After Britain emerged as the leading colonial power, the British pound gained increasing acceptance as an international currency and its dominance continued up to the First World War.

During the two decades after 1920, the dollar emerged as a serious competitor and shared almost equal honour with the British pound in terms of acceptance as an international currency.

During the Second World War, Britain suffered heavy economic losses and its foreign debt mounted. Hence, the British pound lost its dominance to the dollar. This reality was formalised in the Bretton Woods Agreement. Since then the dollar has remained the dominant international currency, with nearly two-thirds of the foreign exchange resources of the world being held in this currency.

However, there have always been some reservations about its acceptance. The opposition to the dominance of the dollar as international currency in 1945 was not confined to just the Soviet Union and its allies. One view has been that in an increasingly complex world, the currency of any one nation should not be the dominant international tender and some other alternative should be evolved by international monetary and financial institutions.

However, as long as the United States retained its economic and political dominance of the world, the acceptance of the dollar as the international currency did not see any major hurdles. It was assumed, or at least hoped, that the United States would use this special privilege in a responsible way. Valery Giscard d’Estang, finance minister of France, said in 1965 that the dollar’s prominence in global finance is an “exorbitant privilege”.

In 1971, President Richard Nixon made a unilateral declaration that the United States was not obliged any more to provide gold in exchange for the dollar. This one-sided de-linking from gold, without due international consultation, led scholar Susan Strange to observe that now it was a situation of “super exorbitant privilege”.

In an interview, American economist and Nobel laureate Paul Samuelson told People’s Daily Online on Dec 26, 2005, at a time when the dollar was regaining strength: “In the short run, the dollar appreciates relative to the euro and yen. That can last for as long as these countries recycle eagerly their trade surpluses with the United States into holding dollar assets (such as low yielding American treasury bonds). Be not misled. So… irreversible are American balance of payment deficits, we must accept that at some future date there will be a run against the dollar. Probably the kind of disorderly run that precipitates a global financial crisis.”

Samuelson also said that the situation was being worsened by a less then responsible use by the United States of its privileged position. He told the interviewer, “President Bush is a reckless economist leading a reckless crew of subordinates. Spending on a hopeless imperialist caper in Iraq plus Bush giving away to the rich much of America’s tax base, will eventually depreciate the American dollar. Those now abroad who hold dollar assets will then reap the capital losses that they are not now expecting.”

A new balance can emerge in which the dollar continues to have widespread acceptance as international currency but shares the honour with one or more leading currencies (like the euro) while at the same time some guidelines of responsible behaviour of countries that have this privileged position are ensured.

In 2008, Jonathan Kirshner of Cornell University wrote in a paper titled “Dollar Primacy and American Power: What’s at Stake?” that there were good reasons to anticipate fundamental changes in the international role of the dollar, and concerns about the future of the dollar are heard with increasing frequency. “Such a change would not only have considerable economic implications; it could shake up foundations of international power politics.”

He added that the US trade deficits have been shattering record after record, surpassing $700bn in 2005. He commented wryly, “Most other countries would find their back to the economic wall under such circumstances.”

Since then the situation has deteriorated further as the share of the United States in the world economy has been declining. Add to this the irresponsible use of its privileged position to impose sanctions against Iran, which are widely considered to be unjust and you realise why there have been several voices in recent times suggesting that the United States has not been using its “exorbitant privilege” in a just and fair way, with the consequence that this can harm the interests of others and lead to increasing financial instability.

Our approach should be to resolve the difficult issue before it is too late ie before it results in a very serious crisis, perhaps of the kind Prof Samuelson warned in his 2005 interview. If there is further irresponsible behaviour on the part of any big power or its adversaries and the use of force is also involved, then the issue can get out of hand.

It has been suggested by some observers that the unresolved currency issue has already led to violence in the past and this can be repeated in the future also. So we really need to resolve this well in time and in peaceful ways.

A new balance can emerge in which the dollar continues to have widespread acceptance as international currency but shares the honour with one or more leading currencies (like the euro) while at the same time some guidelines of responsible behaviour of countries that have this privileged position are ensured.

Or there are other solutions of a truly international currency, which can be negotiated to create a just and fair situation. But the world must have the ability to reach these solutions in conditions of peace and stability.

—The Statesman/ANN

Published in Dawn, The Business and Finance Weekly, February 11th, 2019