Barry Eichengreen's latest book, The Exorbitant Privilege: The Rise and Fall of the Dollar, is a brief history of the dollar as the dominant international currency. The book is written for a broader audience, and historical analysis is carefully combined with predictions about the future of the international monetary order. The key discussion deals with recent concerns about the dominant role of the dollar as an international medium of exchange. Although the United States produces only 20 per cent of the world's GDP, the dollar remains the sole international currency: it is the main medium of exchange in international transactions and reserve currency for central banks across the world. This gives the United States the ‘exorbitant privilege’ of running large budget deficits at very little cost and provides a competitive advantage for its banks and firms. To answer the questions of why the dollar still maintains its power, and why it will no longer be able to do so in the near future, Eichengreen compares the history of the dollar with its two close rivals: the euro and the renminbi. 

The first chapter of the book deals with the emergence of the dollar as a national currency and its transformation into an international one from the late eighteenth century to the interwar period. It is argued that, during this period, the transition from the pound sterling to the dollar was a natural choice as the former lost its stability after World War I. This chapter not only revisits the argument that the dollar became dominant only after the foundation of the Bretton Woods system, but also underlines the importance of politics, and gives a thorough presentation of various monetary reforms targeted to establish the dollar as a reliable currency. Chapters 2 and 3 extend this history until the collapse of the Bretton Woods system. The lack of alternatives after World War II meant that the emerging international monetary order would be dollar based due to the economic strength of the United States. Even after the two oil crises, which brought an end to the Bretton Woods system, the dominance continued, as there was no serious rivalry. Chapter 4 presents a parallel history of the emergence of the euro as a rival to the dollar. Discussion on the euro sketches the creation of the European Monetary System and European Exchange Rate Mechanism. This presentation is especially useful for casting light on the current debate regarding those countries which are expected to leave the euro zone as a result of government debt crises and budget difficulties. Although the euro is pictured as an important rival, its flaws are also highlighted: the lack of support by the United Kingdom with its strong economy and financial centre, and the absence of a unified fiscal policy and single bond market. Chapter 5 assesses the effect of the recent economic crisis on the dollar's role as an international currency. The interpretation of the crisis is neatly tied in with the dollar's history. Following the crisis, purchases of US treasury bonds by foreign central banks led to an enormous accumulation of dollar reserves in China and several other countries. Although this can still be seen as evidence that the dollar has successfully weathered the crisis, it has also resulted in excessive accumulation of dollar-denominated reserves abroad. In chapter 6, by building on the historical presentation of the previous chapters, Eichengreen evaluates the alternatives, and maintains that as the world economy is becoming more multipolar, its monetary system will and should become more multipolar as well. One of the most serious players in this new monetary order, according to Eichengreen, remains the euro, despite all its problems. SDR (Special Drawing Rights) is ruled out as an option, due to absence of a global government, and thus a global central bank. Lastly, according to Eichengreen, if the euro is a ‘currency with no state’, then the renminbi is a ‘currency with too much state’. It can only be a rival in the long run if China can implement necessary reforms, such as making its currency convertible and allowing its use beyond cross-border trade, introducing flexible exchange rates, establishing full-fledged commercial banks and so on. Overall, Eichengreen believes that the renminbi can be a regional or subsidiary reserve currency, but it is hard to imagine that it will be the dominant reserve currency in the foreseeable future.

Finally, Eichengreen speculates on the pessimistic scenario of a dollar crash. He excludes the possibility that a conflict with China might lead the latter to dispose of its US Treasury bond reserves, which would spike interest rates in the United States. Based on historical examples, Eichengreen argues that this would also damage the Chinese economy, as it would push down the value of China's dollar assets. Moreover, if investors decide not to hold dollars, the Federal Reserve would interfere. A more reasonable scenario, according to Eichengreen, is the exacerbation of current problems of the US economy, more specifically large budget deficits. If investors start selling bonds due to loss of confidence in American debt levels, then even if the Federal Reserve buys bonds to prevent the panic, this would only have an inflationary impact, and cause a mass migration from the dollar. The book concludes that a world of multiple international currencies is coming. The emerging monetary order is welcomed, as stability will come to depend on the policies of multiple countries issuing reserve currency rather than just a single one, and the international monetary order will be in better agreement with the real economy.

Although the whole discussion is quite stimulating, perhaps one of the shortcomings of the argument is the underemphasis on commodity monetary standards, especially on gold and silver. For the first time since the collapse of the Bretton Woods system, there is now one state within the United States (Utah) which has recognised gold and silver as legal tender, and a few other states are considering similar changes.Footnote ¹ Moreover, the Chinese, Indian and Russian central banks have recently been buying significant amounts of gold to reduce their dollar reserves. In this context, gold and silver, perhaps together with some other major commodities, can one day constitute the basis for a new international monetary standard. Although Eichengreen's lack of faith in gold is based on the assumption that China cannot sell more dollars to buy gold (as this would increase the cost of its exports), historical evidence suggests that foreign exchange markets, governments and central banks can act irrationally especially during periods of structural shift.