This is a brisk and invigorating account of a century of international monetary developments by one of America’s foremost economic historians.footnote1 As would be expected, Exorbitant Privilege is extremely well informed, cogently argued and broadly persuasive. Events and policies, such as the Suez war, the ems breakdown or the current financial crisis—together with sharp criticism of the excessive deregulation favoured by both Alan Greenspan and Larry Summers—are splendidly documented. Conflicting views of what might happen in future are clearly put forward and analysed. Unexpectedly, perhaps, the book also displays fairly frequent touches of humour. In other words, it is both erudite and readable.
The main story begins in 1913, the year in which the us Federal Reserve system was created. At the time, America was already the world’s largest economy and largest exporter. Yet the dollar was hardly used in international exchanges. Semi-obscure currencies such as the Belgian franc or Italian lira were apparently more important. By 1924, just over a decade later, the dollar had dethroned sterling as the world’s main reserve currency and unit of account. Thus, already during the Weimar hyperinflation, prices in shops across German cities were only decided upon late each morning once a phone call from Berlin had provided the day’s exchange rate between the Reichsmark and the dollar. In part, the currency’s rise reflected America’s growing importance as a world power. But it was also strongly aided by the conscious efforts the newly founded Federal Reserve made to help its internationalization. After World War Two, of course, the dollar’s dominant role in international exchanges was institutionalized in the Bretton Woods agreement, enshrining what, at the time of the Vietnam War, de Gaulle’s finance minister Giscard d’Estaing would dub America’s ‘exorbitant privilege’. In some respects this would increase when Nixon abandoned convertibility with gold in the 1970s.
Yet in recent years, voices have increasingly been heard challenging this dominant role. Today, ‘in the wake of the most serious financial crisis in eighty years, a crisis born and bred in the United States’, Eichengreen writes:
There is again widespread criticism of America’s exorbitant privilege. Other countries question whether the United States should have been permitted to run current-account deficits approaching 6 per cent 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 us external deficit, like it or not. With cheap foreign finance keeping us 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 us in order to obtain the dollars needed . . . underwrote the practices that culminated in the crisis.
More than this, some have argued that, ‘as a result of the financial mismanagement that spawned the crisis and growing dissatisfaction with the operation of the international monetary system’, the dollar’s singular status is now in doubt: