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Vice President JD Vance’s recently resurfaced comments rightly question whether the U.S. dollar should continue to be the world’s reserve currency. He has also recognized that the problem dates back 40-some years, thereby indicting President Reagan and his Fed chairman, Paul Volcker. Equal blame should go to President Carter, who appointed Volcker in 1979. And the system’s deep origin was President Nixon’s 1974 agreement that Saudi Arabia could charge whatever it wanted for oil, provided it traded in dollars. But it was under Reagan and Volcker, in 1981, that the hammer fell.
I became executive director of the congressional Joint Economic Committee in January 1981, as interest rates hit 20%, driving the economy to the wall. It fell to my intrepid members, chaired by Henry Reuss (D-Wis.) — along with a few brave Republicans like Jack Kemp (R-N.Y.) — to oppose the policy. We saw that whipping inflation meant defeating America’s trade unions by destroying the industries they worked for. Reuss’ Milwaukee, a capital of machine shops, was hard hit. Ohio, then the heart of manufacturing, was devastated. Vance, born in 1984, grew up in the Rust Belt wreckage of those years.
The same high interest rates that battered industry did save the dollar, which soared in value. German and Japanese cars and machinery conquered U.S. markets, while the supposed threat of the deutschemark and yen to the dollar receded. In 1985 the Treasury engineered a depreciation, but the industrial damage was irreversible, and the dollar’s supremacy was locked in. Eventually Europe would adopt the euro, and industrial power would shift to China, yielding the world we inhabit today.
For many years the “end of history” crowd argued that as “benign hegemon,” the U.S. would reap financial rewards and also supply the thin edge of the most advanced technologies to the world. Regular Americans could buy and consume the fruits of other people’s industrial and farm labor. China would become a well-behaved liberal democracy. If any nation tried to move off the dollar exchange-reserve system, the military was available, as Libya and Iraq would find out.
However, military strength rests on industrial power. New technologies emerge by practice and perfection of skills and by selection from many options. Industrial and engineering decline erode the skills and sap the options. Eventually, leadership passes elsewhere. A military built on obsolete doctrines and supplied from a depleted base cannot cope.
What remains is the hollowed-out edifice of financial power. Perhaps this too will one day fall — as it did for the previous hegemon, Great Britain, bankrupted by two world wars. But one day is not now, or necessarily soon. President Franklin D. Roosevelt insisted on subordinating the sterling area — those nations and colonies that used the British pound as a reserve currency — to the dollar, because the U.S. was ready and willing to take over. The U.S. back then had no industrial peer.
Today, China is an industrial peer. But the U.S. still has no financial peer. Even the financial crisis of 2007-2009, a made-in-America debacle, did not shake the international dollar. Sanctions imposed on Russia have created a non-dollar, non-euro zone, but it is far from taking over.
Most important, financial hegemony would not serve China well. It would worsen that nation’s wealth distribution and erode its industrial advantage. So China maintains capital controls and manages its exchange rate, while building vast reserves of oil, metals and strategic minerals. A chronic export surplus is the price worth paying for progress, for security and for the social stability on which Chinese state legitimacy rests.
Thus the problem Vance described has no known solution. To rebuild U.S. industrial and military power is impossible while the God-almighty dollar reserve system endures. Subsidies and tariffs can help keep the old and backward afloat. They cannot move them to the low-cost, high-volume, new-tech frontier. That frontier will not magically return to a country that kicked away the foundations before Vance was born.
But even if the dollar system collapses someday, it would not help. Devaluation would fuel inflation — as in Britain in the 1970s. To rebuild industry, technology and the society that can sustain them would require the kind of whole-of-society effort last seen here in the 1930s and 1940s, at the dawn of the age of oil. Even should the necessary state structures be created, it is far from sure that the resources would be there. For now, the future is in the hands of the artificial intelligence companies and their data centers, which will drive up power prices and erode the electrified prosperity that has underpinned American life for a century.
One might compare the U.S. at present and the late USSR — a superpower with a bloated military, obsolete technologies, a disaffected population and an aged politburo, trapped by its ideologues. But there is another parallel, well-suited to the gilded sensibilities of Donald Trump. It is the court of Louis XV, reputed to have said, throwing up his hands after an ill-fated war and a disastrous defeat, “Après moi le déluge” — after me, the flood.
And with Vance as the future Louis XVI, waiting in the wings.
James K. Galbraith, a professor of public affairs and government at the University of Texas at Austin, is the author of the forthcoming book “The Power to Destroy: How Bad Economics Drove America’s Decline.”
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Ideas expressed in the piece
- The article argues that the dollar’s role as the dominant reserve currency is the product of specific political decisions, tracing its deep origins to the 1970s oil-dollar arrangement and, more decisively, to the Volcker-era interest rate shock under Presidents Carter and Reagan, which crushed inflation by devastating industrial employment and trade unions.
- It contends that the extreme monetary tightening of the early 1980s preserved dollar supremacy at the cost of deindustrializing regions such as the Midwest and locking in a permanently overvalued currency, thereby opening U.S. markets to German and Japanese manufacturers while eroding the domestic industrial base.
- The piece maintains that subsequent efforts, such as the mid-1980s engineered dollar depreciation, came too late to reverse the damage, and that the later rise of the euro and China’s industrial ascent only confirmed a world in which production shifted abroad while the United States specialized in finance and consumption.
- The article describes a prevailing post–Cold War ideology that cast the United States as a “benign hegemon” that could enjoy financial rewards and technological leadership while other countries provided industrial and agricultural labor, an outlook the piece links to expectations that China would liberalize politically.
- It asserts that U.S. military power has been used to defend the dollar-centered system, citing interventions in countries that attempted to move away from dollar-based arrangements, while warning that military strength ultimately depends on an advanced industrial base that the United States has allowed to erode.
- The column argues that financial hegemony has produced a hollow U.S. power structure: the country retains unmatched financial clout but suffers from industrial and engineering decline, which over time undermines technological innovation, military capability and strategic autonomy.
- It stresses that, unlike the United States at the end of World War II, there is today no willing and suitable successor to the dollar system: China is now an industrial peer but deliberately avoids assuming global financial-hegemon status, maintaining capital controls, managing its exchange rate, and accumulating commodity reserves to preserve its industrial advantage and social stability.
- The article concludes that the “dollar trap” has no practical escape: rebuilding U.S. industrial and military power is portrayed as incompatible with a reserve-currency regime that keeps the dollar strong and trade deficits large, while subsidies and tariffs are described as insufficient to push the U.S. back to the technological frontier.
- It further argues that even a collapse of the dollar system would not provide an easy path to recovery, because devaluation would likely trigger serious inflation and genuine reindustrialization would demand a whole-of-society mobilization on the scale of the 1930s and 1940s, which the piece suggests is politically and materially implausible today.
- Finally, the article paints a bleak near-term outlook in which artificial intelligence firms and data centers dominate investment, drive up energy costs, and strain the electrified prosperity that has long sustained American life, likening the contemporary United States to both the late Soviet Union and the decadent court of Louis XV, with current leaders cast as presiding over a system heading toward eventual crisis.
Different views on the topic
- In contrast, a report from the Congressional Budget Office describes the dollar’s international role as generating both benefits and costs, emphasizing that while a stronger dollar reduces export competitiveness and contributes to persistent trade deficits, it also lowers interest rates, expands access to credit, and reduces transaction costs for U.S. businesses and households, framing the system as a complex trade-off rather than a one-way path to decline[2].
- Research from the Federal Reserve Bank of Philadelphia characterizes dollar dominance as both a “blessing” and a “curse,” noting that global use of the dollar supports deep, liquid financial markets and stable financing conditions for the United States, even as it can amplify certain financial risks, and concludes that alternatives remain limited, suggesting the situation is manageable rather than structurally hopeless[1][7].
- A working paper from the American Enterprise Institute argues that the economic gains the United States derives from dollar dominance are likely modest and that the system does not impose large net costs on trading partners, contending that widespread dollar use has facilitated global trade, investment, and growth by providing a common unit of account and a reliable store of value, and that dollar primacy is likely to persist without requiring radical policy upheaval[5].
- Analysis from the Council on Foreign Relations emphasizes that dollar hegemony confers significant advantages—such as allowing the U.S. government and firms to borrow at lower interest rates in their own currency and keeping import prices down for consumers—even while acknowledging that a strong dollar can hurt export-oriented industries, portraying the arrangement as a source of “exorbitant privilege” but not as inherently incompatible with a competitive economy[8].
- Post-Keynesian scholarship on dollar hegemony highlights that, alongside seigniorage and geopolitical influence, U.S. residents benefit from lower borrowing costs and reduced exchange-rate risk, and that high global demand for dollars can help restrain domestic inflation by making imports cheaper, while recognizing the downside for manufacturing—an assessment that sees the regime as a powerful but double-edged instrument rather than a pure trap[4][3].
- Other critics of dollar primacy, writing in mainstream U.S. policy journals, argue that the system’s main problem lies in domestic distributional effects—favoring financial institutions and global investors over manufacturers and workers—yet focus on policy reforms to rebalance the economy rather than declaring reindustrialization impossible, suggesting that the reserve-currency role can be adjusted or partially tamed without dismantling it outright[6].
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