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Book Review 225: Exorbitant Privilege

January 22, 2012 - Harry Eagar
EXORBITANT PRIVILEGE: The Rise and Fall of the Dollar and the Future of the International Monetary System, by Barry Eichengreen. 215 pages. Oxford, $27.95.

If you're going to read only one book about the economy this election season, make it Barry Eichengreen's “Exorbitant Privilege.” It will make you feel better.

Eichengreen is the go-to guy for economic analysis of monetary policy – Federal Reserve Chairman Ben Bernanke cites him as much as any other economist in his academic work. And, despite claims that economics is dismal, Eichengreen is an amusing writer.

“Exorbitant Privilege” is a concentrated dose of common sense on a subject that is the favorite whipping boy of kooks like Ron Paul: fiat money.

The dollar is the world's reserve currency, what we use now that we don't use gold to give credibility to our paper and electronic money. Eichengreen estimates that being the world's reserve currency is worth half a trillion dollars a year to American consumers: The Treasury prints $100 bills for a few cents and foreigners happily accept them in exchange for cars or cocaine.

It's a much better deal than borrowing from the Chinese in exchange for Treasury bills, because we don't have to pay it back. But it is also a source of great resentment, especially but not only from the French, who'd like to get in on this gravy train.

The phrase “exorbitant privilege” was invented during one of France's occasional attempts to restore the franc as a reserve currency.

Merely being the biggest, strongest economy does not guarantee that a nation's currency will become the, or even a reserve currency, with all the benefits that can bring. In fact, the dollar was insignificant as a reserve currency long after its economy became the biggest. The pound, franc and mark were all more important.

World War I, the accumulation of credit America compiled against the Allies and the creation of the Federal Reserve in 1913 – the thing Paul wants to extinguish – turned the dollar into world money.

The United States is no longer the world's creditor, and there has been much anguish about the possibility that the dollar might be dethroned. When Eichengreen was completing his manuscript early in 2011, it looked as if the euro – currency of a bigger economic totality even than the United States – might be making a bid. Now, it appears the euro may not even survive.

China's renminbei is also probably not a real contender, and the yen never made a showing, for reasons that Eichengreen explains is his characteristic terse but easily understandable style.

The fate of the dollar as a reserve currency, or even as currency, is uncertain. “The fate of the dollar ultimately hinges . . . on U.S. budgetary policy,” Eichengreen writes, although his additional analysis will not bring any smiles to Tea Partiers.

Nor will he comfort Republicans who want to unleash Wall Street again. When it comes to the current recession that brought the dollar's fate into sharp focus, Eichengreen writes, “And as for what enabled all involved to act on those (misguided) incentives, the answer is simple: inadequate regulation.”


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