Decoding Dollar Dominance. The Global Credit View on the Monetary System in International Political Economy

Abstract

Sovereign Currency View (SCV) and the Global Credit View (GCV) on the international monetary system regarding four crucial assumptions: credit theory of money instead of monetary theory of credit; the co-evolution of public and private credit rather than metallism vs. chartalism; interlocked balance sheets in global finance rather than a ‘triple coincidence’; and a focus on gross flows rather than net flows in global payments. By constructing a 2x2 “Matrix of Monetary Thought,” we show that the SCV’s monetary theory of credit leaves critical issues about the global money and credit system unexplained compared to the GCV’s credit theory of money. Viewing the credit money system as subject to a co-evolution of public and private liabilities/assets in which a central public actor repeatedly validates excess private credit creation explains the hierarchical structure of national credit systems connected through interlocked balance sheets, and crisis dynamics within those systems. This approach reverses the understanding of the current account deficits and net foreign debt that SCV authors identify as fundamental problems for the dollar, or more precisely, for dollar-based credit systems backed by a hegemonic US state. These are features, not bugs, of credit systems, and help offset capitalism’s inherent deflationary tendencies. The GCV also helps unify academic analyses that suffer from the fallacy of composition, an excessively unit-level analytic framework, or incoherence in their theoretical premises, and provides an understanding of the structural features that have sustained US dollar dominance at a time when Trump Administration policies have made dedollarization more attractive to other states.

Keywords: Credit Money, Monetary Theory, US empire, Monetary power, Federal Reserve, Sovereign Currency View, Hierarchy