The Treasury Standard: Causes and Consequences


The U.S. dollar is the global reserve currency and the U.S. Treasury security is the global reserve asset. Conventional explanations suggest that this state of affairs is explained through path dependence following the collapse of Bretton Woods, the absence of a better alternative, and/or the prevalence of invoicing international trade in terms of dollars. These narrowly rational explanations of what I will refer to as the Treasury Standard miss the forest for the trees. In fact, the Treasury Standard is the latest stage of an evolutionary process aimed at financing large-scale, open-ended military conflict that arguably dates back to the Military Revolution. In this paper, I discuss the evolutionary process of the world financial system against the backdrop of this fiscal/military constraint. I then discuss the deliberate policy actions of the U.S., including its control of the international institutions created under the Bretton Woods system, that have brought about this outcome. Finally, I discuss the economic implications of this system and the role that the dollar plays in U.S. foreign policy.