Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System

Published by EH.NET (August 2011)

Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. New York: Oxford University Press, 2011. iii + 215 pp. $28 (cloth), ISBN: 978-0-19-975378-9.

Reviewed for EH.Net by Gianni Toniolo, Departments of Economics and History, Duke University.

?We are seeing the government of a global sport (cricket) passing from west to east for the first time. The shift is unique and irreversible. The east can now take something western and make the west a supplicant. We had better get used to it? (M. Bose, Financial Times, 7/21/2011, p.11).? How long will it take before the main reserve currency will be added to the list of ?something western? passing east?? The main tenet of Barry Eichengreen?s book is that it will take a long time before the dollar follows the fate of cricket, not so much because of the dollar?s strength but because of the weakness of the alternatives.

The book, written for the general public, is useful and pleasant to read also by the so-called professionals. Those used to Eichengreen?s clear and fluent prose will find here a particularly light touch obtained by dropping here and there a good dose of anecdotal hints to lessen the weight of serious history and rigorous economics: this is particularly appreciated by those like me who write on monetary history and know how heavy a meal it is to digest — both by undergraduates and the educated public.

A brief introduction sketches the main argument of the book, namely that there is a ?fallacy behind the notion that the dollar is engaged in a death race with its rivals? (p. 9): rather than getting used to money moving, with cricket, from west to east we should prepare to a world ?in which several international currencies coexist,? as they did for most of the past two centuries.

Chapter 2 traces a brief history of the dollar, from its humble and foreign origin (it even got its name by assonance with the silver thaler coming from the south) to the turning point of the 1930s.? The main question here is why the dollar didn?t become the leading international currency by the end of the nineteenth century when American economy and trade were already larger than Britain?s, the producer of the most important among the international currencies of the day. The answer, for Eichengreen, is to be found in the underdevelopment of the U.S. money market vis ? vis Britain?s.? As long as acceptances were more efficiently traded in the liquid London market, the dollar could not aspire to the status of international currency. Had Jackson not vetoed the renewal of the Second Bank of the United States, things might have been different; as it was, the international rise of the dollar was checked by the absence of a central bank. Things changed after 1919 when the pound remained inconvertible and the United States became the main lender to Europe: by 1925, when London resumed convertibility, the dollar had already overtaken the sterling in the reserve portfolios of the world?s central banks. One might add that, had the Congress ratified the Versailles Peace Treaty, giving America a more decisive role in European affairs, by 1930 the dollar?s weight as international currency might have been more decisive.

Chapter 3 deals with the time when ?the dollar reigned supreme,? much to De Gaulle?s chagrin (hence the title of the book). Everything of course began at Bretton Woods where Keynes?s bancor never stood a chance. Brains or no brains, industrial might and military power had already decided in favor of the American currency. The history of the rise and fall of the Bretton Woods system has been told so many time, including by Eichengreen, that relatively few pages are devoted to the quarter-century following 1945. There were, of course, good reasons for the continued dominance of the dollar much beyond the demise of Bretton Woods: Eichengreen stresses both the strength of the American economy and the lack of alternatives.

Chapter 4 outlines the history of the euro, potentially the only credible rival to the dollar. An outstanding expert on European monetary history and economics, Eichengreen provides a lively account of the long gestation of the single currency from the road leading to the Warren Report of 1970, up to the present. The chapter will be my suggested reading to those in need a short briefing on the politics of European monetary union, an object still largely misunderstood not only by the American public and press but by academic experts as well. Eichengreen?s conclusion is that the euro would have made a formidable rival to the dollar had the UK opted in. This may be true from a technical point of view but, as Eichengreen knows only too well, for good or bad, Continental ways are not British ways. British participation has arguably weakened the progress towards a more politically integrated Europe (a prerequisite for the health of the euro in the long run) and one may wonder how British and German cultures would be integrated in running the ECB.

Chapter 5 provides a masterful user?s manual for the crisis that began in 2007. Interestingly, in fact, each chapter of this book can be read in its own right as a synopsis for relevant international monetary issues, regardless of their bearing on the book?s theme: the future of the dollar. The manuscript was given to the publisher when the Great Recession (the terminology might look awkward a few years hence) was on its way to being slowly overcome. The events of Summer 2011, unfolding while I write this review, might oblige at least a partial change the overall interpretation of the past eventful years. They might also impact on the prospects of the dollar-euro relation. It is, however, impossible to say to what extent this will be the case. Economic history stops at the end of the cycle previous to the one when it is written: economic historians need the perspective of the full cycle in order to explain both its origins and consequences.

Chapters 6 and 7 can be read together: they discuss the end of the dollar?s monopoly as reserve currency and ask whether the dollar will (relatively) soon crash or just slowly lose weight, sharing its reserve currency role with other means of international payment. History shows ? and this is one of the themes of the book ? that the ?normal? case is one where several reserve currencies coexist, with one of them in more or less dominant but not monopolistic position. Monopoly, in the post- Second World War years, was an exception due to both economic and geopolitical reasons. We are now back to ?normal? times but, for all the economic and political weakness of the United States, we shall not witness a precocious move away from the dollar. For one thing, the American economy is still the world?s largest and, at market exchange rates, it is destined to remain such for another while.? For the rest, alternatives don?t look very promising: the euro has problems of its own, the renminbi is not convertible, the Swiss franc is backed by too small an economy, the Indian and Brazilian currencies might in the future qualify for limited diversification but are no match to the dollar, gold is not used for current transactions, timber is illiquid, and so on. International trade is still largely invoiced in dollars and this is a powerful incentive for central banks to hold dollar reserves. All these conditions may, and probably will, change: the future will look like the early twentieth century when a number of reserve currencies coexisted with the leading one. What we saw after the publication of this book tends to reinforce its conclusions: the demand for T Bonds and other dollar-denominated assets increased in spite of Standard & Poor?s.

As I said, this is a book aimed to a large audience of non-specialists. Its chapters make superb assignments to undergraduate classes (most economics Ph.D. students would hugely benefit from reading it but I doubt that many of them ever will.). It contains a lot of details that will interest specialists as well. There is only one question the reader, specialist or otherwise, finds unanswered: what about geopolitical factors? Eichengreen brings them explicitly to the fore in discussing, with a wealth of details, the impact of the unfortunate Anglo-Franco expedition to Egypt in 1956. For the rest, there are here and there hints that politics matters for the international status of leading currencies and Eichengreen states that the leading world power also tends to own the leading currency but one remains a bit unsatisfied by the relative paucity of elaboration on this theme, particularly regarding future scenarios. Jeffrey Sachs recently stated the obvious when writing: ?For at least two decades the U.S. has been unable to provide monetary stability, financial regulation and fiscal rectitude? (Financial Times, May 31, 2011). Are we, in this respect, back to the interwar years? Eichengreen seems to agree that similarities exist. If so, will weak international leadership have no impact on the dollar?s status in any plausible scenario? The dollar might even get stronger in cases of looming international military or political crises, as it did in the late 1930s: by bringing geopolitical considerations more to the fore Eichengreen would have probably strengthened his own conclusions.

Gianni Toniolo is Research Professor of Economics and History, Duke University, Contract Professor of Political Science at the Libera Universit? delle Scienze Sociali (Roma) and Research Fellow at CEPR, London

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