Exorbitant Privilege
The Decline of the Dollar and the Future of the International Monetary System
By Barry Eichengreen
Book Review
By Richard E. Noble
I chose this book to read because I wanted to know more about paper money and the U.S. dollar in particular. We can learn even by reading books that we disagree with.
This book is well written, easily understandable, informative, and not beyond the scope of any student of history or economics.
I am sure that Mr. Eichengreen feels that he has presented the economic facts of life and that his analysis and conclusions are the only common sense economic alternatives. I disagree and I have no doubt that he will disagree with my criticisms of his philosophy and alternatives. But first I will give credit to the author for writing a very interesting and informative book and state some of the things that the author has taught me or made me better informed about.
I now know what the Exorbitant Privilege is.
The Exorbitant Privilege is a negative description of the advantage given to the Dollar by virtue of its being the currency of international choice. It is an actual monetary advantage that the Dollar enjoys (as high as 6%) because of its history and the fact that it has been the number one choice as a reserve currency of central banking systems throughout the world. This is a condition not necessarily admired or appreciated by other nations competing for economic equality in the world of international finance. Because of this “Exorbitant Privilege” the U.S. is able to operate with a 6% deficit spending and still break even in the international market place.
Secondly, I learned what it means to be a reserve currency. Where nations once horded precious metals, like gold and silver, in reserve to back up their paper money, they now use Dollars. The Dollar is and has been the new financial world’s gold. The Dollar is, at present, gold in 68% of the central banking systems of the world. It was once even higher but in recent years it has been challenged by the Euro. The Euro is now gold in 32% of the central banking systems of the world.
To be the reserve currency to the world gives numerous advantages but harbors many perils. Pointing out these advantages and perils is the major scope of this book as I see it.
Another smaller point of interest to me was the author’s economic insights to the famous Marshall Plan. We always hear the Marshall Plan being touted positively as the greatest act ever of generosity and sound economic thinking. Very rarely is the perilous side of this generosity expounded upon. The biggest point of interest to me is the fact that in order to perform this act of generosity the U.S. had to put its own economic position and the stability of the Dollar in jeopardy.
The author tells us that the money to supply to our European allies did not exist. It had to be printed up and in excess to the gold that backed it at the time. It was extremely inflationary and dangerous but who was to complain? Certainly not the recipients.
In today’s conservative parlance money was manufactured from nowhere. In effect, the post war world was rescued by “fiat money.” By what gold bugs would call worthless pieces of paper.
If the countries in Europe took the dollars given to them and instead of investing them in their own countries and people, chose to speculate and cash them in for gold, they could have bankrupted the U.S. treasury. They could have made themselves or a few of their bankers and super-wealthy, very rich. They didn’t because it was to their advantage not to … at first. They could become richer by using the Dollar to invest in their people and their country’s reconstruction.
By the time we arrived at the post World War II Nixon administration the economic situation had changed. Some of our European beneficiaries now felt that the U.S. had been manipulative and overly demanding with their almighty Dollar. They started turning them in for U.S. treasury gold. It was then that Nixon took America off the gold standard. The U.S. would no longer trade their treasury gold for dollars. Nixon and the legislature who approved this action, in effect, created this paper world that so many conservative thinkers are so hateful of today. The dollar would now “float” in the international market place. It would become a commodity as opposed to a security, I guess one could say. From that point forward all paper money would be valued against all of its competitors in an international marketplace.
The author then continues to present the international Dollar situation, describing alternatives and possibilities that could be on the international economic horizon.
The author uses his trained economic “conventional wisdom” to outline what he thinks must now be done … only giving ground to a lack of political will in doing what he suggests is economic reality and common sense. It is here that he falls back on Thomas Carlyle’s “dismal science” that he has learned to know and love in his college and university training.
His prognosis is to basically downsize the American standard of living, cut the middle class, cut wages, cut government, cut benefits, negatively spin unions and prepare for the flood of superior foreign global competition by advising Americans to put on nose plugs and resign themselves to gulping and swallowing large amounts of economic foreign overflow as they slowly go under until we reach a parody with China, India, Asia and the middle East.
In demanding this balanced budget on the backs of the middle and lower class and an overall downsizing of Middle American life, he dismisses military cuts and imperial aspirations in two very short statements. One statement philosophizing the inevitability of war and the necessity for defense spending and the other referencing a rather dubious figure equating military spending and GDP. In closing that door, he then closes the door on tax increases to the power of the Republicans leaving the only alternative of domestic and social cuts. This is monumental understatement and absurdity. I assume the author is attempting to be glib.
In all fairness the author does not state his prognosis in the exact terms as I have above but this is how I read it, nevertheless. He closes the book by stating that the fate of the Dollar is all in our hands and not the hands of the Chinese. He says this is the good news. But this was all prefaced by the necessity of solving our Dollar problems in accordance with his dismal notions of necessity.
I would like to counter some of his conventional wisdom with some of my radical Americanism.
The author keeps closing open doors and boxing himself and us in his dark economic cave of limited possibilities. The first door he closes is that of the global economy. He accepts it unquestionably. I disagree strongly.
There is no product that we can manufacture here cheaper and more efficiently than it can be manufactured in some foreign country. Therefore to compete on a global, totally free market basis is an outright loser for the U.S. Anyone that says otherwise, in my opinion, is simply pulling your leg. We can’t do it.
Our standard of living is too high. Our values are too high. And rightfully so. We should not throw our hands in the air and give up our values and our standards. We also cannot change the standards and values of our worldly competitors. We must fight, not conform.
We must nationalize our own standards and values and protect them with incentives and legislation as the situation demands. Japan, China, Germany and other countries have been doing this all along. We have got to start competing by designing a level playing field where we make the design and not our competitors and to the advantage of our workers and our national industries. And I emphasize National to the exclusion of international.
When you hear the president or anybody else boasting about the competitiveness and superiority of the American labor force they are blowing smoke up the American workers butt and it is as simple as that. Any worker can sit on a forklift or tractor or press the green or red button. Don’t kid yourselves. This “global” reality must be recognized.
The author then states that we have a negative trade balance that must be corrected. He explains arguments for devaluating the dollar and thus making our exports more attractive to foreign countries. He demonstrates how this is a delusion and does not work.
But there is more than one way to balance our negative trade balance and it has nothing to do devaluating or inflating anything. Our economy is our working people. The Dollar is the tale of the dog, not the dog. Manipulating the tale does not wiggle the dog. It’s the reverse that is required.
We could increase our exports … if we had anything to export. Rather than increasing our exports, we could decrease our imports. No we are not going to tighten our belts, stop buying and start doing without. We could decrease our imports by reclaiming production and manufacturing markets here at home. We all wear shoes. We all wear underwear. These manufacturing outlets and a thousand more can be reestablished here at home via incentives to national companies who have no overseas attachments. Don’t call General Electric, let them call us. The author dismisses this notion by stating that this type manufacturing America should be glad to be rid of. This is foolishness. Eighty-three percent of Americans agree that the U.S. must increase its lost manufacturing capacity.
We can also encourage new domestic manufacturing. But for any new manufacturer to invest here at home, he will have to be granted incentives and some security. China has manufacturers competing for the right to put a plant in their country. We have the largest market in the world. We should be doing the same. No one is going to invest millions here at home in electric cars or wind mill motors only to see their investment go down the drain in a year or two because of cheaper imports from China, Asia, India, or Europe.
The author points out that too much of our national debt is in the hands of foreign governments. We can thank Ronald Reagan who was the first to borrow and spend more than American’s could buy. I suggest we declare a war on foreign debt. Let’s get our government back in the War Bond business. Start a campaign offering bonds to American investors ONLY … common working people as well as big money people, a bond a week at work etc. Pay us a little worth while interest and then use our cash to gradually buy back some of this foreign debt. Most of us regular people will spend and invest our interest right here in our own backyard. It’s a win/win situation. Give Americans the chance to own America once again. We all may be surprised at the results.
I could go on and on but the point is simple. Think nationally. We can actively participate in the global market place but with reservations and to our advantage. Any company currently importing to the United State could be required to establish 20% of their totally manufacturing here in the U. S. or pay a premium. Make trade agreements fair to working Americans not international investors. And the truth is if our government can no longer be trusted to do this for us, Americans are going to have to figure out ways to do it for themselves.
