Dollar primacy and American power: What's at stake?

While the demise of the dollar has been predicted in the past, expectations of a fundamental change in the international role of the dollar are increasingly widespread, and eminently plausible. From a situation where the dollar was the undisputed and dominant international currency, one likely scenario is that it will become one of several key currencies that could be characterized as ‘peer competitors’. This raises the question: does it matter? In particular, does it matter for US power? This paper reviews why the dollar's status might change, from that of a ‘top’ to a ‘negotiated’ currency. It then considers the consequences–the loss of economic benefits and structural power, and the costs associated with managing a currency in (relative) decline and eroding international prestige. I conclude that, even as the dollar is likely to remain the world's most widely used international currency, the vulnerability of the greenback presents a potentially significant and underappreciated restraint on contemporary American political and military predominance. KEYWORDS: Dollar dominanceinternational currencyhegemony ACKNOWLEDGEMENTS I thank three anonymous referees, Eric Helleiner, Chris Way, and all the other participants in the Cornell workshop on ‘The Future of the Dollar’. Notes 1 See, for example, ‘The Passing of the Buck’; CitationGray (2006). 2 For a good and representative tip of this iceberg, see Gavin (Citation2004: 59–88); Zimmermann (Citation2002: 105–26); Strange (Citation1972: 191–216); CitationBergsten (1975b); Triffin (Citation1978–1979: 269–86); CitationCalleo (1982); CitationKrugman (1984). 3 Cooper (Citation1973: 4; 2005). 4 The future of the international role of the dollar is the focus here. The dollar can (and has) depreciate (or appreciate) with little or no impact on its role as an international currency. Nevertheless, the two are not always unrelated. Widespread concerns about the future value and stability of the dollar will influence decisions about the use of the dollar internationally, and these perceptions and decisions can have a self-reinforcing character. 5 On the crucial and mercurial role of confidence in monetary affairs, see for example Scitovsky (Citation1970: 37). 6 See CitationBergsten and Williams (2004), and CitationBergsten and Williamson (2003). 7 For developing countries, as a rule of thumb, net external liabilities of 40% is considered a ‘crisis threshold – the point at which the imbalance will trigger a financial crisis’. 8 Obstfeld and Rogoff (Citation2004: 1, 5, 7, 18); Mussa (Citation2005: 175–6, 186, 194–5, 201–3); Cline (Citation2005: 3, 66, 85, 99, 154, 168–71, 275–7); Edwards (Citation2005: 2–3, 11–12, 26, 40–2). 9 For discussions of the economic and political origins and maintenance of the contemporary international dollar order, see CitationMcKinnon (2005) and Schwartz (Citation2002–3: 333, 343, 345, 348). 10 CitationMcCauley et al. (2005); CitationMurray and Labonte (2005); Burdekin (Citation2006: 6); Truman and Wong (Citation2006: 42). 11 CitationCohen (2004); McNamara and Meunier (Citation2002: 849–68). On the euro as a peer competitor, see Bergsten (Citation1997: 83) (quote); Henning and Carlo (Citation2000: 22–8); Henning (Citation2006: esp. p. 130). 12 CitationKindleberger (1976a). 13 Eichengreen (Citation2005: 7–8). For a discussion of the relationship between the reserve and vehicle roles of international money, see Roosa and Hirsch (Citation1966: 3–6). 14 CitationKirshner (2003). 15 CitationZimmerman (2004); CitationWalter (1999); CitationKatada (2002) CitationBowles (2002). 16 CitationStrange (1971b); CitationHelleiner (2006a). 17 General de Gaulle (Citation1967: 80); Rueff (1972: 78); Memorandum from Secretary of the Treasury Fowler to President Johnson (1998: 257–62); Zimmerman (Citation2004: 177–8). 18 The most comprehensive assessment of the costs and benefits can be found in Cohen (Citation1971b: Chapter 2). See also Salant (Citation1964: 165–72); Aliber (Citation1964: 442–56); Grubel (Citation1964: 189–212); CitationKarlik (1968). 19 Kindleberger (Citation1976a: 35, quote); CitationKrasner (1978) (‘the fragility of the international monetary system is inherently related to the declining international power of the US’; p. 82); see also Kennedy (1987: 434). 20 Nau (1990: 154–7); Keohane (1982: 11). 21 On France's ‘strategic disruption’ of the international monetary system in the 1960s, see Kirshner (Citation1995: 192–203). 22 Strange (Citation1987: 569); see also Calleo (1969: 16). 23 McKinnon (Citation1969: 5, 17, 21–2); CitationGrubel (1969); Cohen (Citation1971a: 494–507); Kirschen (Citation1974: 355–78). 24 Salant (Citation1964: 165, quotes, 166, quote); Aliber (Citation1964: 445, 454); Rueff and Hirsch (Citation1965: 2–3). 25 Strange (Citation1988: 25, quote); Strange (Citation1990: 259–74); Strange (Citation1994: 407–10); see also Helleiner (Citation2006b: esp. pp. 73–6). 26 CitationHirschman (1980); Kirshner (Citation1995: Chapter 5, ‘The Theory of Monetary Dependence’); Abdelal and Kirshner (Citation1999–2000: 119–56). States which accumulated dollars in the 1960s found themselves with a considerable stake in the viability of the dollar; see, for example, CitationSalant (1964), CitationCooper (1973). 27 The informal term ‘overhang’ was originally associated with the postwar British problem of ‘the notorious ‘overhang’ of official sterling balances over British reserves of gold and foreign exchange’. In theory, with freely floating exchange rates, the ‘overhang’ can be ignored and excess currency ‘mopped up’ by greater depreciation. In practice, states are sensitive to the management of the overhang in any event, and in the past the management of the ‘dollar overhang’ attracted considerable attention even in the absence of a fixed exchange rate or any formal commitments on the part of the US. See Strange (Citation1971a: 219, quote); Kenen (Citation1973: 194); Bergsten (Citation1975a: 80); Cohen (Citation1979: 42). 28 Gilpin (1981: 31, quote); see also Kindleberger (Citation1970: 56, 204–5, 217–8). 29 Kirshner (Citation1995: 140–8); CitationShannon (1950); ‘The Sterling Balances’ (Citation1950: 1075); Hirsch (Citation1969: 336–43). 30 CitationStrange (1971b); see also Fielding (Citation1999: 633–7, 645, 651); Burk and Cairncross (Citation1992: esp. pp. 20, 78, 105). 31 OECD in Figures: Statistics on Member Countries (Citation2005: 13–14). 32 Spiro (Citation1999: 121–4). 33 On diplomacy of the dollar after the Iraq war, see Taylor (Citation2007: esp. p. 212); on pre-war currency manipulation, see CitationKirshner (2006). 34 If preserving the international role of the dollar was such a high national priority that it was worth going to war over, the US had a much more powerful and less expensive option available – reducing the federal budget deficit. But the Iraq war – with uncertain consequences on third country dollar choices at best, made those federal deficits even larger. 35 A dollar crisis, like most financial crises, would be fueled by thousands of uncoordinated, individually rational decisions to get out of the dollar in anticipation of further dollar decline, decisions which would be self-fulfilling. If anything, the fact that a large percentage of dollars and dollar liabilities are held by governments is relatively stabilizing, as governments will be less sensitive to profit motives in managing their reserves than private actors. 36 Strange's concept of a negotiated currency was principally a statist one – with an emphasis on political agreements between states. Here the primary ‘negotiation’ will likely be a tug of war between US government officials and anonymous and disembodied market forces. 37 Or more pointedly, to the ability to benefit from the fact that it is borrowing in dollars as opposed to foreign currencies. Makin (Citation1971: 350–1); Schwartz (Citation1997: 143); Citation‘Shrinking Role of U.S. Money’ (1979); Truman (Citation2005: 353, 354). 38 CitationKirshner (2007). 39 Kirshner (Citation1995: 63–82); Kunz (Citation1991: 139–40, 143, 152–3); Johnman (Citation1989: 176); Dooley (Citation1989: 516–17). 40 Gilpin (Citation1981: 153, 163–8); Kindleberger (Citation1996: 32, 214–5); Cipolla (Citation1970: 4–5, 13–14). 41 On this last point see CitationAllison (2004). 42 CitationDewey (1922); CitationStein (1996). 43 Citation‘Historical Budget Data’ (2006), Tables 8 and 9; Chamberlin (Citation2004: 28–9); Clayton (Citation1972: 379, 393). US military spending accounted for 47% of world military spending in 2004. SIPRI Yearbook 2005: Armaments, Disarmament, and International Security (Citation2005: Chapter 8).