What does the US dollar’s continued dominance in the global monetary and financial systems mean for geo-economic and geo-political power? In a recent article, Yakov Feygin and Dominik Leusder question whether the United States actually enjoys an “exorbitant privilege” from the global use of the USD as the default currency for foreign exchange reserves, trade invoicing, and cross-border lending. Like Michael Pettis, they argue that the dollar’s primacy actually imposes an exorbitant burden through its differential costs on the US population.
Global use of the dollar largely benefits the top 1 percent of wealth holders in the United States, while imposing job losses and weak wage growth on much of the rest of the country. This situation flows from the structural requirements involved in having a given currency work as international money. As Randall Germain and I have argued in various venues, a country issuing a globally dominant currency necessarily runs a current account deficit.1 Prolonged current account deficits erode the domestic manufacturing base. And as current account deficits are funded by issuing various kinds of liabilities to the outside world, they necessarily involve a build-up of debt and other claims on US firms and households.
A large share of those foreign claims are on US firms in the form of corporate equity. US holdings of foreign firms’ equity are roughly equal in size, but these are largely held by the top 1 percent. The bulk of US debt to the rest of the world is public and private debt, including securitized mortgages. As the top 1 percent largely avoid taxation, the broad US public is on the hook for those debts. The rich reap the rewards of dollar dominance in the form of financial rents and easier tax avoidance. Meanwhile, the rest of us compete against artificially cheap low wage imports while struggling to find affordable housing.
Feygin and Leusder’s argument about the class basis for dollar dominance is certainly sound (which is academic-speak for: “I've argued the same thing so it must be correct!”). But they dismiss the geo-political aspects of dollar dominance too quickly. Two flaws in traditional histories of the nineteenth century European empires lead them to misunderstand the structure of empire and in particular the relationship between imperial centers and peripheries. Examining these missteps clarifies the global role of the British pound then, and the US dollar now.
The first flaw sees the centers of those empires as internally coherent, unified nation states, like those that populated Europe and North America after the first and second world wars. Instead, I argue, nineteenth-century imperial European states are better understood as systems of power with permeable boundaries between the center and a hierarchically ordered, integrated set of peripheries.
The imperial European states of the nineteenth were hardly the linguistically and culturally unified states of the postwar era. All had seen massive in-migration—including from their tropical colonies—into populations who themselves spoke distinct dialects, while also emitting millions of emigrants to the temperate zone colonies. As Ian Lustick has demonstrated, imperial officials did not draw sharp lines between center and periphery, even as they drew nearly impermeable lines everywhere on the basis of race. Consistent with Feygin and Leusder’s argument, banking elites in London, Montreal, and Melbourne had more in common with each other than with the ranchers, dockworkers, or butchers bringing Australian lamb and prairie wheat to that London banker. Metropolitan and settler elites circulated across center and periphery in parallel with the unskilled laborers in steerage, as the careers of Leo Amery or Cecil Rhodes show.
The second and related flaw is in taking the later empires built in Africa (and to a lesser extent Asia) as the generic model, rather than the earlier British “empire of food.” From an economic standpoint—which mattered for the British pound—the real imperial action occurred earlier in the nineteenth century with the genocide and displacement of indigenous populations in thinly settled temperate zones and their replacement by mostly European settlers. Australia, Argentina, Canada, New Zealand, and, above all, the United States became prodigious exporters of the food and agricultural raw materials that fed the workers and machines of Europe’s industrial revolution. Compare: total British investment in Australia, with a population roughly 4 million in 1900, roughly equaled that in British India, with a population of over 300 million. British exports to Australia and New Zealand from 1894 to 1913 exceeded its exports to all of sub-Saharan Africa. All of that trade and investment was denominated in pounds sterling, flowing through banks with sterling-denominated ledgers, and managed, yes, by a transnational but culturally and largely ethnically British financial elite.
This is the historical context in which we should understand the geo-political and geo-strategic advantages of the dollar’s role in the monetary system. The dollar functions not only as the currency of a specific nation, but also as the currency of a global imperial state centered on but not exclusively limited to the United States as a formal legal entity. As in the nineteenth century, the lines between the imperial core and its dependencies are blurred, those dependencies have differential status in the imperial hierarchy, challengers reside inside and outside that hierarchy, and a single currency is an important bulwark of that empire. There are four important aspects to this role for the US dollar.
First, the dollar partially frees the US state and allies from resource constraints. In both world wars, the British temperate zone empire of food was a decisive factor tipping the balance of physical resources in favor of the Allies against Germany. And Britain’s tropical empire, particularly India, was a decisive manpower resource in World War I, providing the vast majority of combatants outside the European theatre and over 20 percent of total troop strength; the white settler colonies contributed a further 20 percent. The British empire, including its constituent parts, largely issued sterling-denominated debt to buy these physical and human resources. Similarly, dollar debt funds US special forces who train local militaries today as auxilia.
Although there is no mechanical relationship, the cumulative US current account deficit from 1992 to 2019 equals 83 percent of cumulative US official defense spending over that period. Major expansions of the military budget run concurrent with increases in the current account deficit. In essence, current account surplus economies give the US enough consumer goods on credit to free up domestic productive resources for the outsized US military apparatus. This ability to draw on global resources rests not only on other actors’ belief that they can use those dollars in the future to purchase US goods, but also on their own economies’ reliance on the US market for growth. Excepting China after 2010, the major export surplus countries all grew more slowly than the United States after 1992, despite their export surpluses. And other major countries with current account deficits are also hostage to US growth—most obviously, Canada and Mexico. How would Britain grow if the City of London were not the global center for dollar based financial flows, or Ireland not a convenient tax haven? Holding and using dollars keeps their currencies from appreciating and pricing their exports out of world markets.
Second, all five Anglo countries are tightly tied geopolitically to the United States through some combination of intelligence cooperation, alliance-based joint exercises, actual warfighting, and a dense network of circulating elites. The integration of military and intelligence organizations is every bit as dense as with finance, and, as with finance, there is a hierarchy of privilege and access that radiates out from the center. These military ties run parallel to the financial ones. The truism that oil exporters exchange dollar pricing of oil for US military protection can be understood in even broader terms, as the current debate over removing troops from Germany shows.
Third, the Federal Reserve Bank is de facto the world’s central bank. By acting as lender of last resort in global crises, the Fed has structural power over almost all of the global financial system. Access to the Fed is a life or death issue for non-US banking systems in major financial crises. The US dollar is, in technical terms, global “state money” or “outside money.” Put as simply as possible, monetary systems generally are composed of both inside money (created inside the financial system) and outside money (created by the state outside the financial system). Banks exchange purchases of public debt for a license to create inside money, that is, credit to other private actors. This credit need not rely on prior savings. Rather, the extension of credit creates a loan, which shows up as an asset; the simultaneous deposit of loan funds into the borrower’s account creates a liability for the bank. Et voilà, new money now exists. Globally, non-US banks generate almost all of the 60 percent of cross-border lending that is US dollar-denominated. In other words, they voluntarily create the dollar liabilities on their balance sheets that make them ultimately depend on the Fed in a crisis. But ‘voluntarily’ here needs to be understood in the context of societies whose exports to the United States transform stagnation into merely mediocre growth. The Eurozone’s cumulative export surplus from 2011 to 2018 equals 90 percent of the US cumulative current account deficit.
Only regulation and bankers’ weak self-discipline limit the creation of inside money. In the 2000s, European and other banks took dollars earned through their trade surpluses and dollar-denominated inside money created in the eurodollar system and recycled them into global lending. The balance sheet of the average European or Canadian banking system was over one-third dollar denominated, amounting to roughly $14 trillion of assets in 2017. This created considerable vulnerability if, as in 2008 and 2020, the collateral backing the asset side of the balance sheet collapsed and borrowers defaulted on their loans. All those banks needed US dollars, but their central banks could not create outside money to bail out banks’ US dollar-denominated liabilities. Instead, the Fed created dollars—outside money—to lend to those central banks for on-lending to their local systems. As with military cooperation, more tightly integrated and cooperative countries received better treatment and faster access to these swap lines. The inner Anglo-circle of financial ties is so close that some analysts refer to “Anglo-American finance” as a coherent whole, and describe the Bank of Canada as the “13th Federal Reserve Bank.” The use and recycling of dollars maintains the transfer of resources noted in the first two points above.
Fourth, widespread use of the dollar means that most trade and financial flows are settled through plumbing controlled by either the US state or entities regulated by the US state. This gives the US state, mostly via the Treasury Department, a kind of tactical or operational power vis-à-vis non-US financial systems in non-crisis situations. The global financial plumbing system uses the Fed-wire, CHIPS and SWIFT networks, which largely settle through New York. Regulatory oversight of the networks and non-US banks’ need for a presence in the United States give the US state the ability to compel behavior from non-US banks. For example, the threat of exclusion from clearing networks compels foreign banks to comply with sanctions against geo-political enemies. SWIFT expelled Iranian and North Korean banks from its payments network, greatly hindering their nuclear programs and their normal commerce. The US state also used the threat of expulsion from the payments network to compel banks to enforce sanctions on some Russian banks and firms after Russia invaded Crimea. The US state similarly used SWIFT data on global financial transfers to identify and target terrorist groups. The Fed supplies the carrot of crisis management, while the Treasury wields the stick of exclusion from the payments system.
Analysis like Feygin and Leusder's is correct call out the exorbitant burden the US dollar imposes on the non-elite US population. But that burden needs to be seen in the context of the overall system of power radiating unevenly from Washington, New York, Silicon Valley, and so on, through a network of allied states, firms, and free floating intellectuals that cross the permeable boundaries of formal citizenship and legal domicile. That system of power is anchored in and funded by use of the dollar as the de facto currency of a global imperial state centered on (not in) Washington. The exorbitant privilege does not net out the exorbitant burden; it is the obverse of a coin held by much of the global power elite.
The current account deficit (or surplus) adds the balance on investment income, labor income, and unilateral transfers (like foreign aid or remittances) to the trade deficit (or surplus) on just goods and services. ↩