For more than half a century, the U.S. dollar has been not just
America's currency but the world's. It is used globally by
importers, exporters, investors, governments and central banks
alike. Nearly three-quarters of all $100 bills circulate outside
the United States. The dollar holdings of the Chinese government
alone come to more than $1,000 per Chinese resident.
This dependence on dollars, by banks, corporations and governments
around the world, is a source of strength for the United States. It
is, as a critic of U.S. policies once put it, America's "exorbitant
privilege." However, recent events have raised concerns that this
soon may be a privilege lost. Among these have been the effects of
the financial crisis and the Great Recession: high unemployment,
record federal deficits, and financial distress. In addition there
is the rise of challengers like the euro and China's renminbi. Some
say that the dollar may soon cease to be the world's standard
currency--which would depress American living standards and weaken
the country's international influence.
In Exorbitant Privilege, one of our foremost economists, Barry
Eichengreen, traces the rise of the dollar to international
prominence over the course of the 20th century. He shows how the
greenback dominated internationally in the second half of the
century for the same reasons--and in the same way--that the United
States dominated the global economy. But now, with the rise of
China, India, Brazil and other emerging economies, America no
longer towers over the global economy. It follows, Eichengreen
argues, that the dollar will not be as dominant. But this does not
mean that the coming changes will necessarily be sudden and
dire--or that the dollar is doomed to lose its international
status. Challenging the presumption that there is room for only one
true global currency--either the dollar or something
else--Eichengreen shows that several currencies have shared this
international role over long periods. What was true in the distant
past will be true, once again, in the not-too-distant future.
The dollar will lose its international currency status, Eichengreen
warns, only if the United States repeats the mistakes that led to
the financial crisis and only if it fails to put its fiscal and
financial house in order. The greenback's fate hinges, in other
words, not on the actions of the Chinese government but on economic
policy decisions here in the United States.
Incisive, challenging and iconoclastic, Exorbitant Privilege is a
fascinating analysis of the changes that lie ahead. It is a
challenge, equally, to those who warn that the dollar is doomed and
to those who regard its continuing dominance as inevitable.
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