The Wall Street Journal has recently published an article by Barry Eichengreen titled “Why the Dollar’s Reign Is Near an End”.
Barry Eichengreen is a very serious scholar, affiliated with as prestigious a school as the University of California at Berkeley, and a long-time student of matters related to international reserve currencies. That he took such a strong stand on the future of the Us dollar as an international reserve currency is a very remarkable thing and, for those who follow the evolution of his thought on the subject, a rather unexpected turn away from the traditional academician’s caution. Of course, an article on the WSJ cannot possibly have the breadth, the depth, and the balance that a scholarly paper has. Still, the title is neither ambiguous, nor cautious.
Here I want first to review the main points of the article, though I recommend reading the original, unabridged version (www.wsj.com). Secondly, I shall submit a different way to think about international reserve currencies, a way that is actually not widely held in the profession and that I may even refer to as ‘my view.’ Some concluding remarks will bring the discussion to a close. Since as a reader I always find it useful to know the author’s thesis from the very beginning of the paper, let me state here what my perspective on the issue is:
I maintain that world demand, public and private, for an international reserve currency strictly derives from the position that the issuing country holds in the international division of labor. If today the dollar holds the position of pre-eminent reserve currency -and that position at the moment is not a matter for debate, even though Eichengreen maintains that it will not last- it is because the dollar is the currency issued by the country which launched first, and governs since, what we call ‘international production networks’. By such expression I mean that production processes spreading across the world are organized in ‘production networks’ the functioning of which relies on the cooperation of the Us and China, one form taken by such cooperation being the system of virtually fixed exchange rate between their currencies for nearly 20 years now.