Fixing Global Finance by Robert Skidelsky: Book Review

The current (July 16) New York Review of Books contains a brilliant review (http://www.nybooks.com/articles/22898) of Martin Wolf's latest book, Fixing Global Finance, by Robert Skidelsky, Emeritus Professor of Political Economy at Warwick University, England. The concluding section, reproduced below, is a succinct description of the relationship of the dollar to American hegemonic power that bears close reading.

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... Wolf's book offers important pointers to the way ahead. But his story is only half-told. He has very little to say about America's responsibility for both creating and ending the system of global imbalances. For the fact is that the present system has suited the United States—specifically the power holders in the United States—just as much as it has those in China. The phrase "it has enabled the Americans to live beyond their means" is too vague to be useful. One needs to ask: which Americans? Certainly many middle- and low-income American households have been given opportunities to borrow beyond their means.

But secondly, the American–Chinese symbiosis has been excellent for US business profits. American businessmen have been complicit in Chinese "super-competitiveness" by arranging for manufacturing jobs to be moved to China from the US in order to cut costs. The decline in US manufacturing and the growth in nontradable services, and the financial operations that secured this restructuring, have enabled financiers and businessmen to earn huge profits that should have been shared with their workers. Morally, the financial community has been living well beyond its means. But perhaps above all, by getting other countries to finance its imperial pretensions, the US government has been able to live beyond its means. Wolf refers in several places to the "exorbitant privilege" of the US dollar, but omits entirely to discuss the political benefits that this privilege buys.

This points to the main weakness of Fixing Global Finance: the lack of a historical perspective. The history of the overprivileged dollar, after all, goes all the way back to the 1960s. Its roots lie in the failure of John Maynard Keynes's plan for a Clearing Union, which he worked out during World War II. The Keynes plan was specifically designed to prevent creditor countries from hoarding reserves by trading at undervalued currencies. If they did not spend their surpluses, the surpluses would be confiscated and redistributed among debtor countries. In this way a global balance between saving and investment would be secured through a balanced trade position, which would in turn allow fixed, but adjustable, exchange rates.

The Bretton Woods agreement of 1944 adopted the proposal for fixed but adjustable rates, but failed to provide a remedy against countries with trade surpluses accumulating, or hoarding, reserves. In practice, the problem was solved by the United States taking the place of nineteenth-century Britain as the chief supplier of foreign investment funds. The outflow of American savings helped reconstruct Europe after the war, and kept global demand buoyant throughout the Bretton Woods era. The dollar replaced gold as the world's chief reserve currency. This allowed the US to print dollars to cover its growing trade deficit. The arrangement suited both the Europeans and the United States, because it not only enabled the Europeans to export to America at undervalued exchange rates, but it also covered the cost of America defending Western Europe and non-Chinese East Asia against communism. In other words, the "exorbitant privilege" of the dollar allowed the US to pursue an imperial mission that, in the era of the cold war, was greatly to the satisfaction of its partners and allies.

The privileged position of the dollar survived the collapse of the Bretton Woods regime of fixed-exchange rates in 1971. In theory, the resulting system of floating exchange rates removes the need for any reserves at all, since adjustment of current account imbalances was supposed to be automatic. But the need for reserves unexpectedly survived, mainly to guard against speculative movements of short-term investment—"hot money"—that could drive exchange rates away from their equilibrium values. Starting in the 1990s, East Asian governments unilaterally erected a "Bretton Woods II," linking their currencies to the dollar, and holding their reserves in dollars. This reproduced both the benefits and faults of Bretton Woods I: it avoided global deflation, but undermined the long-run credibility of the dollar as the global reserve currency.

The new arrangement allowed the United States to continue to enjoy the political benefits of "seigniorage"—the right to acquire real resources through the printing of money. The "free" resources were not just unpaid-for imported consumer goods but the ability to deploy large military forces overseas without having to tax its own citizens to do so. Every historian knows that a hegemonic currency is part of an imperial system of political relations. Americans acquiesced in the unbalanced economic relations initiated by East Asian governments in their undervaluation of their currencies because they ensured the persistence of unbalanced political relations.

A willingness by the US government to end macroeconomic imbalances thus depends on its willingness to accept a much more plural world—one in which other centers of power in Europe, China, Japan, Latin America, and the Middle East assume responsibility for their own security, and in which the rules of the game for a world order that can preserve the peace while effectively tackling the challenges posed by terrorism, climate change, and abuse of human rights are negotiated and not imposed. Whether, even under Obama, the US is willing to accept such a political rebalancing of the world is far from obvious. It will require a huge mental realignment in the United States. The financial crash has disclosed the need for an economic realignment. But it will not happen until the US renounces its imperial mission.

End Text (dated June 17)