In a time of turbulence in global politics and economics, one thing remains constant.
The dollar’s supremacy as the dominant currency for international finance and reserves is unchallenged — nor is it likely to be replaced anytime soon.
That’s the theme of a new book by Benjamin “Jerry” Cohen, the Louis G. Lancaster Professor of International Political Economy at UC Santa Barbara. It’s called “Currency Power: Understanding Monetary Rivalry” and was published recently by Princeton University Press.
After reading “Currency Power” and visiting with Cohen, I’m convinced that his argument for dollar supremacy should be taken seriously by anyone interested in understanding the role of the United States in the 21st century.
First, one caveat: Cohen is not arguing for a specific value of the dollar versus other currencies. He does argue for its “indispensable” role in the conduct of international finance, as a store of wealth and as trusted place for foreign governments to park excess reserves.
Dollar supremacy is a “demonstration of U.S. power with tangible consequences for other countries,” he told me during our December meeting.
Cohen, a dutiful student of the dismal science called his “optimism about the dollar uncharacteristic.” In his book, he painstakingly lays out the argument for dollar supremacy today and far into the future.
One of the things that gives the dollar staying power is the inertia of global financial markets.
The same inertia meant that the pound sterling remained the dominant currency for decades after the U.S. and German economies surpassed Great Britain in the early part of the 20th Century.
The draw of the dollar, the top currency for more than half a century, is so powerful that when the financial crisis erupted, investors flocked to U.S. Treasury bonds even though it was excess lending in the U.S. that started the crisis in the first place.
A second issue is confidence that the U.S. will pay its debts. The ability of the U.S. government to manage its finances, the subject of much political debate, is unmatched. The Eurozone crisis, which threatened to break up the continent’s experiment with a single currency, underscores the value of a big, liquid market like U.S. government bonds. Recently, the Federal Reserve’s move to raise interest rates is a signal the U.S. will not try to inflate its way out of debt.
In his book, Cohen argues that the Japanese yen in the 1980s, the deutsche mark in the 1990s and the euro in the early 21st Century all looked like potential rivals to the dollar. The yen, though still powerful in its own right, faded after Japan’s real estate bubble burst. The mark was merged into the euro, which appears to have peaked a decade ago.
The newest rival to the dollar is the Chinese yuan, or renminbi, managed into a bigger role by the Chinese government, and on Dec. 1 earned International Monetary Fund designation as a reserve currency. Having vaulted past Japan to become the world’s second largest economy, there’s a lot of speculation about when China might surpass the U.S. in total GDP.
The abrupt slowing of the Chinese economy has raised new questions but Cohen argues that just because China claims No. 1 for GDP, that fact doesn’t guarantee yuan supremacy.
In order to gain crucial confidence, Cohen argues, China has a daunting task. Among other things, it will have to make its currency more convertible, curb the excesses of its state-owned enterprises and make its financial system far more transparent.
“Currency Power” makes the case for the dollar as the world’s “indispensable currency,” a status that gives the U.S. the “exorbitant privilege” of running deficits — so long as they don’t undermine confidence.
Dollar supremacy is likely to last “well beyond the period where the U.S. is no longer the No. 1 economy in the world,” he said.
That’s one forecast you can take to the bank.
• Reach Editor Henry Dubroff at [email protected]