Dollars and Depressions

In the last two weeks, I read two books that sit firmly in the world of finance and money. The first is Barry Eichengreen’s Exorbitant Privilege, from Oxford UP, and the second is Liaquat Ahamed’s Lords of Finance, which has won a number of awards including the Pulitzer Prize. Ahamed’s book reads almost like a novel, with a diverse cast of characters found in the key central bankers of the era. His book is ultimately one of technocratic bumbling in the context of a political vacuum, wherein the key countries, often for reasons of domestic pride, hold hostage sound economic policy. By far the most interesting vignette comes early on, with regards to the issue of Germany’s World War I reparations. Ultimately, all sides end up compromising, but it’s not enough to prevent Germany from heading into a spiral ahead of the rest of the world (and eventually into fascism). While long, Lords of Finance is extremely entertaining.

One wants to continually draw parallels with the recent crisis. Of course, the central bankers of the times had a living and breathing Keynes, whose work is well woven into the story. Nevertheless, Keynes was probably too new at the time to have a meaningful impact. And of course, in the lead up to our crisis, Keynes was willfully ignored, and has had a minor resurgence among policymakers. Bernanke, Paulson, Brown, et al. look like financial wizards in comparison to Norman, Strong, Schacht, and Moreau. Nevertheless, given the greater global political consensus on the need for action, it is somewhat disappointing that the solutions were still half-measures, and the banks have only gained more power over governments, finance ministries, et al. This book shows we’ve come a long way, but still have far to go.

Eichengreen also has a keen knowledge of history- he traces the rise of the dollar through history, showing the economic and political underpinnings of it’s dominance and the sterling’s faltering. His book is most interesting when it discusses the role of the dollar in the present day, and the shortcomings of possible usurpers. What Eichengreen deserves most praise for is his discussion of the ability for a multipolar currency world to arise amid a multipolar global economy. Though he shows how the dollar’s dominance was indeed an “exorbitant privilege” for the US economy, it is clear that economic strength leads to currency dominance, not vice-versa. However, even amid our stagnation, Eichengreen rightfully cautions against assuming that the dollar will fall. Parts of the book could be summed up as, “rumors of the dollars demise are much exaggerated.”

Money is an area I don’t understand sufficiently, but this book helped me understand what brings about a strong or weak currency. However, I was annoyed at the last chapter, which attempts to argue that US deficits will ultimately determine the US’s ability to dominate. The evidence for this is never given- rather, it’s merely assumed that a large federal debt need imply stagnation. Most economists will go along with this, so I suppose it’s fine that he does. However, I don’t think the connection between the deficit and the dollar is intellectually strong. Indeed, the dollar has been a haven for investors amid economic uncertainty and record deficits. The dollar may not dominate forever, but perhaps its fall could come from too little deficit spending and thus too weak an economy. I agree with one of Eichengreen’s closing sentences, “the fundamental underlying health the economy matters for geopolitical leverage. If one wants a single unified explanation for the behavior of the exchange rate…it would be [that].” Indeed, but perhaps we need a better macroeconomics to probe that underlying health.

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