Imagine a form of almost magic money, one that everyone around the world needs and thus wants more of. Imagine that money being held in large quantities by central banks and commercial banks all around the world, and also lent out as the default denomination for most debt instruments. Imagine that money being used almost exclusively by governments, businesses, and individuals across the globe when buying oil and settling international transactions. Imagine that money being issued at the whim of one government’s central bank and Treasury, yet used and accepted in exchange for real goods and services worldwide. Imagine that same government being able to wildly overspend, borrow money, and pay it back at exceedingly low interest rates--again using money it alone produces. And finally imagine a political arrangement that perpetuates it all, created against the backdrop of an emergent postwar order led by a dominant new military and nuclear superpower?
We might call that entire arrangement “privilege,” which is exactly what every American paid in US dollars (and holding assets denominated in US dollars) enjoys even today.
Henry Hazlitt, then a top financial columnist for The New York Times, had no illusions about what the Bretton Woods agreement of 1944 would mean. He knew it created an ersatz gold standard, gave the US undue influence in world affairs, and would lead to destructive inflation and the end of anything resembling sound money in the global economy. Worst of all, he saw how Bretton Woods connected all the major governments and central banks around the world in an unholy monetary union, one where judicious and prudent control of nominally sovereign currencies would handicap those currencies against the US dollar.
America, Hazlitt understood, could now export inflation.
Under Bretton Woods, the whole world needed dollars like it once needed gold. Valéry Giscard d’Estaing, former president of France and onetime finance minister to Charles de Gaulle, called the post-Bretton Woods arrangement America’s “exorbitant privilege.” This privilege, he understood, would grant America economic power and prestige beyond what she actually deserved. For a few pennies the US Treasury could produce a $100 bill, but the rest of the world would have to exchange real goods and services for it.
What he could not have imagined, perhaps, is the military, geopolitical, and cultural power that would accrue to the US over the next half century. Under the unholy trinity of the Federal Reserve Bank, US Treasury, and US Congress, the American state rose to become the biggest and most powerful government in the history of humanity. No amount of fiscal profligacy is allowed to dampen the market for US Treasury debt, even as the spendthrift Congress ought to be treated like any banana republic and charged junk bond rates for high-risk investors.
What does it mean for the US dollar to be the world’s reserve currency? It means a privileged position for America in the world, and an unearned level of economic and material well-being. It puts other central banks in the uncomfortable position of holding vast US dollar reserves, and thus suffering if the dollar crashes-- even as their respective governments and people understand how damaging US dollar privilege is to them both economically and geopolitically. It means having the full force of the US military and nuclear arsenal acting as a backstop to that privilege. And it means a form of de facto monetary interventionism around the world.
