Whither the U.S. Dollar

Is the U.S. dollar really doomed? If it were for some headlines, you would certainly think so. Because of the "Made in the U.S.A" financial crisis, growing budget deficits and debt, increasing dissatisfaction with the international monetary system, and the emerging power of countries such as China, many voices are now proclaiming the eventual demise of the dollar.

Not so fast, some discerning minds warn. One of them is Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, and author of the recently released book, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. He came to present his new book to the World Bank this week, sparking a fascinating debate not only about the future of the dollar, but about global politics.

"I'm not predicting its demise, but that it [the dollar] will share the stage," Eichengreen concluded.

But to get here, the professor first debunked four prevailing myths:

  • Widespread international use of a currency confers on its issuer geopolitical and strategic leverage.
  • Incumbency is an overwhelming advantage in the competition for reserve currency status.
  • The dollar is now doomed to lose its international currency status.
  • There is room for only one international currency.

As Exorbitant Privilege makes clear, it's a country's position as a great power that results in the international status of its currency, not the other way around. Regarding the incumbency "myth," the British pound, for instance, remained the dominant international currency until after World War II, even after the U.S. had overtaken Britain as the leading economy. And what about the "menacing" euro, the emerging Chinese reminbi, and the Special Drawing Rights (SDRs) from the International Monetary Fund? Professor Eichengreen makes clear that despite their growing importance, they cannot yet compete with the currency of the U.S., still the largest economy in the world with the largest and deepest financial markets of any country.

But all of the above doesn't mean that the dollar will remain untouched. In fact, there is room for more than one international currency. "There is no reason that only one country can have financial markets deep and broad enough to make international use of its currency attractive," writes Eichengreen. For him, the emerging world is one in which several international currencies coexist: dollar, euro, and reminbi.

"We are definitely moving into a world with emerging currencies, and multipolar monetary and financial systems," he explained at the World Bank. Will this be a better international system than what we have now? Only time will tell, but for now many like Professor Eichengreen and I believe such a system will better reflect the reality of our multipolar world, and therefore, make it more stable.

This blog was originally posted on the World Bank Institute Growth and Crisis website.