An old video of JD Vance resurfaced this week in which the then-senator asks a question Washington usually treats as settled: Is issuing the world’s reserve currency actually good for the United States?
The dollar allows Americans to buy imports cheaply, he observed, while the same strength makes domestic production less competitive.
Reserve status looks like a prize until you examine the bill.
Economist Robert Triffin identified the underlying conflict more than sixty years ago. A national currency cannot indefinitely serve both its own economy and the world’s demand for reserves without forcing its issuer into choices that eventually undermine confidence.
The dollar survived the first Triffin crisis by abandoning gold convertibility and becoming a true fiat currency. The dollar’s value is sustained through Treasury securities, offshore dollar markets, and now stablecoins, but the contradiction remains.
Bitcoin offers a way out of the dilemma once and for all, because it can perform the neutral reserve function without requiring any country to run deficits, hollow out its industrial base, or promise redemption from a vault. The Triffin dilemma was always a design problem – that is, it was a shortcoming of the tool we call money. With bitcoin, we now have a tool that is better-designed for this job.
In the video shared by economic historian Phil Magness, Vance calls his own view “super heterodox.” Reserve status creates an obvious subsidy for American consumers because foreign demand for dollars raises the currency’s value. Imports become cheaper, but the other side of that exchange is paid by factories, exporters, and workers whose goods become more expensive to the rest of the world. The standard description of the dollar’s “exorbitant privilege” emphasizes America’s ability to borrow cheaply and purchase foreign goods with a currency it issues. Both advantages are real – but so is the structural demand for dollar assets that keeps the exchange rate stronger than it otherwise would be. A stronger currency increases household purchasing power while imposing pressure on tradable industries. The consumer sees the discount at checkout, but that same person might see their job shipped overseas, and never realize the two are tied together. This helps explain why Vance’s argument is compatible with the Trump administration’s industrial policy even though the administration also wants to defend dollar primacy. Tariffs, domestic manufacturing incentives, and a global reserve currency pull in different directions. Policymakers can manage the tension for long periods, especially when American productivity and capital markets remain dominant. In any case, they cannot explicitly repeal the monetary architecture that produces it.
Under the Bretton Woods system, other major currencies were fixed to the dollar, and the dollar was convertible into gold at $35 an ounce. As international commerce expanded, governments and banks needed more dollars to settle trade and hold as reserves. The United States supplied them by sending dollars abroad through persistent balance-of-payments deficits. In 1960, Triffin explained to Congress how this trap works. If America refused to supply dollars, global liquidity would contract and trade would suffer. If America continued supplying them, foreign dollar claims would eventually exceed the gold available for redemption. The act of serving the system would destroy confidence in its reserve asset. The arithmetic won. By the late 1960s, foreign-held dollars had overtaken the United States’ monetary gold, and repeated attempts to defend convertibility merely postponed the reckoning. On August 15, 1971, President Nixon closed the gold window. The Federal Reserve’s own history describes the accumulated deficits and looming gold run that brought Bretton Woods to an end. Triffin had identified the failure mechanism 11 years before it arrived. Nixon intentionally broke the promise of gold convertibility before it could produce a scandal by becoming impossible to fulfill. This allowed the dollar system to continue, as Treasury securities gradually became the reserve asset behind the reserve currency. Today, Foreign investors hold about $9.3 trillion in U.S. government debt. The world still accumulates American liabilities to obtain dollar liquidity, and the United States still receives goods and capital in exchange for issuing them.
The post-1971 system is more flexible than Bretton Woods. Offshore banks can create dollar credit, and the Federal Reserve can supply emergency liquidity through swap lines. Foreign countries can earn dollars through exports, borrow them, or sell assets to American investors. A current-account deficit is therefore less mechanically necessary than it was under gold convertibility. However, this flexibility swaps out some financial plumbing while preserving the conflict between domestic and international objectives. Global demand for safe dollar assets draws capital into the United States, supports Treasury borrowing, and keeps the currency strong. Those same forces make American exports less competitive and encourage the country to consume more than it produces. Persistent deficits then create an ever-larger stock of claims whose value depends on confidence in American institutions and fiscal capacity. Stablecoins extend this system. Dollar tokens backed by Treasury bills can bring billions of people into the dollar economy and create a new structural buyer for federal debt. Stablecoins may strengthen dollar primacy for decades, but we must bear in mind that every token backed by a Treasury security still rests on an American liability. Stablecoins increase demand for the existing architecture – perhaps dramatically – but do not ease its contradiction. A euro or yuan reserve system would do nothing but relocate the burden to a jurisdiction that has a poorer reputation for upholding property rights than the U.S. Additionally, Europe or China would inherit our Triffin Dilemma and feel pressure to supply safe assets, tolerate capital inflows, and subordinate domestic priorities to global liquidity. This is a no-go. Keynes proposed a supranational reserve unit called the bancor at Bretton Woods precisely because he recognized the problem with assigning a neutral function to one nation’s money. The idea failed because a synthetic unit administered by governments still requires governance everyone trusts – once again moving the problem instead of solving it.
Gold Points Toward The Answer, But Isn’t Central banks have already begun moving toward a reserve asset that is no nation’s liability. According to the World Gold Council, they purchased more than 1,000 tons of gold annually for three consecutive years after 2022. The freezing of Russian reserves demonstrated that even sovereign assets can become contingent on the issuer’s political approval. Gold offers neutrality because it has no issuer. Gold also carries the constraints of atoms. Large transfers require ships, planes, guards, vaults, and assayers. Verifying a sovereign stockpile is expensive and incomplete, an issue I explored in “What If The Gold Is Gone?” Gold’s scarcity is strong by terrestrial standards, though its supply responds to price and advances in extraction. Its monetary neutrality comes with extreme settlement friction. Bitcoin combines neutrality with easy, digital final settlement. New supply enters according to a fixed schedule, independent of any country’s trade balance or fiscal policy. Anyone can verify the circulating supply with a “node” (a small computer program). Transferring ownership across borders requires no correspondent bank or physical shipment. No sovereign must issue a liability for another sovereign just so that it may acquire bitcoin. Volatility and shallow sovereign adoption currently limit bitcoin’s usefulness as a primary reserve asset. Central banks need liquid markets, established custody, and confidence that large transactions will not destabilize the asset they are buying. Gold has centuries of institutional precedent. Bitcoin has 17 years. The relevant comparison concerns direction rather than present scale. As I argued when asking whether bitcoin could help solve a sovereign debt crisis, reserve transitions begin before the old system admits they are necessary.