Greenback's slide sparks 'dollar envy'

Harold James Professor of History Princeton University Project Syndicate

Currencies can become the focus not just for commercial transactions, but for diplomatic and political wrangles. When this happens, commercial transactions become more difficult and subject to greater uncertainty. The politicization of money during the interwar depression was economically devastating. But there have been more recent occurrences of nasty currency wars.

In the 1960s the international monetary order became the focus of a political tug-of-war. Each side had quite different theories and explanations of what was going on. The Europeans -- in particular the French -- complained about what General Charles de Gaulle termed the "exorbitant privilege" of the U.S. dollar. The General and his monetary guru, Jacques Rueff, argued that the U.S. used the dollar's status as the major reserve currency of the Bretton Woods fixed exchange-rate regime in order to run deficits and pay for its overseas military adventurism (at that time in Vietnam).

France responded with calls for monetary reform that would end the peculiar role of the dollar and tried to revive the largely discredited gold standard. Europeans began a long discussion of the advantages of monetary union, achievement of which would allow them to look the dollar in the face.

But from the American point of view, the international role of the dollar was a trap. Other countries could change their exchange rates, and in this way could maintain greater export competitiveness. The U.S. government was powerless in the face of an undervalued yen, fueling the belief that the rest of the world was using the dollar to attack America's manufacturing base.

The Nixon administration came to the conclusion that the only way to save the American economy was to engage in monetary unilateralism -- a monetary expansion so dramatic that other countries would be forced into adjusting their exchange rates.

These long-forgotten battles seem suddenly very immediate once again. The world no longer has a fixed exchange-rate regime, but the dollar remains the major reserve currency -- a sort of floating Bretton Woods. For Americans the reserve role of the dollar is a potential threat, while for non-Americans it is yet another instance of an American neo-imperial quest for hegemony.

In this decade, China has taken the place of 1960s Japan, holding its exchange rate down in order to push export growth. Consequently it is the target of U.S. complaints about unfair competition, and of efforts to force an exchange-rate adjustment that would deter Americans from buying Chinese toys, appliances, and clothing. Manufacturers in the U.S. have decided that Chinese-made bras constitute a threat to the American way of life.

Meanwhile, Europeans (especially the French) complain about the big U.S. deficits, and de Gaulle's argument that the rest of the world is paying for America's wars is in fashion again. Some Europeans suggest that Asian central banks should hold a greater part of their reserves in euros, an echo of the General's unsuccessful attempt to force America to its knees by selling dollars for gold.

The 1960's ended in the breakdown of the "system," and in major financial turbulence, accompanied by an inflationary surge of commodity prices. Everyone was hurt, and America's role in world affairs was shaken. A similar collapse now is likely to have a rather different effect. The floating-rate system of today is stronger and the costs of adjustment differently distributed. Most Americans do not suffer greatly from the dollar's sharp fall, as foreign sellers have to make price adjustments for the U.S. market.

Asian economies are growing vigorously, and their central banks are building up claims on the U.S. They are likely to continue this policy, as the alternative would be a sudden setback to the competitiveness of their export sectors in the all-important U.S. market. This gives the U.S. a longer time to address a current account deficit that is in the long run unsustainable.

The economically dynamic regions of the world -- North America and Asia -- are thus linked together in a pact that will ensure the continued centrality of the American dollar. Americans will continue to pile up debt because Asians want them to do that. To abrogate the pact would be against the interest of both parties.

This is not American unilateralism, because it means working with Asia. But to Europeans, who are excluded from the pact, it looks like monetary and economic unilateralism.

In the meantime, the rise of the euro against the dollar creates substantial European pain for manufacturing exporters. Europe, however, is unable to do much to gain relief. Indeed, Europe will be the major sufferer in the new currency clashes. Answers that were touted in the 1960s -- revival of the gold standard, or the invention of a common European currency -- do not appear to be very helpful any more. Having a single currency has turned out not to afford substantial protection.

The old version of the European response -- what psychologists might call "dollar envy" -- will only become more acute. There will be appeals to the European Central Bank to expand the monetary base, as if imitating the dollar were the answer to all the industrial, structural, and demographic problems plaguing Europe. But a moment's reflection should remind us that Europe's problems are not amenable to currency manipulation.

Protesting the new version of America's exorbitant monetary privilege should be seen for what it is: A way of compensating for a real European powerlessness. So dollar envy is here to stay, and it will become even greater as the greenback's international value melts away without any obviously bad effects on the people who print and use it.

The writer is author of The End of Globalization: Lessons from the Great Depression.