trades or deriva�ves. Again, following the dollar and euro in the ranking comes the yen,
pound, renminbi, Australian dollar, Canadian dollar, and Swiss franc, in that order.

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Federal Reserve, the dollar remains three �mes as important as the euro, and far more
important than the yen, pound, or renminbi. 9
Only in the case of global SWIFT payments,10 does the euro come close to the dollar’s
share as of 2023: 32.6 % of payments versus 41.7%. The SWIFT rankings again put the renminbi
in fi�h place, at a mere 2.3 %. Admitedly, recent growth in the renminbi (RMB) would show up
more strongly if data on the Cross-Border Interbank Payment System, which China launched in
2015, or other non-SWIFT alterna�ve payments systems could be included.

2. The challengers
When the Breton Woods system came undone fi�y years ago, it seemed that the dollar
had lost its special status. Ini�ally, some expected that the IMF’s SDR could fill the gap. 11 A�er
all, the SDR had originally been proposed and created as a means of repairing the Breton
Woods system by offering an alterna�ve to dollar reserves. But the synthe�c unit never caught
on as an interna�onal currency. 12 To be sure, 12 countries, many of them in Africa or the
Mideast, had pegged their currencies to the SDR by 1979, rising to 16 in 1982. As a percentage
of peggers, this was a rise from 16.4 per cent in 1979 to 22.5 per cent in 1982. But it was all
downhill from there. By 1995, the number had declined to only three (Libya, Myanmar, and
Seychelles). The SDR largely fell out of use, except as an interna�onal reserve asset for central
banks. 13 The SDR lacks the advantage of a home base where it is the indigenous na�onal
currency. In the common analogy, if the dollar is akin to the English language, as the world’s
lingua franca, then the SDR is akin to the world’s Esperanto. The SDR and Esperanto were both
deliberately designed for maximum usefulness, and yet remain litle used in prac�ce, precisely
because they were created ar�ficially, rather than growing organically out of a home base.

9 Bertaut, et al, (2021), Figure 10. The measure is a weighted average of five criteria.
10SWIFT (April, 2023). The Society for Worldwide Interna�onal Financial Telecommunica�ons is
a messaging system that accompanies inter-bank transac�ons. It provides the highest-frequency
measure of interna�onal currency use. Chau, Ilzetski, and Rogoff (2022).

11 Grubel (1963), Solomon (1976), Kenen (1987), and Williamson (2009).

12 Eichengreen and Frankel (1996), Obs�eld (2011).

13The IMF occasionally s�ll issues new batches of SDRs, notably in August 2009 in response to
the Global Financial Crisis. Truman (2022).

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 Excitement over rival currencies tends to come in waves of pessimism regarding the role
of the dollar. 14 In the last 40 years, a procession of currencies have been characterized as
candidates to challenge the dollar as premier interna�onal currency. The Deutsche Mark from
1973 to 1990, 15 the Japanese Yen from 1984 to 1991 16, and the Euro in the 2000s17, each had its
turn. Since around 2009, it has been the turn of the RMB. 18
Predic�ons that the RMB might challenge the dollar for the number one spot by 2020
obviously were premature. Although China’s currency has two of the three necessary
condi�ons to be a leading interna�onal currency -- economic size and the ability to keep its
value -- it s�ll lacks the third: deep, liquid, open financial markets. Much as the Chinese
government craves the global stature of a major interna�onal currency, it has not been willing
to give up capital controls and to achieve free conver�bility. In par�cular, it effec�vely halted its
efforts to interna�onalize Chinese financial markets a�er 2014, when ten years of net capital
inflows gave way to ten years of net capital ou�lows. It has further been observed that China
does not have the democra�c form of government, free media, and independent central bank
that characterize the homes to most interna�onal currencies.
In 2023, the five BRICs countries -- Brazil, Russia, India, China and South Africa – began
talking about establishing a new currency19, to be an alterna�ve to the dollar. Details are
scarce. China would dominate a BRICS currency, by sheer economic size. But it is hard to
imagine that five such disparate countries could live with a common currency, whether or not it
would be China’s yuan. Russia has proposed that the BRICS currency might be a new basket of
the five na�onal currencies. If such a new synthe�c currency is envisioned alongside the five
exis�ng currencies, it would fail for lack of a home base, like the SDR but more so.

14 For example, one wave of declara�ons that the dollar was on its way out came in 1995, at the
nadir of a 10-year decline in its foreign exchange value against the mark and yen (not that there
need be any connec�on between interna�onal use of a currency and its exchange rate). E.g.,
Kindleberger (1995), Kunz (1995), and Frankel (1995).

15 Tavlas (1993).

16 Frankel (1984), Tavlas and Ozeki (1992), Hale (1995), and Takagi (2011).

17Alogoskoufis and Portes (1992), Bergsten (1997), Portes and Rey (1998), Frieden (2000), Chinn
and Frankel (2007), Posen (2008) and Goldberg (2010).
18Dobson and Masson (2009), Ito (2010), Park and Song (2010), Eichengreen (2011b),
Subramanian (2011a, 2011b), Prasad and Ye (2012), Frankel (2012), and Zhang (2022).
19 “Why a Brics currency is a flawed idea,” Paul McNamara, Financial Times, Feb. 10, 2023.

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 Arslanalp, et al (2022), point out that the con�nued gradual move of global central bank
reserve holdings out of dollars is not primarily into any of the aforemen�oned challengers, but
rather into new rela�vely small reserve currencies, like the Canadian dollar, Australian dollar,
South Korean won, Swedish krona, and Norwegian krone. In addi�on, some other rela�vely
small currencies, like the Singapore dollar, South African rand and New Zealand dollar, are held
as reserves or as anchors to peg to, by a few s�ll-smaller countries in their regions. One might
add these rela�vely small units to the list of interna�onal currencies, though obviously not as
candidates for a leader. It is interes�ng to note that the dollar could con�nue to lose market
share indefinitely, while yet remaining in the number one slot.

3. Is a mul�-currency system consistent with network externali�es?

The tradi�onal view of interna�onal currencies accords a very strong role to network
externali�es.20 Like the English language, people find the dollar convenient to use, given that
everybody else is using it. This implies good reasons to have one currency dominate, at any
single �me, whether it is the pound, the dollar, or some future challenger. It is more efficient to
use a single currency interna�onally for the same reasons that it is more efficient to have a
single currency within a country.
One implica�on of network externali�es is iner�a in the world’s “choice” of the top
interna�onal currency. (“Choice” is put in quotes, because these models tend to have mul�ple
equilibria and thus path-dependence.) There may be long lags between the �me that one
currency’s fundamental determinants, par�cularly the size of the home economy, pass another
currency, and the �me that the system reaches the �pping point when the challenger currency
passes the incumbent in interna�onal use. Sta�s�cal studies of reserve holdings do indeed find
a lot of iner�a.21 The tradi�onal view is that this explains why the dollar did not fully supplant
the pound as the premier interna�onal currency un�l 1950 or so. The fundamental
determinants had come to favor the dollar over the pound by around 1920: the US passed the
UK in economic size in 1872 and had acquired a central bank in 1913, while Britain had lost the
strength that goes with being a large interna�onal creditor as a result of borrowing during
World War I. But iner�a delayed the overturning of the old order. 22
A “new view” can be associated with Eichengreen (2010, 2011a,b): that network
externali�es are not as large as previously believed and that mul�ple top leading interna�onal

Kindleberger (1981), Krugman (1984), Matsuyama et al (1993), and Gopinath and Stein (2018,
20

2021).
21
Including Lindert (1969), Krugman (1984), Chinn and Frankel (2007) and Iancu et al (2020),
among others.
22
Schenk (2010).

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currencies can exist simultaneously. Eichengreen and Flandreau (2009, 2012) and Chitu, et al,
(2014, 2017) argue that the dollar in fact surpassed the pound quite soon a�er World War I, by
1925. A reasonable interpreta�on of the numbers is that interna�onal use of the dollar in the
1920s and 1930s atained approximately the same level as the pound and that the dollar only
pulled decisively ahead a�er World War II.
The global monetary system can be usefully viewed as a tradeoff between the advantage of
a single currency (network externali�es) and the disadvantage: namely, that the issuing country
may abuse its exorbitant privilege, provoking countries to look for alterna�ves (Farhi and
Maggiori, 2017). Abusing the exorbitant privilege used to mean “debasing the currency” --
excessive budget deficits, money growth, current account deficits, infla�on, and deprecia�on.23
Econometric es�ma�on of the determina�on of interna�onal currency shares included the
ability of a country’s currency to hold its value. (The other two most standard kinds of
determinants are country size, as already men�oned, and the openness and liquidity of the
country’s financial markets.) 24
Lately, overuse of exorbitant privilege has taken on a second meaning. It has been
increasingly evident that frequent American use of sanc�ons can provoke some countries to
move away from reliance on dollars.
Most interna�onal sanc�ons historically have accomplished rela�vely litle, especially if they
were applied without strong mul�lateral support. Experts tended to view them usually as just a
way for a country to register a clear protest, one of the few op�ons in between armed
interven�on and doing nothing. But sanc�ons have been used more o�en in recent years,
par�cularly financial sanc�ons.
The US government’s exploita�on of the dollar’s global dominance in order to extend the
extraterritorial reach of US law and policy has been deemed “weaponiza�on of the dollar.” 25 An
atempt to shut Iran out of the interna�onal banking system was among the economic sanc�ons
applied against the country in response to its threatened development of nuclear weapons.
Ini�ally, in 2005, the US had mul�lateral support. True, Europeans occasionally grumbled about

23 The 1973 collapse of the monetary system was not simply the culmina�on of the Triffin
Dilemma (1960), but was accelerated by the fiscal and monetary expansion of the Vietnam War
era, under Presidents Lyndon Johnson and Richard Nixon. Since 1973, the US has accumulated
another $31 trillion in na�onal debt, ataining the highest ra�o to GDP since the end of World
War II.
24 Dooley, Lizondo, and Mathieson (1989), Mathieson and Eichengreen (2000), Chinn and
Frankel (2007), Ito and McCauley (2020), Aizenman et al (2020), Lusinyan et al (2020), Arslanalp
et al, (2022), and Chinn et al (2022).

25 Frankel, 2019, "How a Weaponized Dollar Could Backfire," The Guardian, Oct. 23.

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US extraterritoriality, suspec�ng that the US might be quicker to impose large penal�es on
European banks than on their American peers for viola�ng sanc�ons. In any case, sanc�ons
were relaxed when Iran agreed to halt its nuclear weapons program under a 2015 nuclear deal,
the Joint Comprehensive Plan of Ac�on.
The sanc�ons lost much of their mul�lateral support when Donald Trump reinstated them in
September 2020. Trump in 2018 had withdrawn the US from the 2015 agreement, which Iran
had not been viola�ng. For this reason, in the eyes of the interna�onal community, 26 it became
harder to jus�fy sanc�ons in the name of a global public good and easier to characterize them
as an abuse of the American exorbitant privilege. Not just China, but Europe as well looked for
channels to pay for purchases of Iranian oil outside the US-controlled banking system. The
episode fed concerns that the dollar might lose its long-standing primacy.

When Russia seized Crimea and invaded the eastern provinces of Ukraine in 2014, financial
sanc�ons were intended to be an important component of the mul�lateral response. Their
effects turned out to be rather limited. Worse, the Moscow government spent the subsequent
seven years building up its financial defenses. With the aid of substan�al current account
surpluses, Russia’s central bank accumulated $643 billion worth of interna�onal reserves, equal
to an impressive 40% of GDP. Furthermore, the Bank of Russia, almost alone among the world’s
central banks, deliberately shi�ed the composi�on of its interna�onal reserves out of dollars,
and into renminbi, other currencies, and gold.
Before the 2022 invasion of Ukraine, cu�ng off Russian banks from the global financial
system, via the SWIFT messaging system or otherwise, seemed an ambi�ous goal. In the event,
the US and its allies were able to accomplish that and a lot more. The US Treasury, together
with the EU, Japan, other G-7 countries, Switzerland, Korea and Singapore, jointly took almost
unprecedentedly strong ac�on on February 28. They denied the Russian authori�es (the central
bank plus the sovereign wealth fund) access to their foreign exchange reserves and other assets
held overseas, thereby disarming the carefully prepared defenses. As a result, the ruble
suddenly plummeted 30%, on top of earlier declines, bringing it below one cent in value.
Over �me, however, the ruble fully recovered. Even though the western countries applied
sanc�ons at the outer end of what was expected before the invasion, the effect as of 2023
seems to have been less than expected. Facilita�ng evasion of sanc�ons is the expansion of
alterna�ve payment mechanisms, in renminbi or other non-dollar currencies.
A few recent studies examine whether the countries that are geopoli�cally the least aligned
with the US and thus the most exposed to the threat of sanc�ons are generally the ones that
have been shi�ing their reserve holdings out of dollars. Eichengreen et al (2017) use a dummy
variable reflec�ng whether the country in ques�on has a defense pact with the US. Mosler and
Potra�e (2020) use the rate at which the country votes in agreement with the US in United

26
Politico, September 21, 2020.
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Na�ons General Assembly resolu�ons. Arslanlap, et al (2022), use both variables. The case of
Russia notwithstanding, the general finding is litle significant effect of these geopoli�cal
variables on dollar holdings.

4. Alterna�ves to na�onal currencies

Na�onal currencies are not necessarily the only sort of interna�onal reserves, nor, for that
mater, the only sort of interna�onal unit of account or means of payment. One alterna�ve
asset, though un�l recently considered by most economists “a relic of the barbarous past”, is
now regaining an ac�ve role as a component of interna�onal reserves. That is gold. The other
alterna�ve is a new one: cryptocurrency (a sign of a barbarous future?).
We long thought that central bank holdings of gold were an anachronism. Monetary
authori�es in many countries s�ll held some gold, but did not treat it as an ac�ve part of their
interna�onal reserves. That is, they did not buy or sell it. In recent years, however, central
banks, especially in Asia, have been ac�vely buying (and selling) gold.27 Ferran� (2023) finds
that from 2016 to 2021, those countries that face a higher risk of US sanc�ons increased the
share of gold in their interna�onal reserves more than countries facing a lower risk of US
sanc�ons.
Ferran� (2023) also explores whether it is sensible for a country that faces a modest risk of
sanc�ons to diversify some of its central bank’s por�olio out of US Treasuries and into
cryptocurrency, specifically bitcoin. 28 (The cryptocurrency ques�on is dis�nct from the ques�on
whether countries will issue Central Bank Digital Currencies that are used interna�onally. 29)
Somewhat surprisingly, he concludes that the answer is yes: Given that bitcoin is the asset that
is the hardest for US authori�es to block, one does not have to make op�mis�c assump�ons
about the future return to bitcoin to find that the possibility of sanc�ons gives bitcoin a place in
some por�olios and gives it a fundamental long-run value.

5. Conclusion regarding the interna�onal currency system

27
Arslanalp, Eichengreen and Simpson-Bell (2023).
28
Also, Smales (2019) and Aysan et al (2019).
29
CBDCs, if successful, would be merely another technological step akin to -- but probably less
important than -- the laying of the first successful trans-Atlan�c cable in 1865, which allowed
the real-�me trading of dollars for pounds (“cable”). CBDCs would not eliminate the need for
an interna�onal vehicle currency, a role now played by the dollar. Eichengreen (2021).
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 The U.S. currency has withstood repeated blows over the last five decades, most of them
self-inflicted. An example is the danger that repeated standoffs over the debt ceiling between
the two poli�cal par�es will eventually force the US Treasury to default at least par�ally on its
obliga�ons.
So far, there is s�ll litle sign of the dollar losing its posi�on as the leading interna�onal
currency. Various measures show it s�ll comfortably in the number one posi�on. Strikingly,
when a global shock raises percep�ons of risk on the part of financial markets, investors s�ll
rush to the US dollar as the safe haven currency. This is true even when the shock originates in
the United States, as was the case with the 2008 Global Financial Crisis.
The explana�on for the dollar’s staying power is easily iden�fied: Lack of an alterna�ve. The
euro remains wounded from the 2010 crisis among its periphery members and there is a
paucity of highly rated government bonds issued in the currency. The economies of Japan, the
United Kingdom, and Switzerland are not big enough to sustain the number one role. China is
big enough, but s�ll lacks financial markets that are sufficiently deep, open and liquid. With
respect to the store-of-value func�on of an interna�onal reserve asset, the recent resuscita�on
of gold could well become more important in the future. Even bitcoin could conceivably join
the roster. But these two assets cannot fulfill the func�ons of a unit of account or a means of
payments, at least not as capably as the dollar.
Let us keep in mind the dis�nc�on between an interna�onal currency and the leading
interna�onal currency. It is normal for an important economy like the eurozone or China to
conduct some of its trade in its own currency, rather than en�rely in dollars. It is even normal
for such a currency to be used in some transac�ons between other pairs of countries in its
region. This does not make it a plausible candidate to supplant the dollar as number one
interna�onal currency.
Perhaps the need to balance network externali�es against the danger of abuse of exorbitant
privilege can give rise to an equilibrium in which there is a handful of interna�onal currencies of
equal size. There may be an a priori logic suppor�ng the number three (dollar, euro, and RMB).
If there is only one premier interna�onal currency in the system, its government has a strong
incen�ve to run deficits and profit from the interna�onal seigniorage. But if there are three
currencies, there is a check on the seigniorage. Every �me that two of them are tempted to
collusively abuse the exorbitant privilege, the third government can keep them honest by
exercising greater monetary discipline, thereby offering a higher rate of return on its currency
and atrac�ng holders away from the first two.
But beter suited to the data than the triumvirate would be an equilibrium in which the
dollar has a substan�ally greater role than the euro, the euro has a substan�ally greater role
than the third-place currency, and so on, as in Zipf’s Law. 30 If the dollar can withstand the

30 Chau, Ilzetski and Rogoff (2022).

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infla�on of the Vietnam War era, the Nixon shocks of 1971-73, the 2007-08 sub-prime mortgage
crisis, the 2017-2020 American loss of interest in global leadership, and the blowback from the
2022 sanc�ons against Russia, perhaps it can also withstand par�san poli�cs that threaten a
downgrading of US government debt. A good guess is that, even with the dollar slowly losing
market share to others, it will remain in the lead.

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