US president-elect Donald Trump has warned that countries that opt out of the dollar system of exchange will face the wrath of his government.
This statement, with attendant warnings of sanction, should not be taken lightly for its short-term implications. However, it fits neatly into the passage of “the rise and fall of the dollar and the future of the international monetary system”, that has been heavily studied over the past two decades or more.
It is safe to say that the glorious ride of the dollar, and its role as global reserve currency, will eventually end. It may not happen in our lifetime, but it will end. The most forceful opposition to the dollar’s role is ideological. That’s fine. Most of the copper-bottomed Americanophiles or people who fear “losing the West” enjoy lives that are thoroughly imbricated in US culture, and can’t imagine a life without the mighty dollar.
Internal and external, and transnational factors, as well as long-run historical issues that have previously been alluded to in this column, help us understand what Valéry Giscard d’Estaing, Charles de Gaulle’s finance minister, described as the “exorbitant privilege” the dollar has enjoyed since at least the end of World War 2. If we consider nonfinancial factors, cultural and information, communication and technological factors, we may get a better understanding of the inevitable end of this exorbitant privilege.
Let’s stay with the “big issue”. The exorbitant privilege Giscard d’Estaing referred to was an early reminder that everyone in the world had been carrying a disproportionate burden for using the dollar. It has shaped almost every aspect of our lives, and not always for the better. When US treasury secretary John Connally said in 1971 that the dollar may be that country’s currency, but it was a problem for everyone, he referred to deployment of the dollar to secure US interests.
The US has been the key currency country that has held together the global financial system, running deficits at home while supplying the world with international liquidity. This “liquidity” cost individual countries in more than just financial terms. We will take a brief look at this below.
Consider that it probably costs the US less than 10c to print a single $100 bill, but any country that uses the bill has to produce $100 worth of goods and services to get a single note. That seigniorage, a medieval-era privilege that ensured the “lord” kept an amount of the money he printed for himself, remains intact. This means that every country that uses any of the estimated 5.4-billion dollar notes now circulating in the world, based on data produced at the end of 2023, pays for the actual use of each bill.
The dollar became indispensable for almost every transaction across national boundaries. For instance, if Zimbabwe buys goods from Sri Lanka it will pay in dollars. The same applies to Taiwan and Australia, Malaysia and India, or Ecuador and Argentina. When France imports cars or heavy machinery from China, or vice versa, the trade is made in dollars, and thereafter follows the cost of converting dollars into local currencies. A Swiss bank will accept deposits in euros or francs, but when a borrower wants dollars it adds to the cost of doing business because of currency fluctuations.
Moreover, central banks and government agencies around the world may, at any moment, hold billions in US treasury bonds. Along the way benefits accrue to the US. When crises hit, as in 2007/08, bonds and investments around the world retain most of their dollar value. There was a long-run decline after 2007/08, but immediate profits accrued to Americans. These are some of the realities of global finance.
What about the military, strategic, cultural, social and information, communication and technological factors that matter more to most people? Here we see at work, rather briefly described, the ideological factors. Just as Los Angeles has become a “natural” or “normal” fixture in Hollywood films, the “dollar” has become part of the lives of almost everyone in the world who has been exposed to the “American culture”.
It may seem silly, but these things add up to building lifestyles heavily dependent on the dollar, or at least normalises “the dollar”. Cast a gaze at “bling-bling” (fashion) and you don’t have to search too long to find diamond encrusted dollar signs as ornamentations of US consumer culture. This seeking external validation (with the display of dollar signs) is probably the inspiration of Emily Dickenson’s poem The Bird Must Sing to Earn the Crumb, but maybe I have read that wrong.
Anyway, in the eponymous musical Annie, the protagonist sings: “The sun'll come out, tomorrow. Bet your bottom dollar that tomorrow there’ll be sun!” We sing along unthinkingly.
Sure, the dollar comes with a financial burden, as Connally said in 1971, and represents that exorbitant privilege the US has over the global financial system, but we have to try to imagine a world without “the dollar”. We love money not just for what it can buy, but also for what it represents socially and culturally.
• Lagardien, an external examiner at the Nelson Mandela School of Public Governance, has worked in the office of the chief economist of the World Bank as well as the secretariat of the National Planning Commission.
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