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In the wake of the worldwide financial crisis, attention has turned to America's position in the global economic order. Will the U.S. continue to occupy the commanding heights? Or will rising powers like China and European Union gradually achieve parity or even surpass the U.S.? If there is one indicative measure of America's shifting status in the global econwmy, it is the dollar. The dollar, the world's international reserve currency for over eighty years, has been a pillar of American economic hegemony. As a critic of U.S. policies once put it, it bestows upon the dollar "exorbitant privilege" in international finance and reinforces U.S. economic power. In Exorbitant Privilege, eminent economist Barry Eichengreen explains how the dollar rose to the top of the monetary order before turning to the current situation. The current crisis has placed serious strains on the dollar, and many fear that Americans are in for a prolonged period of belt tightening because of increasing interest rates and the rise of competing currencies like the Euro and the Chinese renminbi. Eichengreen suggests that while we are most likely entering an era with more than one reserve currency, it does not constitute a crisis. While the US will lose some of its power, a multiple-reserve currency system has worked before--in the era prior to World War I. Given the pervasive predictions of US decline, this will be a counterintuitive--and welcome--rejoinder to the emerging conventional wisdom about American decline.
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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, which was shortlisted for the FT Goldman Sachs 2011 Best Business Book of the Year, 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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