These attributes are a prerequisite for a vibrant international financial system and are supportive to global trade. A regime with many reserve currencies would imply a well-governed international economy. This should facilitate global investment, resulting in rising productivity growth and improving standards of living. In other words, I don’t see this as a zero-sum game. If other countries’ currencies emerge to gain stature as reserve currencies, it is not obvious to me that the United States loses. This is assuming, of course, that the emergence of alternatives is being driven by their progress, rather than by the U.S. doing a poorer job in satisfying the attributes that I discussed earlier. Having more countries achieve the stature of having a reserve currency may also be desirable for other reasons. First, with more reserve currencies available, portfolio diversification opportunities are enhanced. This is desirable because, all else equal, it would allow investors to move further out on the risk/return frontier. Second, more currencies are likely to be close substitutes, which could dampen currency volatility. With many viable reserve currencies available, no particular one would necessarily have to bear the bulk of any adjustment. The dollar’s dominant reserve currency status has sometimes been referred to as the United States’ “exorbitant privilege,” implying that the U.S. benefits extraordinarily from this privileged status. I’d argue that the situation is much more nuanced. Yes, this status does allow the U.S. to benefit from seigniorage. More than half of all U.S. currency outstanding is held abroad.

Third, the U.S. has an independent central bank – the Federal Reserve – which has been successful in keeping inflation low and stable. As a result, the dollar has been a reliable store of value in recent years. Another point in the United States’ favor is the considerable steps taken to shore up areas of weakness revealed by the financial crisis. In particular, the safety and soundness of our financial system has been enhanced. Capital and liquidity requirements for U.S. banks have been raised significantly. Stress tests have been imposed to enhance the viability of large systemic institutions even in very adverse economic and financial environments. Reforms have been enacted to facilitate the recovery and resolution of troubled institutions. This  2  BIS central bankers’ speeches  includes living will requirements for the major systemically-important financial institutions, and the development of an improved resolution regime to ensure that institutions that do get into difficulty can be resolved without disrupting the stability of the financial system. In conclusion, I welcome other countries’ progress toward achieving the preconditions necessary for their currencies to attain the stature of a reserve currency. However, we should not act as if this is sufficient to achieve a well-functioning global financial system. In particular, the current regime is inefficient in a number of important ways. Countries have found it necessary to self-insure against the risk of large capital flow reversals. This has led to a very sharp rise in aggregate foreign exchange reserve holdings.