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Published Jun 6, 2011

Barry Eichengreen on the Dollar and International Finance

Barry Eichengreen delves into the intricate dynamics of international finance, analyzing the causes of financial crises, the pivotal role and challenges facing the dollar's global dominance, and China's strategic economic maneuvers through currency manipulation, while underscoring the necessity of prudent fiscal policies.
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  • Exorbitant Privilege

    The dollar's global dominance offers significant advantages to the United States, often referred to as "exorbitant privilege." explains that the dollar's status as the ultimate form of liquidity makes it attractive to international investors and central banks, allowing the U.S. to export currency at low cost and import goods like Toyotas and BMWs 1. This privilege also enables the U.S. government to borrow money at lower rates, as foreign entities buy U.S. treasury bonds to keep their own currencies competitive 1. notes, "The fact that the dollar is the dominant currency is of considerable convenience to U.S. banks and firms," as they can conduct international business without currency exchange risks 2.

       

    Historical Evolution

    The historical evolution of the dollar into the dominant global currency was shaped by strategic policies and historical events. highlights the 1907 financial crisis, which led to the creation of the Federal Reserve to provide liquidity to U.S. markets 3. This move, coupled with World War I's disruption of London's financial dominance, accelerated the dollar's rise 4. By 1924, the dollar had surpassed the pound sterling in international trade and as a reserve currency. states, "The creation of the Fed and the Fed's campaign to create these markets and internationalize the dollar" were pivotal in this transformation 4.

       

    Challenges and Risks

    Despite its dominance, the dollar faces challenges and risks that could threaten its status. warns that the real danger to the dollar comes from U.S. fiscal policy rather than external forces like China 5. He emphasizes the need for responsible fiscal management to avoid a potential dollar crash, noting, "If there is one, we Americans will do it to ourselves" 5. Additionally, discusses the Fed's role, suggesting that increased transparency and changes in governance could help maintain the dollar's position 6.

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