This week we recommend Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, by Barry Eichengreen
The best robberies in the history of the cinema have one thing in common: the loot is counted in dollars. Regardless of the era or continent in which the robbery occurs, the suitcase always contains the same green bills. Is it carelessness on the part of American cinema? Much more than that. A hangover from World War II, this “exorbitant privilege” that the dollar enjoys in the international world of finance is a reality that the US economist Barry Eichengreen questions and exposes skillfully in his latest book.
Today the US economy still conserves the privilege of controlling the currency that governs most international transactions, whether or not it participates in them. In the 1950s, when the United States was the majority source of investment around the world (nearly 85%), it made more sense that it had an international financial hegemony, although France already complained that it was an “exorbitant privilege”, a term coined by the then French Finance Minister Valery Giscard D’Estaing.
The globalization and multipolarity of the 21st century have not managed to wrest financial hegemony from the United States: its currency is the currency of all the commodity markets; oil is traded in dollars; central banks have more than half their reserves in dollars. What advantages does the United States obtain from this situation? The possibility of investing more money than it produces, thanks to the spread between the interest rates it pays on its debt.
However, the current global financial crisis, which was born and raised in the United States, has focused attention on this privilege that circumstances have revealed to be “more exorbitant than ever.” Should we replace the dollar as a global currency? Are we witnessing the birth of a multipolar financial market?
The problem is that there is no rival among the possible candidates sufficiently strong to dethrone it: the euro is a currency without a state, with limited fiscal and financial powers and little capacity to react, due to the EU’s system of decision-making. Special Drawing Rights (SDRs), an international reserve asset created by the IMF, cannot be used to intervene in private markets and the IMF would also have to be more like a central bank and provide liquidity in case of urgent need. Is the solution a Chinese replacement? In contrast to the euro, the Chinese renminbi is a currency with “too much state”. Government control of the Chinese financial system limits its international use. The liquid financial market has to be completely liberalized.
In these circumstances, will we one day see the crash of the dollar? What would happen then? In the financial future sketched by Eichengreen, the outlook is not so bleak. Management of the world economy is increasingly more multipolar, so there would be various international currencies, each with a region of influence. Does Eichengreen rule out a sudden collapse of the dollar? What he does make clear is the paradox of hegemony of this currency as an international currency: its future does not depend on the action of its economic or geopolitical rivals, but rather on the capacity of the United States to manage its own economy.