Exorbitant Privilege? On the Rise (and Rise) of the Global Dollar System

14 Pages Posted: 15 Feb 2023

See all articles by Perry Mehrling

Perry Mehrling

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: January 9, 2023

Abstract

The global dollar system, though repeatedly reported to be on its last legs—most recently in the Global Financial Crisis of 2008, but most famously in the Nixon devaluation of 1971—has repeatedly instead consolidated and gone on to further geographical expansion (McCauley 2021). The key currency approach to international monetary economics, first put forward by John H. Williams in the aftermath of the 1931 devaluation of sterling, suggests that such resilience arises from the actions of market practitioners who appreciate the convenience of a global means of payment. So the question arises, why has the key currency approach remained a minority view, if not among practicing bankers then certainly among practicing academics? This paper proposes two main reasons—the discredit of monetary optimism during the depression, and the subsequent fateful adoption of Walrasian equilibrium as the frame for academic discussion after WWII.

Keywords: key currency approach, Hahn Problem, sterling system, dollar system, exorbitant privilege

JEL Classification: B2, F3, N1

Suggested Citation

Mehrling, Perry, Exorbitant Privilege? On the Rise (and Rise) of the Global Dollar System (January 9, 2023). Institute for New Economic Thinking Working Paper Series No. 198, 2023, Available at SSRN: https://ssrn.com/abstract=4357432

Perry Mehrling (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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