Review: Exorbitant Privilege: The Rise and Fall of the Dollar by Barry Eichengreen
Oxford University Press
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 coin. So did Spanish pieces of eight, which dealers called "dollars".
Today, the dollar figures in 85pc of all foreign-exchange transactions, says Eichengreen. Oil is priced in dollars. The greenback accounts for more than 60pc of the foreign reserves that central banks hold.
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".
US exporters, after all, get paid in the same currency they use to pay workers and suppliers. An Irish company selling machine tools to China and receiving payment in dollars bears the cost of converting them into euros.
America's advantages don't end there. The US 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.
And then there's the $5 trillion in US Treasury bonds and agency debt that foreign central banks hold: the interest the US pays on those liabilities is less than the rate of return it gets on its foreign investments. That allows the US to import more than it exports, year after year.
To understand how this happened, we need some historical context. Right up to the eve of World War One, even the Belgian franc outranked the dollar. Three decades and a second world war later, the dollar had become the dominant international currency.
This made sense when the US was the only major economy left standing amid the postwar rubble. The question is why the dollar continues to hold sway, when Germany and China export more than America does.
Eichengreen starts with the fact that the US still has the world's biggest economy and its most liquid financial market. For now, no other currency comes close to supplanting the greenback.
But the world could be heading toward a multipolar system in which the dollar will compete with the euro and China's renminbi, Eichengreen writes. The days when an international currency status meant a natural monopoly 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 is long.
They account for less than 5pc 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.
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.