ZoneBitcoin EditorialAt the heart of the global economy, the U.S. dollar has reigned supreme for more than half a century. This position gives the United States a considerable economic advantage, which former French Finance Minister Valéry Giscard d'Estaing called an "exorbitant privilege."
In 1964, he coined the expression which would subsequently be taken up by numerous critics of the domination of the dollar, notably by Charles de Gaulle. The phrase is a criticism of the privileged position enjoyed by the dollar as the world's reserve currency.
In this article, we will explain the concept of the “exorbitant privilege” of the US dollar while showing its profound implications in the global economy. It seems essential to us to understand the mechanisms underlying this status and to consider the possible consequences of a reversal of its hegemony.
The Bretton Woods Agreement and the reign of the American dollar
The dominance of the US dollar in the world economy began to take shape mainly after World War II. It was particularly with the "Bretton Woods Agreement" in 1944 that the dollar gained its first place. In order to reconstitute a new international monetary system, it was decided at this meeting that all national currencies would henceforth be linked to the US dollar, which was in turn backed by theor.
Winner of the war and enjoying a strong economy, the United States was well positioned to make the dollar the primary international reserve currency. The choice of dollars was explained by the fact that it could facilitate international commercial transactions.
Although in 1971 the President Nixon cancels dollar convertibility in gold, the fact remains that today, the dominant role of the American dollar in the world economy is undeniable. It is omnipresent in international commercial transactions or as an economic unit of measurement. We use, in fact, dollars to carry out measurements on extreme poverty (less than 1,90 dollars per day), to classify the fortunes of billionaires or to establish the amount of the trade balance of countries. Thus, the dollar fully fulfills the three objectives of a currency, namely being an instrument of measurement, instrument of exchange and instrument of reserve.
How can we speak of “Exorbitant Privilege”?
To understand Valéry Giscard d'Estaing's point, it is important to emphasize the term "privilege". This refers to a situation where an entity has more advantage in a given situation compared to other entities.
In economics, this is what is referred to by the word that dates back to the Middle Ages, namely "seigniorage". This defines the gain inherent to any issuer of currency, which is particularly high for the country whose currency is established as the main international currency. It must therefore be understood that the entity issuing the currency does not have the costs of production or distribution of the notes. This then ensures additional income or lower costs by issuing the currency.
Thus, by issuing the currency, it provides the United States with an economic advantage over other countries. According to the economist Barry Eichengreen, “It costs the U.S. national printing press just a few cents to make a $100 bill, but to obtain it, other countries must pay $100 in real goods and services.”
More generally, all countries that issue a currency that is used elsewhere than in their countries benefit from seigniorage. Thus, France, for example, with the CFA Franc can also benefit from seigniorage by printing currency in the territory.
The problems of dollar domination
Because dollars are abundant in businesses that trade with the United States, banks and corporations buy dollar-denominated securities (typically Treasury bonds). In his book, The Exorbitant Privilege"This puts downward pressure on the interest rates the United States has to pay on its foreign debt," Eichengreen said.
The rate of return on their investments thus becomes higher than the cost of financing their debt, which allows the country to support a significant trade deficit.
The other problem raised by the domination of the dollar is certainly the fact that non-American players are exposed to the risk of a variation in currency prices. This is a risk from which American businesses and individuals escape since they do not need to exchange their dollars for another currency in absolute terms. Concretely, if a French importer signs a contract for the purchase of a volume of oil, he takes the risk that the euro depreciates against the dollar and that he must therefore pay more in euros to acquire an asset whose price in dollars remains unchanged.
The geopolitical excesses of the United States
In recent years, the United States has also made the dollar an instrument of political and military blackmail. The use of the greenback is in fact the reason used by the United States justice system to condemn European companies having done business in countries sanctioned by Washington. In fact, the United States can decide unilaterally to sanction a country if the country judges that the latter does not comply with the imposed rules of conduct. Thus, the American embargo on Cuba is one of the oldest and best known. Established in 1960, the embargo remains partially in force today. We can also cite the embargo on Iran which has been strengthening since 1979 which is linked to the country's nuclear program.
The domination of the dollar is then perceived as an unparalleled pressure tool. States, governments or even financial institutions can be victims. In this regard, we can recall the case of the BNP Paribas bank which was accused of having “violated” the American embargo against Sudan, Cuba and Iran, by transiting dollars to those countries. The trial which took place in New York in 2014, then condemned the French bank to a record fine of 9 billion dollars.
The Triffin Paradox and the resilience of the dollar
Normally, a reserve currency should not remain so forever. This is in any case what the Triffin paradox tells us. Also called the "Triffin trilemma", it is an economic paradox revealed by the Belgian economist Robert Triffin in 1960. It may seem surprising to us contemporaries to see that this paradox was stated more than 60 years ago. The paradox states that countries whose currency is an international reserve currency cannot last over time. Triffin explains that it is necessary that the country that issues this currency be in trade deficit so that other countries can obtain its currency. However, by being in deficit for too long, other countries can lose confidence in the currency, which can lead to the end of the hegemonic currency.
What we see is that Triffin had predicted correctly because as far as the United States is concerned, it turns out that the country is experiencing a external deficit which increases from year to year. Thus, the American public debt amounts to 29 billion US dollars.
Thus, some even fear that the US debt ceiling not be achieved in the near future. Currently set at $31 trillion, this ceiling can only be raised by a vote in the American Congress but could cause a real shock to the global economy.
It seems important to us to specify here that in his reference work " Gold and the Dollar Crisis. The Future of Convertibility (1960) », Triffin is very critical of the Bretton Woods agreements and demonstrates that a national currency cannot serve as an international currency.
Towards an uncertain future for the dollar?
More generally, some voices are being raised to predict a weakening of the dollar in the long term, in particular due to the isolationist policies of the United States, notably under the Bush administration.
Other, more optimistic experts, however, believe that the dollar will remain the world's reserve currency for many years to come.
This remains a thorny question and difficult to resolve. The question of the future of the dollar remains open and gives rise to numerous debates today, particularly since the possibility that the BRICS will soon issue their own currency. This currency could then fully compete with the dollar. We then speak of a tendency towards dedollarization of the world which could well accelerate with the introduction of new countries into BRICS. Indeed, the balance of global economic forces would inevitably be upset.
Final word:
Currencies like the Chinese renminbi, or even digital currencies and perhaps even Bitcoin (🙏) could play a much bigger role. Many bitcoiners like the economist Saifedean Ammous believe that bitcoin could become a reserve currency, just as valuable as the dollar currently is.
However, for the moment, it is still too early to comment because none of these alternatives seems ready to dethrone the dollar at present.
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