Barry Eichengreen's last book -- Money Beyond Borders: Global Currencies from Croesus to Crypto -- is great and worth reading, as almost anything he writes. This is specially the case, since it is his most ambitious work since Globalizing Capital: A History of the International Monetary System, first published in 1996. Other writings have been focused on much more narrow topics.
First, let me say two brief things before I even get to the book, that I just finished. This is NOT a thorough review, only just some impressions from reading without going into details. Second, Barry is incredibly generous intellectually and willing to discuss openly and to listen to people who he disagrees with, and that is not a minor matter in the current environment. He came to Kalamazoo College, and the University of Utah, when I invited him, and has a chapter in a book I edited two decades ago. He also debated with me on the cause of the collapse of Bretton Woods a few years back (video here; my paper here and his here in the same issue of ROPE, not ROKE). So, my critiques of the book are friendly critiques, mostly associated to the theoretical apparatus, since the book, like the earlier one, is incredibly rich in historical detail, and is a must read.
My biggest issue with the book is that Barry treats the international monetary system, in analytical terms, as fundamentally a market equilibrium sustained by confidence, with states and geopolitics modifying that equilibrium. My view is that it is an institutionally constructed hierarchy sustained by state power, within which markets and confidence operate. For him, power largely follows successful international money. In my view, successful international money is to a considerable extent an expression of power. Barry gives too much causal priority to trade, confidence and network effects, and too little to the fiscal and military, I might say geopolitical, foundations of international money.
His historical sequence is, in an important sense, backwards. He tends to tell the story as one in which expanding commerce generates a demand for convenient, stable means of payment and particular currencies then emerge because traders converge on them. However, the monetary institutions that make those markets possible are already political constructions. The money of account, the enforceable debt contracts, the power to tax, and ultimately the hierarchy between different liabilities are constitutive of the monetary system rather than consequences of prior commercial development.
This is particularly important when it comes to the position of the dollar. Here the argument is somewhat circular. The dollar is widely used because it is liquid and convenient, while it is liquid and convenient because it is widely used. My explanation puts considerably greater weight on the military, and geopolitical position of the United States. The dollar system was embedded in a political order organized by the United States after World War II, including alliances, security arrangements, international institutions, foreign lending and eventually the willingness of the United States to supply dollar liabilities to the rest of the world. Dollar hegemony cannot therefore be adequately separated from American hegemony.
His last chapter -- that is particularly gloomy -- emphasizes the importance of trade and confidence, and how these build network effects. In a section titled "Trading Places," he gives considerable weight to the fall in the US share of global exports. But that historical fact that should cause trouble for his argument. The problem he describes, the fall in the US share of world trade and output has fallen enormously while the international position of the dollar has changed remarkably little. China is an even clearer counterexample. It is central to world trade and manufacturing but the renminbi remains a relatively minor international currency.
His invocation of the Triffin Dilemma is particularly problematic. The original Triffin dilemma was specific to Bretton Woods. The United States promised to convert official dollar holdings into gold at US$35 an ounce. International liquidity required supplying dollar liabilities to the rest of the world, but the accumulation of those liabilities relative to US gold reserves eventually undermined confidence in their convertibility. More importantly, the world does not even require a US current account deficit to obtain dollar liquidity. Dollars and dollar claims can be supplied through through many mechanisms. Banks and offshore or shadow banks can create dollar liquidity, as can capital outflows from the US, or the swap lines from the Fed discussed by Barry.
Perhaps, from my perspective, the weakest case is the notion that there will be a point at which the US fiscal position will become unsustainable. The United States can certainly default on Treasury obligations. Congress could refuse to raise the debt ceiling, or the executive could refuse payment. An institutional or constitutional crisis could prevent payment. But that would be a politically imposed default, not an inability to obtain dollars. That distinction is crucial.
A government promising to pay US$100 when it is the issuer of dollars is fundamentally different from one promising to pay US$100 worth of gold or 100 euros. In the first situation the government has a nominal payment capacity that it lacks in the other two. This means suggesting that rising debt ratios could ultimately make Treasury liabilities impossible to service, as Barry suggests, reproduces the conventional analogy between the federal government and a private borrower. Not that deficits and debt might not have consequences. But default and danger to the dollar position is not one. In fact, it is the ability to spend and borrow only in its own currency that is the foundation -- what Anthony Brewer called the Fiscal-Military State -- of the the international position of the dollar.
He concludes that the dangers of a less and less trustworthy American economy, and the fact that there is no alternative to the dollar, might lead to a collapse and de-globalization process akin to the 1930s. But one can take the exactly opposite conclusion. Key currency status is not simply a beauty contest in which investors periodically choose the currency inspiring the most confidence. If there is no alternative system capable of performing the same functions, these developments do not automatically culminate in abandonment of the dollar. Inertia should simply lead to the continuation of the status quo, even if Trump is erratic and creates unnecessary turbulence. In fact, the recurring phenomenon in crises has often been exactly the opposite as what he describes. Global instability increases demand for dollars, even when the crisis originates in the United States. 2008 is the obvious example.
Barry is extraordinarily knowledgeable about the institutional and historical evolution and functioning of the international monetary system. He knows that geopolitics and military power matter. He DOES have a section in the last chapter on that. So he does not neglect the subject. But then he concludes that: "the fate of the dollar will rest on the willingness of America's leaders to uphold the rule of law, respect the separation of powers, and honor the country's commitments to its foreign partners." It is subsidiary and dependent on the institutions that create confidence on the dollar. In other words, he tends to absorb all of the political and geopolitical facts into an essentially conventional analytical structure rather than allowing them to generate a rival theoretical interpretation. In a sense, the historical narrative is richer than the theory used to organize it.
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