The phrase `exorbitant privilege' used to describe the special status of the US$ as the world financial system's reserve currency is usually attributed to Valery Giscard D'Estaing, President of France between 1974 and 1981. In fact he was quoting financial journalist Raymond Aron, who used the phrase as early as 1965 when writing in the French national daily `Le Figaro'.
Barry Eichengreen, Professor of Economics and Political Science at Berkeley, is a historian of the development of global economics and the international monetary system. He is also an excellent writer, explaining the complex financial landscape of trade acceptances, special drawing rights and currency management to the non-specialist reader in clear language - though be advised, to get the most from this excellent book it might be better if you are equipped with the basics of undergraduate-level finance and economics.
Eichengreen's book covers the history of the US$ from its tentative introduction in the 1700s (when Spanish pesos were commonly used for transactions in America along with barter and a variety of other ad-hoc `currencies') through the creation of the Federal Reserve - the third, and finally successful attempt to create a reserve bank - to the rise of the US$ as the pre-eminent global currency after WW2 when America was really the only manufacturing economy left standing, and the only substantive exporter. This made the US$ a natural successor to its predecessor, Sterling, and everyone wanted and needed US$ for American goods.
The author lays out the benefits of having the global reserve currency: you can spend more than you earn generation after generation, run big trade deficits, enjoy cheaper borrowing than any other comparable economic jurisdiction, and print money at will, being the obvious advantages. Other trading partners are likely to hold your currency as a store of value (China for example, as of 2010 holds something like US$2.5 trillion as reserves) and this makes it not in their interest to see your currency devalue, as it will devalue their own assets. In a phrase, `earn less, spend more and the rest of the world will make sure you're OK' could be the motto.
Eichengreen explores rivals to the US$: principally the euro and the Chinese renminbi, both of which have their own problems and are unlikely to replace the US$ any time soon (for example, the euro though it represents collectively a more economically powerful trading bloc than the USA is weakened by being, currently, a currency without a central government). However the most likely future he foresees is one where a small number of other emergent currencies from politically and economically stable trading blocs - the euro, the Chinese renminbi, the Indian Rupee - might join the US$ and become principle trading currencies each of a geopolitical region where a great deal of bi-partisan trade is done (but he doesn't see either the Japanese yen or the Russian rouble as viable global currencies for reasons too complex to explore in a short review).
The final chapter titled `Dollar Crash' is devoted to exploring ways in which the US$ might lose its global hegemony more suddenly, rather than gradually over time. The chapter is quite detailed in its examination of the consequences of out-of-control US government deficits; the likelihood (not very, he says) of a panic flight from the US$ and all reserve-holders trying to dump their dollars over a short time; and the possibility of trade wars. His conclusion? There is virtually no chance of the US$ being replaced as the global reserve currency any time soon. Long-term, however - say 100 years from now - well, that might be a different discussion.
The book is only 177 pages excluding notes and index, but is densely written with a lot of detail. The reader less schooled in the detailed and nuanced minutiae of international economics might need to pay close attention, so it's not a quick read.
Charles Feinstein and Michael Bordo might come close, but nobody has a deeper understanding of 20th century finance than Barry Eichengreen. Unlike his peers, who tend to compile loosely connected essays on parts of the story, Eichengreen briskly tells the complete story of banking, currency and finance since its early days. This has two distinct benefits. First, the narrative's pace prohibits him from dwelling on early forms of currency, which bog down a lot of books like this, and no description of the recent financial crisis is more concise. Second, by limiting word count on anachronistic or (by now) clichéd history, he has space to include valuable insight on, for example, the Fed's early days or the significance of 1950s decolonization, all of which helps to illuminate a century of international exchange rate evolution. It reaches no valuable conclusion about the dollar, so the choice of title feels a bit rushed, but it will whet your appetite to keep looking. Money, like language, is a means of exchange. Incumbency, or usage, matters. Perhaps an expert in linguistics is what we need to take this further.
Buy it, read it, a book full of insight about how the dollar has become the dominant currency for trade in goods and capital, how much the United States benefits and what the challenges are going forwards.
If I have a quibble, it is with the line 'Great Britain was a small winswept island off the northeast coast of Europe'. Small, certainly. Island, up to a point (group of islands, really). Windswept? er, not very. Off the northeast coast of Europe? Only in the same sense as the University of California, Berkely is in the southeast of the United states.
The dollar has maintained its role as the dominant means of exchange even as the US share of the global economy has fallen. A huge range of countries still peg their currencies to the dollar and the world keeps nearly two thirds of its ridiculous USD 9trn in currency reserves, invested in dollars.
If the author provides any comfort, it is that the fate of the dollar - and the ability of the US to go on cashing in from its unrivalled status - is in the hands of US policymakers, not the rest of the world. That would be nice if the US were not playing quite as fast and loose with the dollar's status as they are.
Eichengreen provides a simple, logical, well thought out view of the Dollar and it's relations to several other global currencies. Most of his focus is on modern history (post WWII) and the current financial crisis, with a short prediction of what he feels the future role of the Greenback may be. Despite the fast moving pace of the current troubles, as of November 2011, the book is not out of date and still entirely relevant. In fact, those wishing to understand contemporary problems will find their answers here. Non-economists should not be put off, as the concepts can be understood by anyone (although those new to economics may need to support their read with the odd Wikipedia search). My criticism is the rather 'clunky' nature of the writing. If Eichengreen's English flowed better, the book would read easily and be slightly more accessible to those less confident about the subject. Also, once or twice I had to re-read a sentence, not because I couldn't understand a concept, term or argument but because the syntax confused me. Perhaps that is a little unfair, this isn't a novel, but I felt the writing could be better without sacrificing accuracy. Because of this, I didn't award the five stars that the content was well worth. Don't let that put you off, if you are interested in macroeconomics you will enjoy the book. I rarely get to say 'money well spent' anymore, but this was.
This is a fascinating account of global finance, with particular reference to the US dollar, but with a keen look at the Euro too. Tracing the history of the development of the preeminence of the US dollar as the main reserve currency, and as the currency of international trade, the author also gives a fascinating insight into likely developments in the Euro zone and China, both economically and politically.
Eichengreen concludes that the future of the dollar as the main reserve currency, and of the great advantage that this confers on the us economy, is still very much in US hands, and is primarily dependant upon political will to reduce the deficit.
A familiarity with financial markets is a real advantage in reading this book.Although I have a reasonable understanding of economics, and although this book is written in fairly plain language, I found that I had to re-read some pages to fully grasp the ideas contained. Worth the effort though - this is a very informative and thought provoking book
The author provides an interesting discussion about the rise and the fall of the U.S. dollar in an historical context. The dollar became a power bill only after WWII even though United Sates was the largest economy around 1880. When Europe and Japan was in ruins after WWII, the U.S. dollar gained global attention and became the currency of the world's banks; the kind of cash accepted worldwide. It is an economic consequence of a widespread international use of the U.S. dollar that confers on its issuer the geopolitical and strategic leverage, namely its strong financial position and leadership in foreign policy decisions. Because it pays less on its debts, it is better able to finance foreign operations and exert strategic influence. It does not depend on other people's money. Instead, it has leverage over other countries that depend on its currency. In the 19th century, when Britain colonized half the world, the sterling pound dominated international financial markets, with the post-World War II period, when sterling lost its dominance and the United States, not Britain, called the foreign-policy shots. But what made sense then makes less sense now, when both China and Germany export more than the United States. Today the U.S. share of global exports is only 13 percent. The United States is the source of less than 20 percent of foreign direct investment down from nearly 85 percent between 1945 and 1980. These two changes are both manifestations of the same fact: the United States is less dominant economically than 50 years ago. This fact reflects the progress of other economies, first Europe, then Japan, and then China and India.
But today, in the wake of the most serious financial crisis in 80 years, a crisis is born and bred in the United States, there is again widespread criticism of America's exorbitant privilege, other countries question whether the United States dollar should have been permitted to run current account deficits approaching 6 percentage of GDP in the run-up to the crisis. Emerging markets complain that as their economies expanded and their central banks felt compelled to augment their dollar reserves, they were obliged to provide cheap finance for the U.S. external deficit. With cheap foreign finance keeping U.S. interest rates low and enabling American households to live beyond their means, poor households in the developing world ended up subsidizing rich ones in the United States. The cheap finance that other countries provided the U.S. in order to obtain the dollars needed to back an expanding volume of international transactions underwrote the practices that culminated in the crisis. The United Sates lit the fire, but foreigners were forced to provide the fuel. If this was not injustice enough, there is the fact that America's international financial position was actually strengthened by the crisis. In the course of 2007 the dollar weakened by about eight percent on the foreign exchange market. But since American debts are denominated in American currency, there was no impact on their dollar value, In contrast, American foreign investments, whether in bonds or factories, became more valuable as the dollar fell, and the interest and dividends were more when converted back into dollars. Then in 2008, in the worst of financial crisis in 80 years, the U.S. govern¬ment was able to borrow vast sums at low interest rates because foreigners fig¬ured that the dollar was the safest currency to be in at a time of great turmoil. But in the spring of 2010, when financial volatility spiked, investors fled into the most liquid market, that for U.S, treasury bonds, pushing down the cost of borrowing for the U.S. government and along with it, the mortgage interest rates available to American households: this is what exorbitant privi¬lege is all about.
The author points out that it is not the exchange rate or the net foreign investment that plays a role in dollar's strength, but it is the general health of the U.S. economy that matters. Whether the dollar rises or falls will matter much less for U.S. strategic influence than whether U.S. economic growth averages 2 or 4 percent per annum over the next decade. Hence the likely scenario for a dollar crash is one in which brought about by poor American economy. Consequently the fate of the dollar is in American hands and not those of Chinese.
Professor Barry Eichengreen's exploration of the dollar's reserve currency role could be merely an interesting history of currencies and repositories of value - from wampum and whelk shells to credit default swaps - all mapped out from Bretton Woods to the Maastricht Treaty to China's looming role and beyond. But Eichengreen accounts for more than history as he expertly guides readers through the maze of the international monetary system. getAbstract finds that unresolved issues in world markets give this exposition considerable contemporary bite. Eichengreen argues solidly that the threats to the dollar's international reserve status are real enough, but says all signs are that the dollar will endure as the first among rivals, even if other regional kingpins arise. He seems to believe that, despite its various crises and challenges, the dollar will remain dominant - but, in the end, he ducks a definitive judgment and concludes that its fate is in American hands and not in those of the Chinese or other international competitors.
This is a very lucid account about the currencies which dominate the world's economic system and how they have been eclipsed by those of rising nations (Sterling eclipsed by USD, the dollar challenged by the Renmimbi and even the Euro. Barry Eichengreen explains a complex subject extremely well and it is one which has never been more relevant.