With the creation of checks, debit and credit cards, and electronic funds transfer technology, physical coins and currency use in everyday commerce is diminishing.
Coins and currency are used as a medium of exchange to facilitate commerce. They can also serve as a unit of account and as a store of value.
You don’t necessarily need to have custody of physical coins and currency to serve the purposes of a unit of account or store of value. Further, with the creation of checks, debit and credit cards, and electronic funds transfer technology, the use of physical coins and currency in everyday commerce is diminishing over time. In the United States, coins and currency are used in less than 10 percent of transactions.
Effectively, the U.S. dollar became the world’s reserve currency in July 1944 by agreement of the 44 nations at the United Nations Monetary and Financial Conference at Bretton Woods, N.H. Other nations agreed to peg the values of their currencies to the U.S. dollar, with the U.S. government agreeing to redeem gold to governments and central banks at the rate of one ounce of gold for every $35 of U.S. currency tendered. In effect, this replaced the previous gold standard underlying the monetary systems of most major nations.
Because U.S. coins and currency were then “as good as gold,” central banks flocked to add American currency to their official reserves in lieu of adding more physical gold. This increased global demand for physical U.S. currency.
However, when then-U.S. President Nixon “temporarily” closed the gold exchange window in August 1971, that started the slow process of lower international demand for U.S. coins and currency.
At one point, over 90 percent of international transactions were priced and paid in U.S. dollars. Today, the dollar is still used for about 60 percent of such commerce but is almost certain to diminish dramatically in years to come. This decline in the use of U.S. dollars had decreased the need for foreign banks and businesses to hold physical American currency.
According to the International Monetary Fund, U.S. dollar reserves (in the form of currency and U.S. Treasury debt) made up 71 percent of total central bank reserves at the end of 1999. By the end of 2020, the percentage had dropped to 59 percent. Worldwide, central banks today hold about $12 trillion of reserves, with about $7 trillion consisting of U.S. currency or U.S. Treasury debt.
A number of actions are underway around the world that will further diminish the use of U.S. coins and currency in the future.
Central banks in China and Japan are the two largest foreign holders of U.S. Treasury debt. Just over 10 years ago, China’s central bank held $1.35 trillion of U.S. currency and U.S. Treasury debt. That total is now down to $775 billion, where much of the decline has been displaced by that central bank’s purchases of physical gold. According to the Federal Reserve Bank, Japan’s central bank holdings of U.S. Treasury debt fell from $1.3 trillion in January 2022 to only $1.1 trillion in January 2023.
At the beginning of 2024, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates joined the BRICS consortium of Brazil, Russia, India, China, and South Africa. Algeria, Bahrain, Bangladesh, Belarus, Bolivia, Cuba, Kazakhstan, Kuwait, Palestine, Senegal, Thailand, Venezuela, and Vietnam are among more than 30 nations that have expressed interest in becoming members of this consortium. This consortium is actively working to develop an international payment system that will not use the U.S. dollar.
After Russia invaded Ukraine in early 2022, the U.S. and several other countries imposed economic sanctions on that nation. As a result, Russia has stopped accepting payment in U.S. dollars for its massive exports of energy, mineral, and agricultural products.
On July 1, 2024, the Bank for International Settlements announced that India, the Philippines, Singapore, Thailand, and Vietnam (with Indonesia as a special observer) are planning to establish a digital instant payment system to settle transactions among the nations, avoiding the use of the U.S. dollar.
In addition, numerous nations have made bilateral agreements to make payments between them without using the U.S. dollar.
With the trend of using coins and currency in everyday commerce domestically and the surge in developing international payment systems that do not use the U.S. dollar, could U.S. coins and currency someday become obsolete?
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