What price will the United States pay for the end of dollar hegemony, if indeed dollar hegemony ends? Paul Krugman, New York Times columnist and Nobel Prize laureate, suggests that concern over the end of “dollar dominance” might be misplaced. Krugman expresses well-reasoned skepticism that the end of dollar dominance is nigh, then suggests that even the end of dollar dominance might not have the catastrophic effects on the U.S. economy that some suspect. He points out that dollar dominance doesn’t seem to have much of an effect on interest rates on U.S. debt, and that there’s little reason to believe that the value of the dollar would crash if it ceased to be the foundational international currency.
Krugman evaluates a series of measures of vulnerability, including interest rates and currency volatility, debunking the idea that a fall from primacy will necessarily imply a decline in prosperity. As he points out, the end of dollar dominance (however unlikely) is unlikely to have a crushing impact on the U.S. economy; Great Britain’s economic performance was largely uncorrelated with the end of the dominance of the pound, although the special relationship between London and Washington undoubtedly cushioned Great Britain’s landing. Moreover, key global economic actors such as Canada and Australia have not apparently suffered from their inability to control a hegemonic currency.
But as Henry Farrell and others have pointed out, the defense of the dominance of the dollar has less to do with the prosperity of Americans and American business, and more to do with the weaponization of interdependence. The dominance of the dollar, combined with advanced digital tools of surveillance and analysis, gives the U.S. government unprecedented insight into the functioning of the international economy. This allows the United States to precisely employ sanctions against opponents, monitor tax avoidance and tax evasion, and keep track of the international flow of arms, drugs, and other illicit and semi-licit goods.
Krugman’s column stirs up a question that has bedeviled policymakers and academics for a very long time: To what extent do the citizens of a country benefit from primacy, or even prominence? The historical record is ambivalent, but the wild growth in living standards in Germany and Japan after each was forced to abandon its hegemonic aspirations suggests that any connection between hegemony and prosperity is tenuous and contingent.
While the integration of the cyber and financial domains has given the United States exceptional coercive power over the past three decades, the ability of great powers to weaponize the international financial system has a very long history. The waning of financial power will mostly likely be similar to the dissipation of every other kind of power; the U.S. will no longer be able to dictate terms at China’s 12-mile limit, nor threaten to render China’s financial infrastructure transparent at a glance.
A different and perhaps more important question involves the stability of the global financial system in the wake of U.S. hegemony. A generation of international relations scholars in the United States studied, somewhat prematurely, the question of whether the constellation of norms and institutions established by the United States and its allies during the Cold War could persist after U.S. hegemony faded. There is a strong case for doubt as to whether financial institutions are of the same sort as other kinds of international organizations, due to the need for careful management by central banks with a degree of independence from their governments. Whether globalization can survive a multipolar financial system remains uncertain, and the question will likely preoccupy bankers and other policymakers over the next few decades.
This article was originally published on The Diplomat.