Exorbitant Privilege | Barry Eichengreen

Summary of: Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System
By: Barry Eichengreen

Introduction

Step into the world of currency supremacy with Barry Eichengreen’s ‘Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System’. This book explores the astounding endurance and power of the US dollar as the preferred international reserve currency. Delve into the depths of monetary history, understand the exorbitant privileges the US enjoys due to the dollar’s status, and learn whether it can maintain its dominance in the face of potential rivals such as the euro or China’s renminbi. Grasp the complexity of the international monetary landscape and ponder the intriguing question: Can the US dollar withstand the test of time?

The Enduring Dominance of the US Dollar

The US dollar remains the international reserve currency, and its importance is often overlooked, according to this book. The currency’s status gives the US an economic advantage, as other nations must buy dollars to conduct trade or hold reserves. This system also saves the US money on its debt. While there are calls for a move towards a multi-currency trading system as the global economy grows more diverse, the US remains the largest economy in the world and its currency is likely to retain its dominance for some time.

The Battle for Reserve Currency

The US dollar’s position as the world’s reserve currency is facing competition from rising contenders like China and the euro. In the mid-20th century, the US emerged as the incumbent currency in international trade. Military power, an expanding economy, and the output of an affluent population are the main factors that protect a currency’s reserve status. However, the US now accounts for only 13% of all the world’s exports, and China and Germany both have higher export tallies. The possible replacement reserve currencies range from the euro and the renminbi to the International Monetary Fund’s “special drawing rights.” Despite its current headline-catching troubles, the euro accounts for around 37% of foreign exchange deals. However, the euro has a primary flaw: It is a currency without a country and therefore lacks stable central government control. Meanwhile, the pound sterling and the Swiss franc do not have the scale to punch with enough weight in today’s expanding global markets. In reality, the dollar will probably eventually have to share some of its primacy with the euro and the renminbi, but that is not unusual.

The Power of the Dollar as a Reserve Currency

The US dollar’s status as the world’s reserve currency gives it a unique advantage. It has the ability to turn bad economic news into good news, as seen during the 2007 market drop. Despite the 2008 financial crisis, the dollar remains the preferred choice for international trade, accounting for 85% of foreign exchange transactions and half of global international debt securities. During the crisis, some nations were tempted to migrate to the dollar’s competitors, but the dollar emerged stronger. However, the crisis revealed inadequate regulation and a conflict of interest within credit ratings agencies. The system lacks incentives for caution, and the experts failed to predict the crisis. The dollar remains the world’s foundational reserve currency, but the speed with which multiple international currencies arrive will depend on the advantages of incumbency.

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