Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Rise and Fall of the U.S. Dollar

Politics / US Dollar May 30, 2013 - 06:45 PM GMT

By: Mark_Thornton

Politics

Over the last century America’s money—the dollar—has come to dominate the global monetary system. It is used not just by Americans, but in other countries, in the global black market, and by importers and exporters. And it is the primary reserve currency for central banks. This status is what Barry Eichengreen calls an “exorbitant privilege,” because it confers numerous benefits to individuals, companies, and governments. Collectively, it also confers the ability for Americans to consume beyond our ability to produce.


Professor Eichengreen in his book Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, chronicles the rise of the dollar to world dominance, and what it means for the US. He then explores the possibilities of its demise and possible crash. The author should be commended for at times thinking outside the mainstream box, where such issues are often ignored.

He believes that the world is heading toward a state in which there are several reserve currencies, notably the euro and the Chinese renminbi. He maintains that a reserve currency status is based on economic strength: Europe has it and China and India are gaining it rapidly.

Eichengreen says that this is the type of change to expect, and even applaud, because it would mean the end of America's reserve currency monopoly and force the Federal Reserve to behave better. He does not foresee a complete breakdown of the dollar, because that is not in the interests of countries like China. He (p. 8) finds that the only thing that could create a flight from the dollar is “serious economic and financial mismanagement by the United States.”

The book begins with a quick history of money, banking, and trade. The author has a theory that economic dominance leads to monetary dominance. Yet it is noteworthy that the US became the world economic power by the end of the 19th century, while the dollar had virtually no international role well into the 20th century.

In fact, the US was only able to make its “debut” after having established a central bank to help organize the money markets and after WWI had made a US role a necessity. I was glad to see the author’s openness and honesty when describing the people who established the Federal Reserve and their motives. Eichengreen (pp. 24-25) openly described it as a conspiracy by “big finance” against the general public.

After WWII, the US dollar was far and away the dominant currency. It used this influence to establish the fundamentally flawed Bretton Woods system. This system established the dollar as the world’s reserve currency convertible into gold at $35/ounce. This system was abused by the over-issue of dollars which started to generate pressure for convertibility as early as the late 1950s.

Ludwig von Mises was a leading opponent of the Bretton Woods system and the leading proponent of returning to a real gold standard. This is an important point because one of Mises’s followers was Jacque Rueff, the popular economic advisor to French President Charles de Gaulle. Eichengreen (pp. 52-53) correctly describes the French as leading the opposition to the Bretton Woods:

Rueff acquired de Gaulle’s ear. He also acquired the public’s (due to his successful inflation-fighting policies). When de Gaulle attacked the dollar at a press conference in early 1965, castigating the Bretton Woods System as “abusive and dangerous” and arguing that the world should return to a gold-based system, he was channeling Rueff.

Of course the French would continue to pressure the dollar and eventually force it from its perch. The rest of the chapter on the dollar’s dominance provides a concise history of the 1960s and 1970s. Here the author provides real value by drawing attention to the similar problems that China faces today, like what to do with all their depreciating dollars.

The next chapter discusses the improbable euro. While the book makes Americans look like arrogant brutes, this chapter makes Europeans look like immature wimps, and Germans as dupes. Overall, it provides a convincing indictment against the idea that government should run the monetary system.

Given the post-WWII history of government management of money and banking, it was astonishing to me that Eichengreen blamed the current economic crisis on inadequate regulation and too much competition. There are over 100 regulatory agencies that supposedly oversee the financial industry and over 12,000 financial regulators in Washington, DC, alone. At the state, federal, market, and international levels virtually everything in financial markets is regulated by multiple agencies often resulting in turf warfare.

Eichengreen is correct to criticize the Federal Reserve for adding too much fuel, i.e., money and credit, to the economy. It should be obvious that this was the primary problem—the necessary condition.

However, there are two more big problems with the Fed. First, by continuing to bail out financial markets for decades, it has created an enormous moral hazard problem, encouraging participants to incur too much risk in their investments and operations. Second, by acting as a cheerleader for credit default swaps and collateralized debt obligations, the Fed created a moral suasion problem by directly encouraging their use amongst inexperienced participants.

When it comes to the conclusion we find that the dollar still dominates the world. The euro is an existing rival and the Chinese renminbi is a future rival. This rivalry should make the dollar a more responsible currency. If this book goes into a second edition, then this chapter will require some editing.

He does mention gold, but only to dismiss it. “Finally, there are some minor alternatives to be dismissed. Gold has its bugs” (p. 147). It is dismissed largely on grounds that gold is “inconvenient” and because central banks have not shown interest in it. There is really nothing inconvenient here. Gold, silver, and copper coins minted in various weights could easily serve as money, could be title-transferred electronically, and could be transferred either in its own denominations (i.e., 5 gram, 10 gram, 25 gram, etc.) or in other denominations (e.g., dollars, euros, etc.).

Eichengreen seems to downplay the possibility of a crash of the dollar and the loss of its currency reserve status. He cites three situations that could bring about a crash of the dollar: China dumping the dollar, loss of confidence by investors, or continuous runaway government spending. He also reasons why each of these situations is not highly probable.

In contrast, I view the three situations as connected and to be a higher probability. Continuing runaway government spending seems to be firmly baked into the cake of future events. Ballooning deficits and an exploding national debt being monetized by the Federal Reserve are shaking investor confidence in the long-term value of the dollar and this includes other central banks, such as the Bank of China.[1]

There is valuable information in this book, also including an interesting discussion of oil markets and the military and the roles they play in the reserve currency status. The main problem with the book comes in the area of interpretation, where the author fails to fully challenge the status quo.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition and co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War. Send him mail. See Mark Thornton's article archives. Comment on the blog.

© 2013 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules