Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System [Hardcover]

Barry Eichengreen (Author)

Book Description

Publication Date: January 7, 2011

For more than half a century, the U.S. dollar has been not just America's currency but the world's. It is used globally by importers, exporters, investors, governments and central banks alike. Nearly three-quarters of all $100 bills circulate outside the United States. The dollar holdings of the Chinese government alone come to more than $1,000 per Chinese resident.

This dependence on dollars, by banks, corporations and governments around the world, is a source of strength for the United States. It is, as a critic of U.S. policies once put it, America's "exorbitant privilege." However, recent events have raised concerns that this soon may be a privilege lost. Among these have been the effects of the financial crisis and the Great Recession: high unemployment, record federal deficits, and financial distress. In addition there is the rise of challengers like the euro and China's renminbi. Some say that the dollar may soon cease to be the world's standard currency--which would depress American living standards and weaken the country's international influence.

In Exorbitant Privilege, one of our foremost economists, Barry Eichengreen, traces the rise of the dollar to international prominence over the course of the 20th century. He shows how the greenback dominated internationally in the second half of the century for the same reasons--and in the same way--that the United States dominated the global economy. But now, with the rise of China, India, Brazil and other emerging economies, America no longer towers over the global economy. It follows, Eichengreen argues, that the dollar will not be as dominant. But this does not mean that the coming changes will necessarily be sudden and dire--or that the dollar is doomed to lose its international status. Challenging the presumption that there is room for only one true global currency--either the dollar or something else--Eichengreen shows that several currencies have shared this international role over long periods. What was true in the distant past will be true, once again, in the not-too-distant future.

The dollar will lose its international currency status, Eichengreen warns, only if the United States repeats the mistakes that led to the financial crisis and only if it fails to put its fiscal and financial house in order. The greenback's fate hinges, in other words, not on the actions of the Chinese government but on economic policy decisions here in the United States.

Incisive, challenging and iconoclastic, Exorbitant Privilege, which was shortlisted for the FT Goldman Sachs 2011 Best Business Book of the Year, is a fascinating analysis of the changes that lie ahead. It is a challenge, equally, to those who warn that the dollar is doomed and to those who regard its continuing dominance as inevitable.

Editorial Reviews

Review

"A fascinating and readable account of the dollar's rise and potential fall"--The Economist

"A rare combination of macroeconomic mastery, historical erudition, good political instincts and the sort of stubborn common sense that is constantly placing familiar problems in a new light."--Financial Times

"This short, accessible book about the U.S. dollar by Barry Eichengreen may be one of the most important published this year.--Barron's

"[A] brisk primer on the dollar's role in the international monetary system."--Bloomberg News

"Exorbitant Privilege is a book for anyone who has been perplexed why, despite the frequent predictions of the dollar's demise over the last fifty years, it has managed to maintain its position as the world's pre-eminent reserve currency. The book includes both a lively historical account of the dollar's role in the international monetary system and an incisive and balanced discussion of future challenges."--Liaquat Ahamed, author of Lords of Finance

"Short and eminently readable.... In just 177 pages of text, [Eichengreen] provides a wealth of material for both the lay reader and the scholar... You can't do better than Eichengreen for a solid read on the dollar's wild ride."--The American Prospect

"Compact and readable...Eichengreen adds much needed nuance and subtlety to the U.S. dollar debate....is [also] a pithy and amusing history of the international monetary system....for those fascinated by historical figures and events, behind-the-scenes machinations, and the logistical elements that make a complex currency and trade system work, the telling is very well done."--Business Insider

"Barry Eichengreen's book couldn't be more timely... Elegant and pithy."--Finance & Development, IMF.org

"The book, written for the general public, is useful and pleasant to read also by the so-called professionals. Those used to Eichengreens clear and fluent prose will find here a particularly light touch obtained by dropping here and there a good dose of anecdotal hints to lessen the weight of serious history and rigorous economics...provides a masterful users manual for the crisis that began in 2007."--EH.net

"The historical narrative in this book is fascinating and I highly recommend it to both specialists and nonexpert advanced readers."--Journal of Economic History

"This slender and pleasant book is a story of the dollar in the world financial system, and an attempt at speculating on the future of the U.S. currency.... [It] is good reading, contains well organized facts and discussions, and raises important and difficult questions."--Journal of Economic Literature

"[A] detailed and fast-moving analysis of the rise of the greenback as an international currency." --EnlightenmentEconomics.com

"This is a brisk and invigorating account of a century of international monetary developments by one of America's foremost economic historians.... As would be expected, Exorbitant Privilege is extremely well informed, cogently argued, and broadly persuasive. Events and policies, such as the Suez war, the EMS breakdown or the current financial crisis--together with sharp criticism of the excessive deregulation favoured by both Alan Greenspan and Larry Summers--are splendidly documented. Conflicting views of what might happen in the future are clearly put forward and analysed. Unexpectedly, perhaps, the book also displays fairly frequent touches of humour. In other words, it is both erudite and readable."--New Left Review

"Both eloquent and elegant...The book is admirably written and its final message is very clear."--The Economic History Review

"A concentrated dose of common sense... If you're going to read only one book about the economy this election season, make it Barry Eichengreen's Exorbitant Privilege."--The Maui News

"When everyone from Brazil's leader to Sarah Palin questions the dollar's status as a reserve currency, it is time for an expert to sort out the truth from the hyperbole. Barry Eichengreen performs this service with unwavering clarity."--Sebastian Mallaby, Council on Foreign Relations

"Professor Eichengreen has written a truly superb book on the role and global standing of the dollar--past, present and future. Those exposed to the evolution of the globally economy, and that's virtually all of us, will find his book extremely thoughtful and a great read."--Mohamed El-Erian, CEO and co-CIO of PIMCO

"Eichengreen is the master of international money in history and its troubles. Exorbitant Privilege is a fine account of whence it came and a judicious survey of where it might go."--James K. Galbraith, author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too

"Barry Eichengreen again demonstrates his ability to integrate economic history and theory with political analysis in order to illuminate the critical issues of international finance. The timely and accessible book is must reading for all concerned with the prospective balance of international power--financial, economic and political--in a multi-polar world."--William H. Janeway, Warburg Pincus

"[S]urprisingly compact and readable book, Eichengreen adds much needed nuance and subtlety to the U.S. dollar debate . . . a pithy and amusing history of the international monetary system . . . those fascinated by historical figures and events, behind-the-scenes machinations, and the logistical elements that make a complex currency and trade system work, the telling is very well done." --BusinessInsider.com

"[A] brief and readable account of how the international monetary system got where it is today and of past efforts, both successful and (mainly) unsuccessful, to reform it." --Foreign Affairs

"[A] timely book on monetary economics and currencies that is clear and easy to read, with elements of drama and excitement." --The Finance Professionals' Post, a publication of the New York Society of Security Analysts

"If you're going to read only one book about the economy this election season, make it Barry Eichengreen's Exorbitant Privilege." --Maui News

"This is a brisk and invigorating account of a century of international monetary developments by one of America's foremost economic historians. As would be expected, Exorbitant Privilege is extremely well informed, cogently argued, and broadly persuasive. Events and policies, such as the Suez war, the EMS breakdown or the current financial crisis--together with sharp criticism of the excessive deregulation favoured by both Alan Greenspan and Larry Summers--are splendidly documented. Conflicting views of what might happen in the future are clearly put forward and analysed. Unexpectedly, perhaps, the book also displays fairly frequent touches of humour. In other words, it is both erudite and readable." Andrea Boltho, he New Left Review

About the Author

Barry Eichengreen is Professor of Political Science and Economics at the University of California, Berkeley. His previous books include The European Economy Since 1945, Global Imbalances and the Lessons of Bretton Woods, Capital Flows and Crises, and Financial Crises and What to Do About Them. He has written for the Financial Times, Wall Street Journal, Foreign Affairs, and other publications.

Product Details

• Hardcover: 224 pages
• Publisher: Oxford University Press, USA; 1 edition (January 7, 2011)
• Language: English
• ISBN-10: 0199753784
• ISBN-13: 978-0199753789
• Product Dimensions: 0.9 x 6.6 x 9.2 inches
• Shipping Weight: 15.2 ounces (View shipping rates and policies)
• Average Customer Review: 4.1 out of 5 stars  See all reviews (47 customer reviews)
• Amazon Best Sellers Rank: #174,056 in Books (See Top 100 in Books)
  • #96 in Books > Business & Investing > Economics > Money & Monetary Policy

More About the Author

Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, NBER Research Associate, and CEPR Research Fellow. He was formerly Senior Policy Advisor at the International Monetary Fund (Washington, D.C.), fellow of the Center for Advanced Studies in the Behavioral Sciences (Palo Alto), and fellow at the Institute for Advanced Study (Berlin). He is a fellow of the American Academy of Arts and Sciences and a member of the Council on Foreign Relations. He writes a monthly column for Project Syndicate and periodic columns for Estadao Sao Paulo (Brazil), Finanz und Wirtschaft (Switzerland), Handelsblatt (Germany), and Eurointelligence (in Europe). He is past president of the Economic History Association, winner of the Schumpeter Prize of the International Schumpeter Society. and has been named one of the 100 most important public intellectuals by Foreign Policy Magazine. You can follow his tweets at [e-mail].

Most Helpful Customer Reviews

94 of 96 people found the following review helpful

4.0 out of 5 stars Excellent history, weaker on prediction November 30, 2010

By Aaron C. Brown TOP 500 REVIEWERVINE™ VOICE

Format:Hardcover|Amazon Vine™ Review (What's this?)

As other reviewers have noted, the first half of this book is a history of US currency in international transactions. While important, this material is necessarily dull. The author does an excellent job of making it no duller than it has to be. He does not leave out the important minutiae of trade acceptances and special drawing rights, but he explains them clearly and without jargon; without droning on beyond the needs of the history. The author has an extremely dry sense of humor, easy to miss but worth catching, and works in enough amusing detail to keep you awake.

Compared to the conventional story, this book presents a generally negative picture of currency management, especially in Europe and doubly especially in the UK. The US makes its share of mistakes in the book, but fewer than other countries. That plus two world wars propelled the dollar to international prominence. The careful parsing of history also reveals that currency hegemony is more fragile than commonly thought, it is largely coincidence that we have had only two dominant world currencies, sterling and dollar, over nearly 200 years.

Over the last 20 years fiscal mismanagement and financial crisis threaten the dollar's global role, and other countries have made successful innovations. But the dollar's relative advantages remain strong, which should at least make one of the major international currency if we don't screw things up too much. However no currency is likely to dominate the way the pound did in the 19th century or the dollar did in the 20th.

On the downside, the book has a narrow focus. Financial markets are absent from the story, except when they are causing trouble.... The author's analysis of those troubles seems pulled from a few fulminating editorials, in contrast to the careful research on monetary topics (supported by excellent notes and references). Trade flows and import/export considerations are emphasized while the much larger financial flows get scant treatment (and, again, only when the cause trouble). There is no deep treatment of banks, we see them only as lobbyists for monetary affairs. It's hard to believe you can describe money without some discussion of banks and finance.

My other criticism is I found the predictions based to be based entirely on history. While history can teach us a lot, the world has also changed in important respects. Can we really turn back the clock in a global financial system with an Internet? Maybe the answer is "yes," but you won't find convincing arguments in this book.

Overall, I recommend this book highly for people who are already knowledgeable about finance and financial history. You will learn a lot. I have only a qualified recommendation for others. You will also learn a lot, but I think the knowledge will be unbalanced, and the conclusions possibly misleading. Read more ›

73 of 80 people found the following review helpful

3.0 out of 5 stars De Gaulle Did not Use the Expression "Exorbitant Privilege" February 10, 2011

By Etienne ROLLAND-PIEGUE

Format:Hardcover|Amazon Verified Purchase

Most French people attribute the expression "America's exorbitant privilege" to de Gaulle. Those familiar with postwar economic history may associate it with the name of Jacques Rueff, the independent economist who advised de Gaulle on monetary matters. The "exorbitant privilege" of the dollar has been associated with America's ability to record a "deficit without tears" that gives people the impression "that they can give without taking, lend without borrowing, and purchase without paying", to borrow a quotation from Jacques Rueff. Or, as a Treasury Secretary once famously replied to Europeans worried by exchange rate fluctuations, the dollar "is our currency, but your problem."

But in fact it was not de Gaulle nor Jacques Rueff who used this expression first, and the "exorbitant privilege" is nowhere to be found in their speeches or writings. It was Raymond Aron, the public intellectual otherwise sympathetic to American power, who wrote it for the first time in his column published by Le Figaro in February 1965. The line was a quote from a declaration by Valéry Giscard d'Estaing, finance minister to de Gaulle, and also much less inclined to denounce American hegemony.

Barry Eichengreen, who rightly attributes the quote to whom it is due, is the don of international monetary history. He has published scores of books and papers on the international monetary system, from the gold standard to Bretton Woods and beyond. No one is therefore more qualified to write an essay about the challenges facing the dollar as an international currency. His book covers a lot of material presented in a concise and non-academic way. Readers who need a one-stop shop for the history of international currencies should look no further....

The story starts with the clam shells, furs and tobacco leaf bundles used by the Pilgrim Fathers in their trade with Native Americans and between themselves (need a wampum, anyone?). The book then covers the successive attempts to create a central bank in the US. The third trial was the right one: the Fed was born as the creature from Jekyll Island, the remote resort off the Georgia coast where six influential financiers retreated in 1910 to discuss their plot while avoiding publicity. The First World War transformed the US from debtor to creditor nation, and gave a fatal blow to Britain's power. For Eichengreen, from as early as 1914, and even more so in the interwar period, the fat lady had sung its song, and the dollar had dethroned the sterling as the premier international currency. The sterling was however able to cling as an important reserve currency until the Suez Crisis in 1956, when US opposition to UK imperialist policy brought the sterling crashing down (the expression "gnomes from Zürich" used to disparage currency speculators dates from then, and was coined by a British politician, not by the French or de Gaulle, to which it is sometimes attributed. The reasons so many quotes are wrongly attributed to de Gaulle is because he was a master of words, using such rare expressions as "volapük" "tracassin", "cabri" or "tous azimuts" that are a strain to students of French as a foreign language.)

The book also provides a well-rounded chapter on monetary integration in Europe. Eichengreen argues that the eurozone was built with initial flaws that later came to haunt it in the aftermath of the late-2000 Great Recession. To summarize, it all happened because of Luxemburg. This tiny country with impeccable European credentials could only be admitted in the eurozone's inner circle when the European monetary union was created in 1999. But it was already in a monetary union with Belgium, which had a large public debt and more fragile economic governance. Admitting Belgium in turn meant that it would be impossible to invoke the Maastricht Treaty's public debt ceiling to keep other countries from joining in. Hence entered Italy, Ireland, Spain, Portugal, and even Greece, although the admission of the later came back with a vengeance in 2010. Nonetheless, the author is moderately optimistic about the prospects for the euro. Although it was created before all the economic prerequisites were in place, the member states now feel compelled to complete them, and this is why "the euro will likely emerge from its crisis stronger than it was before", Eichengreen writes.

The subprime crisis and the 2008-2009 financial meltdown are covered in some detail, with the author still brimming with anger at the follies of financiers stretching for yield and the sloth of regulators asleep at the switch. In the last chapter ("Dollar Crush"), Eichengreen gives us a glimpse of what the world would look like after the dollar comes tumbling down and loses its international status. It is not a comforting sight. The United States are downgraded to emerging economy status, and have to rely on the generosity of others in the event of a crisis. Losing their exorbitant privilege means Americans will have to consume less, export more, and pay higher interest rates on a debt that will be partly denominated in foreign currencies. The Fed will no longer be able to cut interest rates in recessions without paying due consideration for the external value of the dollar, and it will have to raise rates in case of dollar depreciation. The author deems this scenario moderately plausible. As he notes, "people have been wrong before when betting against the U.S. economy. They have been wrong before when betting against the dollar. They could be wrong again. Or they could be right, in which case the dollar's exorbitant privilege will be no more."

As Eichengreen states in the introduction, much of what passes as conventional wisdom on international currency is wrong. It is thought that widespread international rule of a currency confers on its issuer geopolitical and strategic leverage. In fact, it is the other way around: people choose the dollar because the U.S. remains the largest economy in the world, able to back its stakes with military power and geopolitical influence. Likewise, it is wrongly assumed that there is place for only one international currency on the roost bar, whereas experience suggests several internatuional currencies may coexist, as was the case in the interwar period and indeed in much of history apart from the second half of the twentieth century, when American power was undisputed. For the author, "a world of multiple international currencies is coming because the world economy is growing more multipolar, eroding the traditional basis for the dollar's monopoly." And we should not be particularly worried by this prospect, provided the transition is managed smoothly and the United States do not botch it.

This book was a stimulating reading, but I have several reservations with it. It is too much centered on the US. It is sometimes dogmatic. It only considers history in the light of the present. It lacks a theory of international currencies. And it largely ignores finance. Let me take these criticisms in turn.

Since the dollar has been the anchor of the international monetary system, it is understandable that the author gives it prominent place in his narrative. The history of European monetary integration is also well covered. But what about other countries? How do they manage their exchange rate regimes, and how do they cope with the dominance of the dollar? There is no discussion on dollarization, currency boards, crawling pegs, and other currency regimes. Japan is only mentioned as a side story, a reminder of how some countries can spectacularly mismanage their economy and lose their rank in the international order. As for China, the author is reduced to wild guesses and conjectures as to what the real intentions of its leaders are. Brazil, India, Russia and the other emerging countries are left out of the picture. If this book is to be used as a reference for government officials and academic experts engaged in G20 discussions (and I think it should), then it should broaden its scope and consider a wider range of policy challenges.

It should also be less dogmatic. Having researched the subject for years, Eichengreen rests on firm academic ground, and presents compelling evidence to back his claims. But he tends to be excessively confident and cock-sure, especially when he discusses other people's plans and ideas. He tends to close the debate before it has even started, and without giving other parties a chance to present their argument. The chapter on SDR illustrates this point: for him, this composite reserve asset is only funny money, period. There is no consideration to the role SDR could play to manage an orderly transition to a multipolar world, except to reject the idea of a substitution account as a non-starter. Likewise, people who wish to revive the role of gold or to think about an internationally-managed world currency are dismissed as cranks. He may be right, but on that account people gathered at Bretton Woods in 1944 could never have led the foundations to a new international monetary system. You need to inject some creative energy in the debate, even if some ideas seem crazy at first.

Eichengreen describes the past with an eye to the present. This can become annoying for some readers, who wish a clearer distinction was made between history and contemporary issues, and between fact and commentary. Lessons about how to manage the rise of China and to accommodate a multipolar world will certainly increase the policy relevance of the book, but at the cost of academic accuracy and durability. Twenty years after its publication, Eichengreen's thesis about the Gold Standard and the Great Depression is still widely read; this book will have a much shorter shelf life.

What is an international currency? Eichengreen repeats the textbook definition familiar to every student in economics: it should serve the three functions of money as means of payment, unit of account, and store of value. But a definition doeth not a theory make. Exorbitant Privilege doesn't make any reference to theory, neither to the hegemonic regime approach proposed by Charles P. Kindleberger that Eichengreen spent so much energy criticizing in his former essays, nor to the recent conceptualization proposed by Pierre-Olivier Gourinchas and Hélène Rey, who offer a novel theory of the exorbitant privilege of the dollar based on the consideration of U.S. assets and liabilities. As already stressed out, this is not an academic book, but a dose of academic theory would have helped.

As a last point, it seems to me that a theory of international currencies cannot abstract from the rules of global finance, including the considerations on a country's assets and liabilities that recent research has brought to the picture. Money is a financial asset, and portfolio theory may be useful to explain the motives and mechanisms by which people choose to acquire, retain, or sell an international currency. But Eichengreen does not refer to financial theory in this book. Indeed, he shows very little interest for financial market transactions, except to disparage the excesses and follies that have brought to us the greatest recession since the 1930s. By clinging to the classic view of international currency as fulfilling the three functions of money, Eichengreen turns his back on financial theory, and can only offer diatribes and invectives against the easy targets of bankers and speculators. Read more ›

23 of 24 people found the following review helpful

5.0 out of 5 stars Sobering assessment of America's future November 6, 2010

By Malvin VINE™ VOICE

Format:Hardcover|Amazon Vine™ Review (What's this?)

"Exorbitant Privilege" by Barry Eichengreen offers an uniquely powerful analysis of the U.S. economy and its future. Mr. Eichengreen expertly blends politics, history, and economics to weave a fascinating narrative about the underappreciated but vital subject of fiscal policy. Underscoring the central importance of sound fiscal management to our lives, this book should interest policy makers and students of economics alike.

Mr. Eichengreen takes us through a brief history of American currency practices from the colonial period to today. Interestingly, we learn that foreign currencies such as the peso were commonly used well past the founding of the U.S. government and its fledgling currency, the dollar, was established. Yet, even as the U.S. grew to become the world's largest economic power, the dollar would not come to dominate international trade until after the devastation of two world wars left the U.S. standing alone as the sole remaining capitalist power. The author goes on to explain how the U.S. benefits from the dollar's status as the reserve currency of the world; an exorbitant privilege that, if squandered, would have meaningful implications for our economy.

On this point, Mr. Eichengreen discusses historic events such as the Suez Canal Crisis to illustrate how American power and the dollar are inextricably entwined. Mr. Eichengreen discusses the 2008 financial crisis which has raised serious questions about America's financial stability. Although foreigners were rightfully upset at watching their dollar investments lose value, the author coolly asserts that all serious challengers have their own flaws.... However, the author believes this may well change in the future, as the European Union, China, India and Brazil repair their own deficiencies and seek to gain advantage.

In fact, Mr. Eichengreen believes the greatest threat to the dollar will not come from China but from America's own mismanagement and growing indebtedness. Although the prospect of China dumping its dollars wholesale might alarm some, Mr. Eichengreen reasons this is not likely given that China would in effect be only hurting itself. Mr. Eichengreen prescribes a structural adjustment plan akin to Germany's recent experiences from 2003 to 2010; where a combination of tax increases, spending cuts and investments in education and infrastructure might help restore a measure of economic growth and competitiveness to the U.S. economy. The alternative, the author suggests, is to risk a ballooning deficit that might trigger a wholesale rout of the dollar; with serious economic consequences for the nation.

I highly recommend this exceptionally intelligent, timely and important book to everyone. Read more ›