If you fret that the dollar risks losing its global clout, consider this: It still beats wampum.
Long before the greenback was born, shell beads became legal tender in Massachusetts Bay Colony, as Barry Eichengreen reminds us in “Exorbitant Privilege,” a brisk primer on the dollar’s role in the international monetary system.
Corn, wheat and tobacco took turns as colonial coin. So did Spanish pieces of eight, which dealers called “dollars.” From these inauspicious beginnings grew the world’s most dominant currency.
Today, the dollar figures in some 85 percent of all foreign-exchange transactions, says Eichengreen, warming to his subject. Oil is priced in dollars. The greenback accounts for more than 60 percent of the foreign reserves that central banks hold, and it remains the most important currency for invoicing and settling international transactions.
Eichengreen teaches economics and political science at the University of California, Berkeley. He borrows the book’s title from Valery Giscard d’Estaing’s famous complaint that dollar dominance affords America an “exorbitant privilege.”
U.S. exporters, after all, get paid in the same currency they use to pay workers and suppliers. A German company selling machine tools to China and receiving payment in dollars bears the cost of converting them into euros.
$100 Costs Pennies
America’s advantages don’t end there. The U.S. Bureau of Engraving and Printing can make a $100 bill for a few pennies; other countries, to get the same amount, must hand over $100 in actual goods and services. Who says alchemy doesn’t work?
And then there’s the some $5 trillion in U.S. Treasury bonds and agency debt that foreign central banks hold: The interest the U.S. pays on those liabilities is less than the rate of return it gets on its foreign investments. That allows the U.S. to import more than it exports, year after year.
To understand how this happened, we need some historical context, which Eichengreen rattles off with unpretentious erudition. Right up to the eve of World War I, he explains, even the Belgian franc outranked the dollar in the international pecking order. Three decades and a second World War later, the dollar had become the dominant international currency.
This made sense when the U.S. was the only major economy left standing amid the postwar rubble. The question is why the dollar continues to hold sway today, when Germany and China both export more than America does.
‘Monetary Lingua Franca’
Eichengreen breezes through the reasons why the dollar retains its edge over would-be rivals, starting with the simple fact that the U.S. still has the world’s biggest economy and its most liquid financial market. Nor should we underestimate the power of incumbency. For now, no other currency comes close to supplanting the greenback as what Eichengreen calls the planet’s “monetary lingua franca.”
That doesn’t mean that Americans can afford to be complacent. The world could be heading toward a multipolar system in which the dollar will compete with the euro and the renminbi, Eichengreen writes. The days when an international currency status meant a natural monopoly -- “like municipal water supply or electricity,” he says -- are numbered.
Still, the greenback’s rivals all have drawbacks: The euro, for one, “is a currency without a state,” he says. “The renminbi, for its part, is a currency with too much state.”
As for all the hoopla about the dollar being replaced by Special Drawing Rights, Eichengreen says we should get real. SDRs are bookkeeping claims issued by the International Monetary Fund; the list of their limitations as a currency is long.
They account for less than 5 percent of global reserves, for starters, and they can be used only to settle debts to governments and the IMF. There are no private markets where they trade, and an attempt to create such a market in 1981 flopped, as Eichengreen shows.
The biggest threat to the dollar, it turns out, won’t come from abroad. It will come from America’s failure to strengthen its own economy at home, Eichengreen writes: “We may yet suffer a dollar crash, but only if we bring it on ourselves.”
As I survey America’s economic landscape -- the erosion of its manufacturing base, the thinning of its ranks of engineers and scientists, the geriatric state of its roads and rail networks -- I wonder if the country is committing dollarcide.
“Exorbitant Privilege” is from Oxford (215 pages, $27.95, 14.99 pounds). To buy this book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)