The dollar's reign as the world's undisputed reserve currency could be drawing to a closeby Niall Ferguson / June 20, 2004 / Leave a comment
Published in June 2004 issue of Prospect Magazine
“The convention whereby the dollar is given a transcendent value as an international currency no longer rests on its initial base… The fact that many states accept dollars in order to make up for the deficits of the American balance of payments has enabled the US to be indebted to foreign countries free of charge. Indeed, what they owe those countries, they pay in dollars that they themselves issue as they wish… This unilateral facility attributed to America has helped spread the idea that the dollar is an impartial, international means of exchange, whereas it is a means of credit appropriated to one state.”
Thus spoke Charles De Gaulle in 1965, from a press conference often cited by historians as the beginning of the end of postwar international monetary stability. De Gaulle’s argument was that the US was deriving unfair advantages from being the principal international reserve currency. To be precise, it was financing its own balance of payments deficit by selling foreigners dollars that were likely to depreciate in value.
The striking thing about De Gaulle’s analysis is how very aptly it describes the role of the dollar in 2004. That is itself ironic, since the general’s intention was, if possible, to topple the dollar from its role as the world’s number one currency. True, pressure on the dollar grew steadily in the wake of De Gaulle’s remarks. By 1973, if not before, the system of more or less fixed exchange rates, devised at Bretton Woods in 1944, was dead, and the world entered an era of floating exchange rates and high inflation. Yet, even in the darkest days of the 1970s, the dollar did not come close to losing its status as a reserve currency. Indeed, so successfully has it continued to perform this role that in the past decade some economists have begun speaking of Bretton Woods II – with the dollar, once again, as the key currency. The question is: how long can this new dollar standard last?
The existence of a dollar standard may come as a surprise to any American who has been considering a summer holiday in Europe. With the euro at $1.18 (compared with 90 cents two years ago), talk of a new era of fixed exchange rates seems far-fetched. But “son of Bretton Woods” is not a global system (nor, in fact, was Bretton Woods senior). It is primarily an Asian system. Pegged to the dollar are the currencies of China, Hong Kong and Malaysia. Also linked, less rigidly, are the currencies of India, Indonesia, Japan, Singapore, South Korea, Taiwan and Thailand.