[PDI 워킹페이퍼 NO.14] The Triffin Dilemma, Exorbitant Privileges, and US Monetary Power Beyond International Reserve Currency
임규택 (고려대학교, 평화와 민주주의 연구소 선임연구원)
This paper suggests that the widespread embrace of the US dollar as a key reserve currency does not adequately represent the global role of the US dollar. The paper critiques the Triffin Dilemma by revealing an inadequate relationship between the US dollar and US external deficits. The economic literature has misled us into a narrow characterization of the US dollar as a reserve currency primarily due to inattention to the US dollar’s external role as money of account. The real issue of the Triffin Dilemma is neither persistent US deficits nor the reserve role of the US dollar, but the US dollar’s exorbitant privilege outside the United States. This paper develops two key arguments to contribute to the study of international monetary power. First, the dynamic process of creating various forms of dollar debt outside of the United States has institutionalized the US dollar’s infrastructural power as money of account. Second, the US monetary power is structurally consolidated by the same process of financial globalization.
The 2008 financial crisis, although not directly caused by the present global monetary system, stimulated a vigorous discussion among policymakers and economists on the problem of the monetary system. Generally, the present monetary system is viewed as fundamentally “unbalanced” and excessively dependent on the reserve role of the US dollar. Governor of the People’s Bank of China invoked Triffin Dilemma to point out a contradiction that, on the one hand, the US dollar cannot hold its value as a reserve currency, on the other, it is acting as a global currency, providing international liquidity to the world (Zhou 2009). He indicates that the US dollar’s international dominance is an inherent flaw of the post-Bretton Woods monetary system. Many scholars have argued that excessive dependence on the US dollar for financing world trade and reserves creates an unstable monetary system, and therefore the present system needs to develop into a multicurrency system that would be “better suited to a multipolar world economy” (Subacchi 2010: 667; Stiglitz 2010; Ly 2012).
The post-Bretton Woods system operating on the US dollar’s centrality does not appear inherently problematic and flawed. Dooley et al. (2004, 2009) argued that the post-Bretton Woods monetary system continues to be operational despite global imbalances because the economic rise of the East Asian region from the late 1990s re-established the Bretton Woods II regime wherein East Asian countries accumulated US dollar assets, and that they are “willing” to accumulate dollar assets as a secure way of managing exchange rates and domestic financial markets (2004: 307). Simply put, as long as they are willing to underwrite US deficits, Bretton Woods II is sustainable and has been reinforced by the recent financial crisis (Dooley et al 2009).
Despite the economic debate on the post-Bretton Wood monetary system, a fundamental feature of the present system is that the US dollar reserve role is shared. The US dollar’s current role as a key reserve currency is widely accepted in the economic literature and scholarship of International Political Economy (IPE). The US dollar certainly appears to be a characteristic of a reserve currency in the form of US dollar assets accumulated in foreign countries. The US dollar reserve role assumes that the US economy runs current account deficits to provide international liquidity to the world economy. Yet, the US borrows money from abroad to finance current account deficits (Bernanke 2005; Cohen 2006; Li 2008; Eichengreen 2011; Prasad 2014). The Triffin Dilemma is often reflected in the Chinese Renminbi (RMB) literature, according to which China should run current account deficits to make RMB internationalization successful (Yu 2012; Prasad 2014). The relationship between the reserve status of a national currency and a “real” economic feature of the issuing country – its current account deficits – is believed to be firmly established.
However, the Triffin Dilemma mistakenly assumed that US deficits produced only within the US economy can provide dollar reserves in the sphere of international trade. The world demand for dollar reserves is not entirely determined by the process of “real” economic activities such as in international trade (Altman 1961). The dynamic development of the Eurodollar market contributed to the increasing demand for dollar reserves in European countries during the 1960s (Strange 1976). Foreign actors (official and private) have produced dollar-denominated debts seen as US deficits outside of the United States, but they have not directly affected US current account deficits (Gavin 2004; Bordo & McCauley 2017). As shown in the next section, the original version of the Triffin Dilemma has more to do with the overall US balance of payment deficits than with US current account deficits. The Triffin Dilemma is essentially based on the US dollar’s importance as an international medium of exchange. Gold and US dollars are used as the medium of exchange in the sphere of international trade.
The Triffin Dilemma does not help us grapple with the US dollar’s role outside the United States. As will be shown in Section 3, the neglect of the US dollar’s external role has led economists to develop a distorted understanding of the exorbitant privileges of the US dollar. Without a conceptual understanding of the external operation of the US dollar, the persistent US current account deficits have been primarily viewed as a consequence of the US dollar’s reserve role. The foreign holdings of US dollars are highlighted in the Triffin Dilemma. The real issue of the Triffin Dilemma is neither deteriorating US balance of payments deficits nor the US dollar’s reserve role in a “real” world economic expansion, but the increasing role of the US dollar in the process of integrating global money and financial markets. This understanding requires an analytical reengagement in how persistent US balance of payments deficits is related to the US dollar’s external role in the process of financial globalization.
The aforementioned economic debate on the present monetary system reinforces the general perception about the US dollar as an international reserve currency. It brings back the Triffin Dilemma to our analysis. The economic debate does not guide us to a better understanding of the contemporary role of the US dollar in global finance, in particular. Therefore, different questions should be raised to reveal the US dollar’s global role beyond reserve status. For instance, contrary to the Bretton Woods II regime, why are East Asian countries forced rather than willing to accumulate dollar assets in the first place? What is the US dollar’s infrastructural role that enables the United States to maintain persistent US deficits? How do we understand the US dollar’s exorbitant privileges beyond international reserve currency? Does the United States really “borrow” from abroad to finance US deficits?
The economic debate on the Triffin Dilemma must be revisited to understand what led to an inadequate relationship between the US dollar and US deficits and answer the above questions. Revealing the limitations of the dollar’s economic analysis is crucial to reconsider the US dollar’s role beyond a reserve currency in a conceptual and empirical sense. That is, the primary feature of the US dollar’s reserve status is insufficient to understand its global role. This paper attempts to contribute to the study of international monetary power in the IPE literature, building on a critique of the Triffin Dilemma. While the economic literature does not help us to grapple fully with the role of the US dollar in global finance, the IPE literature has mainly discussed the concept of international monetary power within inter-state terms (Andrew 1994; Henning 2006; Kirshner 1995, 2006; Cohen 1998, 2006; Kirshner & Helleiner 2014).
Moreover, the IPE literature has not fully succeeded in incorporating financial globalization into the study of international monetary power. Braun et al. (2020: 4) recently pointed out that IPE literature of financial globalization has not appreciated the institutionalized processes of international money. This paper attempts to reveal the institutionalization of the US dollar in global finance.
An overarching argument developed in this paper is that the US dollar’s exorbitant privileges should be reconsidered with respect to the US dollar’s external role as money of account. This paper presents two sets of arguments to substantiate this overall argument. First, the contemporary pattern of financial globalization institutionalizes the infrastructural role of the US dollar as the money of account. In particular, foreign actors (official and private) have actively used the US dollar as money of account to create various forms of debt in the offshore market. Thus, the US dollar’s contemporary role needs to be adequately understood regarding the creation of offshore debts and offshore dollars beyond “real” world economic processes. Second, the dynamic process of issuing dollar-denominated foreign debts has extended the role of the US Federal Reserve as a world monetary authority, which has played an essential role in the making of global financial markets.
To develop these arguments and contribute to the IPE literature, sections 2 and 3 provide foundational reasons for limitations of the economic analysis on the US dollar. These two sections help develop arguments in sections 4 and 5. Section 2 aims to highlight an inadequate relationship between the US dollar and the US (external) deficits, as it explores the Triffin Dilemma debate. Section 3 further provides the inadequacy of the economic analysis of the US dollar’s exorbitant privileges. Section 4 focuses on the linkages between the process of financial globalization and the institutionalization of the US dollar. Section 5 is closely intertwined with this financial and monetary dynamic process; it characterizes US monetary power in four ways that distinguish this paper from the existing IPE literature on the role of the United States in global financial market. The final section summarizes the main arguments and provides brief implications.
THE TRIFFIN DILEMMA DEBATE AND LIMITATIONS
By exploring the Triffin Dilemma economic debate, this section shows that the relationship between the US dollar and the US (external) deficits is not adequately understood. The Triffin Dilemma debate is largely grounded on the shared, narrow conceptualization of the US dollar as the international medium of exchange. While the narrow understanding of the US dollar led Robert Triffin to mischaracterize deteriorating US deficits as dangerous, others did not pay due attention to the US dollar’s external role as money of account, which produces external dollar claims misconstrued as US deficits. Therefore, persistent US deficits are assumed to be primarily produced by the US dollar’s reserve role in “real” economic processes such as world trade – the current account version of the Triffin Dilemma.
The Triffin Dilemma debate reveals different understandings of US deficits, the US dollar, and the Bretton Woods system. Robert Triffin viewed deteriorating US deficits as dangerous to the US dollar and the Bretton Woods system. Triffin (1960) stressed that there were two primary forms of international liquidity under the Bretton Woods system: gold and US dollars. Gold production was insufficient, while US dollars were supplied through US balance of payments deficits (1960: ix). In his view, the present Bretton Woods system did not provide a sufficient level of international liquidity required for financing an expanding world trade (ibid: 40, 47). Triffin saw this as dangerous as the liquidity gap, which was increasingly filled in by foreign accumulation of US dollars, deepening the US balance of payments deficits. As a result, the Bretton Woods system created the famous double Triffin Dilemma: 1) if the US economy continued to provide US dollars for expanding world trade, the supply of dollars would force the overall US balance of payments to deteriorate, undermining confidence in the US dollar; and 2) if the United States attempted to eliminate overall US balance of payments deficits by refusing to provide US dollars, the rest of the world would face a lack of international liquidity, eventually turning the world economy deflationary, as experienced in the 1930s (Triffin 1960: 9, 67).
Other economists held different views on the US deficits, the US dollar, and the Bretton Woods system. Jacques Rueff (1972) regarded growing US deficits as an exorbitant privilege of the US economy. In his view, US deficits were not real deficits that the US should pay back to foreign holders, but a double monetary phenomenon of the US dollar’s reserve role. US dollars paid to foreign creditors in the form of monetary reserves (private and official) kept returning to the United States. Thus, the US government did not have to settle its balance of payments deficits with other countries (1972: 23).
Similarly, Charles Kindleberger (1965) understood US balance of payments deficits as an outcome of the banking role of the US economy borrowing short and lending long. He noted that the US balance of payments deficits was confused by “a mistaken definition of balance-of-payments disequilibrium” (1965: 3). This misunderstanding of the national balance of payment disequilibrium came from “confusion between capital markets for transferring ‘real’ assets and money markets for accommodating national liquidity preferences” (ibid: 4). In other words, US balance of payments deficits cannot be understood as an outcome of “real” economic processes in which US dollars are directly exchanged for goods. US deficits cannot be adequately understood from the conception of the national balance of payments, which conceptualizes deficit as disequilibrium (Despres et al. 1996). Rather, US deficits represent a provision of the US economy’s banking role with a large and open capital market that European countries lacked (1996: 210). US deficits were compatible with international disequilibrium.
Furthermore, Oscar Altman (1961) argued that the US balance of payments deficits seen as dangerous and therefore to be eliminated misled Triffin to exaggerate the danger of the Bretton Woods system (162–163). Altman found it even more troubling that an adequate level of international reserves was required to finance the growth of world trade. This belief was not valid because the demand for reserves was the result of various factors, such as banks’ exchange holdings (Altman 1961), banks’ arbitrage of interest rates (Schenk 1998), and the 1958 currency convertibility (IMF 1959). During the 1960s, the offshore money market’s rapid expansion forced countries to accumulate US dollar reserves (Strange 1976). Altman stressed that Triffin’s view on reserves’ requirement was “essentially a mechanistic one based on a rough relationship of reserves to imports” (1961:164). There is no reason to believe that expanding world trade would dictate the world demand for dollar reserves.
Less discussed, however, is the limited constructive engagement on the role of the US dollar beyond its reserve currency, whose production remains only within the US economy. Indeed, the Triffin Dilemma is essentially rooted in the key feature of the US dollar as a safe international medium of exchange in “real” world economic processes. Expanding world trade requires an international medium of exchange – gold and US dollars – to finance international trade transactions across borders. It thus becomes clear why Triffin feared the Bretton Woods system was reaching a dangerous point if foreign holdings of US dollars exceeded US gold stock in the mid-1960s. Viewing this quantitative gap as a precarious point indicates that the US dollar was understood as a neutral veil in commodities’ exchange ratios.
Kindleberger’s focus on the US economy’s banking role does not allow us to conceptualize the US dollar’s external role outside the United States. The emphasis on US-based banks as liquidity providers does not have room for foreign actors abroad in producing dollar claims. Altman (1963) indicated that foreign accumulation of dollar reserves is relatively independent of international trade expansion. Still, he does not go beyond the conceptualization of the US dollar outside the United States. Rueff correctly understands US deficits as exorbitant privileges but essentially shares the US dollar reserve role with Triffin. As Kindleberger (1965) and Despres et al. (1996) recognized, US deficits cannot be adequately understood by the economic concepts of the national balance of payments. More specifically, growing US deficits cannot be understood only by the reserve role of the US dollar as a safe international medium of exchange and store of value. The reserve status of the US dollar prevents us from viewing how the US dollar’s external role operates to produce external dollar claims often misinterpreted as “US deficits” outside the United States. That is, dollar claims produced outside the United States cannot be distinguished from domestic dollar claims on US banks. They may look like US debts but are not necessarily dollar claims on the United States (Mayer 1980: 68; Gavin 2002:128). During the Bretton Woods era, deteriorating US deficits can be seen as a sign of the US dollar’s increasing role in integrating money and capital markets of the world economy.
Persistent US deficits, deeply rooted in the narrow conceptualization of the US dollar as reserve status, established the popular version of the Triffin Dilemma – US current account deficits. The US dollar reserve role in “real” world economic processes subsequently turned the original version of the Triffin Dilemma into the current account version. As discussed above, the original version of the Triffin Dilemma has more to do with the overall US balance of payments deficits and less to do with US current account deficits. Triffin worried that the competitiveness of the real US economy, the exporting sector, would be undermined by the foreign accumulation of dollars, limiting the US autonomous monetary policies during the 1950s. Witnessing gold outflows in 1958, when US interest rates fell below those available in Europe, Triffin thought that foreign accumulation of dollars undermined US autonomous economic policies, such as low-interest rates (1960: 9).
The relationship between foreign accumulation of dollars and its constraint on US autonomous monetary policy, in Triffin’s view, is a partial feature of the US economy whose money was fixed to the price of gold per ounce at 35 dollars under the Bretton Woods system. Specifically, the European economy’s recovery was primarily a result of the successful operation of the European Payments Union (EPU), which enabled EPU members to overcome bilateral trade and payments relationships from the late 1940s until 1958 (Eichengreen 1993). The EPU’s operation did not depend on significant dollar accumulation but on the US dollar’s abstract role as money of account for settling claims and debts of EPU members (Kaplan & Schleiminger 1989: 92; Amato & Fantacci 2012). Empirically, US current account deficits appeared to be systematic only after the early 1980s (Cohen 2011; Bordo & McCauley 2017). Since then, the persistent US current account deficits confirm the current account version of the Triffin Dilemma. However, in the post-Bretton Woods era, US monetary policies have been more autonomous than any other surplus countries (Cohen 2016). The argument that foreign holdings of US dollars would impose limitations on US monetary policies’ autonomy in the post-Bretton Woods era is far less convincing. Instead, the famous Fleming-Mundell model, which indicates the incompatibility of three economic policies at a time, does not apply to the United States in the post-Bretton Woods era (Winecoff 2014).
Furthermore, the current account version of the Triffin Dilemma, stemming from the deterministic relationship between the demand for dollar reserves and world trade, ignores the dynamic process of offshore dollar creation during the Bretton Woods system. An active process of creating credit and debt relations denominated in the US dollar in the Eurodollar market in the 1960s (Higonnet 1985; Schenk 1998; Burn 1999). From 1955, banks in London began to attract dollar deposits through interest rate arbitrage (Schenk 1998). For the Eurodollar market to be further developed, this initial monetary accumulation needed monetary dynamics such as the 1958 currency convertibility and European central banks’ active involvement. The 1958 currency convertibility encouraged private actors to sell foreign earnings to foreign exchange markets for better rates or deposit them in the Eurodollar market (IMF 1959:125). In these favorable conditions, private banks alone increased dramatic dollar holdings, about $1.4 billion outside the United States in 1959 (IMF 1960: 5). As the increase in private holdings of foreign exchange could stimulate massive shifts in their distribution, with far-reaching effects on the execution of monetary management policies at various central banks (BIS 1959: 60), the 1958 monetary event meant that central banks became actively involved in the Eurodollar market. From the early 1960s, European central banks began to place dollars with banks operating in the Eurodollar market (Altman 1963: 57; BIS 1964: 132). European states and European banks began to issue various debts denominated in the US dollar as money of account outside the United States (Swoboda 1968). With their active involvement in the Eurodollar market, European central banks helped to secure the practice of Eurodollar businesses (Braun et al. 2020: 15).
THE REAL ISSUE OF THE TRIFFIN DILEMMA
Distorted exorbitant privileges
The real issue of the Triffin Dilemma is, therefore, neither deteriorating US balance of payments deficits nor the US dollar’s reserve role in a real-world economic expansion. It is the US dollar’s increasing role as money of account in the process of integrating global money and financial markets that is the crux of the Triffin Dilemma. More specifically, it requires us to see how persistent US deficits are related to the US dollar’s external role in the process of financial globalization. This crucial question will be answered in sections 4 and 5.
Here again, the US dollar’s economic analysis has led to a distorted understanding of the currency’s exorbitant privilege as modest economic benefits. The economic literature has not advanced our understanding of the US dollar’s contemporary role in global finance. The typical economic calculus of the benefits and the costs of international currency suggests negligible benefits accruing to the issuing country (Dobbs et al. 2009; Bergsten 2009; Hai & Yao 2010; Krugman 2013 McCauley 2015; Bernanke 2016). The domestic version of national seigniorage, the difference between the value of money and its production costs (Cohen 1971: 495), is extended to the international level. The status of international currency offers economic benefits to the issuing state and domestic actors.
There are two primary forms of economic benefits: foreign holdings of national currencies as interest-free loans to the issuing country and foreign holdings of financial assets as low capital costs for domestic actors. Paul Krugman (2013) noted that international seigniorage of the US dollar provides insignificant economic benefits to the US economy. Richard Dobbs et al. (2009: 8) showed that in a “normal” year, the revenue from the dollar’s reserve status, interest-free loans to non-residents holding US notes and coins is estimated at $10 billion. The lower capital costs for US domestic actors, due to foreign actors’ large purchases of US Treasury securities, are estimated at $90 billion (2009: 8). However, these financial benefits are offset by capital inflows that elevate the dollar’s value, causing a net financial cost of $30–60 billion in 2008 (ibid: 8–9). Robert McCauley focused on the US dollar’s economic benefits. He concluded that the US dollar’s exorbitant privileges are not unique but an exaggeration (2005: 11). More seriously, Fred Bergsten argued that US dollar dominance is increasingly costly to the US economy and no longer in favor of its national interests. The US capital inflows create financial risks such as the 2008 financial crisis. The US dollar’s reserve role enables other countries to manipulate their exchange rates to undermine US exports’ competitiveness (2009: 23–24). Thus, US dollar dominance no longer confers an exorbitant privilege on the United States.
Benjamin Cohen criticized the economic analysis of the benefits and costs of the US dollar. The empirical calculus of the benefits and costs of the dollar suffers from a limited range of data. It narrowly focuses on the cost of exchange-rate appreciation or transaction costs (2011: 25). He noted that the economic literature completely ignores the US dollar’s exorbitant privilege, which often translates into international monetary power in geopolitics. The IPE scholars have been interested in this aspect (Strange 1976, Kirshner 1995, Andrew 1994; Henning 2006; Cohen 2006). Cohen also argued that the economic analysis of the US dollar’s role for decades had distorted our understanding of its contemporary role (2011). Nonetheless, Cohen agreed that the US dollar’s economic benefits and costs are “rather less obvious” (2011: 4). He suggested that the economic benefit of running an international currency is negligible; it imposes significant financial burdens (16–20).
The US dollar and the absence of money of account
The widespread embrace of the US dollar’s contemporary role as a reserve currency prevents us from analyzing its significant role in today’s global money and financial markets. The economic literature overlooks the significance of the US dollar’s role outside the country as money of account to produce various forms of dollar debt since the inception of the Eurodollar market in the late 1950s. It is well known that the expansion of the Eurodollar market has contributed to the rapid development of global finance (Burn 1999, 2006; Frieden 1987; Helleiner 1994; Schenk 1998). The offshore money market amplified the process of globalizing the US dollar during the Bretton Woods system (He & McCauley 2010). However, the offshore dollar has been largely conceptualized as forms of the dollar, such as “stateless” dollars or private dollars (Frieden 1987; Burn 1996; Schenk 1998); that is, the US dollar has been seen as a medium of exchange rather than money of account.
Swoboda (1968) recognized the significance of abstract dollar denomination practiced by European banks operating in the Eurodollar market. He emphasized that European banks issued dollar liabilities to “bid away part of the gains from dollar denomination that previously accrued exclusively to American banks” (ibid: 14, emphasis added). He regarded the European practice as “[dollar] denomination rents.” This important recognition of the US dollar as an abstract monetary denomination by foreign banks is lost in the economic literature. It does not attract adequate attention in IPE scholarship either. Rather, the US dollar’s significant role offshore is misplaced onto the US domestic market from which only US domestic actors can benefit (Cohen 2011: 15; Eichengreen 2011). The economic analysis has reduced the US dollar’s external role into its forms, such as US currencies within the US economy.
In a fundamental sense, what constitutes a large proportion of today’s foreign exchange reserves is not US currencies such as US notes and coins, but US dollar assets such as US Treasury Securities denominated in the US dollar as money of account. In a traditional sense, the economic literature does not have adequate room for conceptualizing money as “money of account.” It restricts money’s role to the so-called “unit of account” to price goods and services rather than measure credit and debt relations (Ingham 2004). There is no consensus in the precise meaning of unit of account in the economic literature (see Chinn & Frankel 2005 vs. Ito 2011). More specifically, the economic literature recognizes the role of the monetary denomination as a “unit of account” when issuing various forms of financial assets in the first place. But then, as they place those financial assets in a functional category as a store of value (e.g., Cohen 1998; Schenk 2012), the significance of money of account, which allows the value of the financial assets to be constructed, is lost in most economic analyses. Economists significantly recognize the noticeable feature of financial assets rather than money’s abstract role, which denominates those financial assets. A few economists have recently begun to recognize the significance of money as a unit of account in the analysis of RMB internationalization in “invoicing” trade transactions (Yu 2012) or denominating financial assets in global financial markets (Park 2010).
However, it is not obvious that forms of money such as national currencies are themselves “units of account” because the economic concept of a unit of account is believed to originate from the commodity theory of money (Schumpeter 1954; Ingham 2004). Money as money of account has historically developed independently from the evolution of monetary forms such as gold and paper (Ingham 1996; Wray 1998). Money as money of account acts as a means of constructing price lists and debt contracts (Keynes 1930: 3). Therefore, the meaning of money as money of account can be seen as broader than the economic concept of a unit of account in a way that money of account denominates not only forms of money such as currencies and bank credit money but also financial assets such as Treasury Securities and corporate bonds (Ingham 2004).The monetary denomination of financial assets should be categorically recognized as money of account rather than a store of value. The significance of the US dollar as money of account should be reconsidered with respect to the offshore market where various forms of dollar debt are produced.
THE INSTITUTIONALIZATION OF THE US DOLLAR
The offshore market has institutionalized the infrastructural role of the US dollar as money of account in financial globalization. The expansion of the Eurodollar market in the post-Bretton Woods era has been based on more transactions between foreign depositors and foreign borrowers outside of the United States than those between US depositors and non-US borrowers (Borio & Disyatat 2011; Shin 2011), except for the period between 2000 and 2007 (He & McCauley 2012). Foreign actors have played an important role in the expansion of offshore transactions across borders. For instance, “only $2.3 trillion out of $8.6 trillion in dollar claims on non-banks outside of the United States were held in the US” in 2013 (McCauley et al. 2015a: 5). The expansion of external dollar claims indicates the embedded practice of using the US dollar as money of account by non-US actors abroad. In the post-2008 financial crisis, a number of scholars have stressed the importance of offshore money creation (Avdijev et al. 2015; Mehrling 2016; Murau 2018).
Foreign actors have actively practiced the US dollar as money of account to issue various forms of debt. Outside of the United States, supranational agencies, such as the World Bank, Asian Development Bank, and the Inter-American Development Bank, have often issued financial debts denominated in the US dollar (Bordo & McCauley 2017: 26). The Asian Development Bank (ADB) has recently issued a large number of global bonds denominated in the US dollar as money of account, which was cleared through the Federal Reserve Banks and listed on the Luxembourg Stock Exchange (ADB 2020). ADB has consistently practiced the US dollar in the global bond market since 1994. The global government bond market expanded from $14 trillion in 1993 to about $19 trillion in 2000. While advanced countries dominated the global market by issuing sovereign bonds denominated in their own money, developing countries in Latin America have increasingly issued sovereign debts denominated in the US dollar (Claessens et al. 2002: 8–10). Since the recent financial crisis, a surge of new sovereign dollar debt issuance in global bond markets has occurred. Many countries across the world – Ghana, Pakistan, Sri Lanka, Zambia, Ethiopia, and Angola – issued sovereign debts in the US dollar between 2014 and 2015 (McCauley 2015b: 34). Emerging economies, such as Turkey and the Philippines in particular, have issued dollar-denominated sovereign debts since 2009 (ibid: 36). From 2017, Chinese state agencies like the finance ministry began to issue dollar-denominated sovereign debts offshore in London (Ding et al. 2019: 358). In 2019, the Korean government issued dollar-denominated sovereign debt of $1.6 billion.
Non-government actors such as corporations and banks in the developing world have also practiced the US dollar to issue offshore bonds. The Asia-Pacific bond market is characterized by a monetary denomination distinction between onshore issuance entirely in domestic money and offshore issuance mostly in foreign money. Firms from Australia, Hong Kong, New Zealand, the Philippines, and Singapore often used the US dollar for issuing offshore bonds between 1994 and 2008 (Black & Munro 2009: 100). In particular, firms in China, India, Brazil, Russia, and South Africa used offshore subsidiaries to issue dollar bonds outside their domestic markets (McCauley 2015b: 36). Chinese state-owned enterprises significantly contributed to the growing offshore corporate bond market in the post-financial crisis from nearly zero in the mid-2000s to $500 billion by 2016. In short, sovereign and private actors in the developing world have actively issued various dollar debts outside their domestic markets.
The process of creating foreign debts (official and private) entails three intertwined monetary dynamics, which empower the US dollar as world money. First, it expands the infrastructural role of the US dollar as money of account practiced in issuing debts. Foreign dollar debts issued outside of the United States are often exchangeable for US domestic dollar debts such as US Treasury Securities and certificates of deposit produced within the United States (Christelow 1966: 228; Mendershon 1980: 182) because they both share the dollar denomination. The production of offshore and onshore dollar debts institutionalizes the infrastructural power of the dollar across borders. Second, financing of dollar-denominated debt contracts requires lenders to provide forms of the US dollar such as US currencies. Similarly, borrowers need to repay debts with US dollars. Thus, the ongoing process of settling dollar debt contracts reinforces lenders and borrowers to seek US dollars. Typically, the payment of offshore dollar loans and dollar bonds are made in US dollars (Mendelsohn 1980; Avdjiev et al. 2015: 15). Consequently, the initial issuance of foreign dollar debts increases the US dollar’s role as world means of payment. The institutional practice of the US dollar has become closely linked to the inherent monetary dynamics of financial globalization (Amato & Fantacci 2012).
The infrastructural role of the US dollar as money of account facilitates cross-border transactions. Within a currency block, the use of a dominant currency reduces transaction costs (Cohen 1998: 72; Helleiner 2005: 7). In contemporary global money and financial markets, the US dollar as money of account has reduced transaction costs. For example, Chinese importers and exporters use the US dollar to denominate the value of goods and services for cross-border transactions. They can subsequently use Chinese currencies to settle cross-border transactions to reduce transaction costs (Yu 2012: 16). Korean corporations and banks have actively used the US dollar to denominate the value of goods and services for cross-border transactions to reduce exchange and currency risks (Eichengreen 2011: 168). The European Union members like France and Germany used the dollar to denominate about 30 percent of exports in 2008 (Fields & Vernengo 2013: 750). Park (2010) argued that the denomination of financial assets rather than trade invoicing requires extensive use of international money. In other words, the role of money as money of account becomes more important in contemporary financial markets. Avdjiev et al. characterized the dominance of the US dollar as “the global unit of account in debt contracts” (2015: 15). The institutionalized practice of the US dollar as money of account across borders allows the US dollar to facilitate cross-border transactions.
Foreign actors, however, become more dependent on US dollars as means of payment as they continue to issue their debts in the US dollar. Ironically, US dollars and US treasuries become more valuable for foreign banks and foreign states during financial crises. Indeed, the foreign recognition of US Treasury Securities as “risk”-free assets can be traced back to the end of the Bretton Woods era in the early 1970s (Garbade 2007; Sarai 2008). The Volcker Shock in the early 1980s pulled an enormous amount of foreign capital into the US Treasury and mortgage debt markets (Greider 1987: 561–563; Krippner 2011: 101; Schwartz 2014: 70). The 1997–98 Asian financial crisis led East Asian countries like South Korea to accumulate US treasuries dramatically to secure domestic financial markets (Duncan 2005: 106; Stiglitz 2010: 161). In the 2008 financial crisis, during which the value of US mortgage bonds fell, financial actors were forced to “bid aggressively for dollars to repay their dollar debts, pushing the dollar’s value in the process” (Avdjiev et al. 2015: 4, emphasis added). The “survival” of those banks and relevant actors that purchased or issued dollar securities becomes largely dependent on their access to Federal Reserve money, which is the most transferable of all dollars. But as will be discussed below, the access to Federal Reserve money depends on how the Federal Reserve accepts financial assets as collateral. Regardless of the narrow discussion of the economic benefits and costs of US currencies, the institutionalization of the US dollar as money of account enforces foreign actors to seek US dollars and US treasuries as safe assets.
US MONETARY POWER
Thus, despite the growing volume of international private capital flows, the dynamic process of creating dollar assets/debts and dollars offshore has necessarily extended the US Federal Reserve’s role as a world monetary authority. The new monetary power of the United States is linked to the monetary dynamics of financial globalization. It, therefore, needs to be understood beyond the sphere of geopolitics or inter-state relations popular in the IPE literature. The monetary power of the United States can be characterized in several ways. First, the US Federal Reserve as a world monetary authority has emerged since the early 1980s. Second, the United States does not face liquidity problems originating from the mismatch of banks’ liabilities and assets in terms of money of account. Therefore, it does not face default risk on sovereign debt. Third, the “burden” of running the US dollar as world money is often “shared” with other surplus countries. Finally, the United States plays a vital role in the development of global financial markets.
The US Federal Reserve emerged as a world monetary authority in the early 1980s when the original version of the Triffin Dilemma shifted to its current account version. The Volcker Shock turned the US economy into systemic current account deficits. It was precisely at this moment the unprecedented rise of the US Federal Reserve as a world monetary authority disciplined banks through the US money market and the Eurodollar market (Greider 1987; Kyuteg 2019). Volcker argued that the shift to monetary targeting was ‘the nature of uncertainty it created’ (FOMC 1980: 22). As Kirshner (1995) noted, hegemonic states could disrupt international money and financial markets. The monetary targeting of the US central bank provided little ground for the interest rate calculation of international banks during the Shock. It, therefore, forced banks to pay close attention to their monetary policymaking. The US monetary authority began to expand the provision of collateral and open privileged access to central bank money for any US-based foreign banks and financial institutions (Timberlake 1985; Guttentag & Herring 1993). The process of so-called financial deregulation from the 1980s effectively increased the power of US monetary authority over the valuation of dollar loans and dollar debts across borders. While the US economy fell into deep current account deficits, the United States could sell US debts effectively, meaning that other countries like Japan were forced to accumulate safe dollar assets such as US treasuries (Duncan 2005). US current account deficits known as the Triffin Dilemma have been a sign of the extended role of the US monetary power over global money and financial markets despite the relative decline of the US share in world trade. Similarly, reflecting on the recent financial crisis, an enormous amount of foreign capital flowed into US financial markets seeking safe financial assets such as US treasuries (Prasad 2014; Hager 2017).
Second, the United States can prevent a systemic crisis stemming from individual banks’ liquidity problems. The extraordinary power of the US dollar enables the United States and US domestic actors to issue their debts in the US dollar and draw foreign actors (official and private) into issuing their debts in the same dollar. Individual US banks can face a liquidity problem stemming from the maturity imbalance between assets and liabilities (Eichengreen 1996). Still, the US state does not face the same liquidity problem for two plausible reasons.
Firstly, unlike foreign banks, US banks are not likely to face double mismatches of assets and liabilities (maturity and money denomination). In contrast, East Asian banks faced double mismatches in the 1998 Asian crisis (Eichengreen et al. 2003). European banks faced the same double mismatches in the 2008 financial crisis (McGuire & von Peter 2009). US banks face only the maturity problem of assets and liabilities. Secondly, US banks experiencing the maturity problem are more likely to be supported by the US Federal Reserve. The US monetary authority can prevent the transformation of individual banks’ liquidity problems into a systemic financial crisis. Given this implicit support and no need to borrow abroad or issue debt in foreign money, US banks and financial institutions are exorbitantly privileged. The foreign states are not free of the liquidity problem stemming from the dollar exposure of their banks operating in global money markets. They should be concerned with their banks’ international operations (Advjiev et al. 2015; McCauley et al. 2015c).
Third, the “burden” of running the US dollar as world money has often been “shared” with other major economic powers in inter-state terms. Most economic literature points out that the economic benefits from the international currency status of the US dollar can be offset by its management costs, such as currency appreciation and even macroeconomic inflexibility (Bergsten 2009; Dobbs et al. 2009: 10; McCauley 2015). These economic ideas are based on the Fleming-Mundell thesis in a broad sense. However, the universal economic claim does not apply to the central position of the US in global money and financial markets (Winecoff 2014; Schwartz 2019). The Fleming-Mundell thesis is inadequately equipped to understand the monetary power of the United States.
Rather, the persistent US current account deficits provide the US government a solid justification to blame other surplus countries for manipulating exchange rates. Considering global imbalances as problematic and requiring adjustment toward “international equilibrium,” which is deeply rooted in money’s role as a medium of exchange in a “real” world economy, the US can easily translate that into politics of exchange rates. In 1985, the US forced Japan and Germany to appreciate the external values of their respective currencies – the Japanese yen and the German Deutschmark (Funabashi 1988). Henning (2006) argued that the US government effectively used the exchange-rate weapon to compel surplus countries like Germany and Japan until the creation of the euro and regional monetary corporations. Nonetheless, the exchange rate politicization continues to be “an instrument of economic influence” for the USA (Henning 2006: 138; Kirshner 2006). In 2005, Ben Bernanke, chairman of the Federal Reserve, argued that developing countries with trade surpluses in East Asia created a “global saving glut” that stimulated excessive lending in the United States (Bernanke 2005). Following this line of argument, in 2009, the US Treasury secretary explicitly targeted China’s manipulation of the exchange rate (Dooley et al. 2009: 3). As persistent US current account deficits enable the US government to pressure trade surplus economies, it can be claimed that the financial burden of managing the US dollar has been “shared.”
Finally, the US Federal Reserve’s role goes beyond an international lender of last resort. On governing the 2007–2009 financial crisis, the US monetary authority implemented unprecedented monetary policies while maintaining almost zero rates between 2008 and 2015 (Bernanke 2013; Bowman et al. 2013; Langley 2015). Existent IPE scholarship pays particular attention to the unprecedented extension of dollar swaps between the US Federal Reserve and other foreign monetary authorities (McDowell 2012; Chey 2012; Broz 2015; Helleiner 2016; Sahasrabudhe 2019). The US Federal Reserve’s role is extended to include foreign central banks, which lend dollars to domestic banks.
The international role of the Federal Reserve as lender of last resort does not reveal its active role in the making of global financial markets. The extension of dollar swaps needs to be understood in a context where the Federal Reserve acted as a market maker to prevent the collapse of global money markets originating from securities markets. After the collapse of Bear Stearns and Lehman Brothers, particularly in September 2008, short-term money markets such as the US Treasury repo market and onshore/offshore money markets froze up. Banks and financial institutions faced a “global shortage” of US dollars (McGuire & von Peter 2009). In particular, banks lacking access to the Federal Reserve were squeezed to bid for US dollars and drove LIBOR rates to unprecedented levels (Mehrling 2011: 121). To manage the internal and external liquidity problems, the Federal Reserve accepted a wide range of collateral.
The Federal Reserve created various liquidity programs and extended dollar swaps with foreign central banks. Immediately following the collapse of Bear Stearns in March 2008, the US monetary authority created the Primary Dealer Credit Facility (PDCF), which provided dollar liquidity directly to primary dealers in the US Treasury debt market. The US authority lent Treasury Securities against illiquid financial assets not accepted in the repo market (Mehrling 2011: 120) to help further. After the collapse of Lehman Brothers in September 2008, the Federal Reserve created the Commercial Paper Funding Facility (CPFF), which provided dollars directly to commercial paper issuers such as nonbank financial institutions. In establishing transactions between the Fed and nonbank financial institutions, the Federal Reserve used primary dealers as agents between itself and commercial paper issuers. Specifically, it aimed to restore the price of asset-backed commercial paper by purchasing illiquid asset-backed commercial paper directly from eligible issuers (Adrian et al. 2010: 6). Opening a discount window to commercial paper issuers was further extended to include US corporations and foreign banks that issued dollar-denominated assets (ibid).
More significantly, in March 2009, the Federal Reserve opened the Term Asset-Backed Securities Loan Facility (TALF), designed to provide dollar liquidity to eligible borrowers with highly rated asset-backed securities linked to small businesses and mortgages (Ashcraft 2012: 36). The Federal Reserve charged the securities at a higher rate than LIBOR and then enabled some of the eligible securities to be transacted in the financial market (Mehrling 2011: 134). In reality, the Federal Reserve’s acceptance of them as collateral at a high price merely affected dealers’ behavior, not banks. Therefore, the market price for the trading of securities was re-established. During the financial crisis, the Federal Reserve accumulated “more than $1 trillion of such securities” (ibid: 134). It moved “the wholesale money market onto its own balance sheet stepping in as a dealer of last resort” (ibid: 125).
To manage the external liquidity problem, the Federal Reserve extended dollar swaps with foreign central banks, including four emerging economies, Brazil, Mexico, South Korea, and Singapore. The selectivity of dollar swaps was meant to restore the pattern of financial globalization, which was deeply rooted in creating cross-border dollar debt. Sahasrabudhe noted that the dollar swap was “a systematic logic underlying the Fed’s choices in favor of economies that shared its policy preference for greater financial openness” (2019: 462). The four emerging economies shared a high level of financial openness as “an implicit condition to receive a Fed swap” (ibid: 467). But due to the high level of financial openness, the four emerging countries, in addition to European and Japanese countries, became more vulnerable to the dollar exposure of their banks operating internationally or foreign banks operating in those countries. While European and Japanese banks faced severe dollar funding shortages due to their active purchase of dollar-denominated assets such as mortgage-backed securities since 2000 (McGuire & von Peter 2009), emerging economies like Korea faced the instability of the domestic financial markets because foreign banks operating in Korea actively borrowed dollar-denominated assets abroad prior to the 2008 crisis. For instance, foreign banks in Korea made a large contribution to the cause of Korea’s overall short-term foreign dollar debt (Jeong 2009; Aizenman 2009). The Korean government restored the stability of the Korean won and the Korean financial market only after the announcement of dollar swaps with the United States (Park 2019), which was repeated in March 2020. Many Asian countries without access to Federal Reserve money depleted a considerable amount of foreign exchange reserves (Aizenman 2009).
Contemporary US monetary power is inherently linked to the monetary dynamics of financial globalization well beyond inter-state relations. Certainly, the United States has promoted financial liberalization to serve “US geopolitical interests” (Kirshner 2006: 16). But more importantly, the promotion of financial liberalization has contributed to the monetary capacity of the United States in a systemic way that produces dollar-denominated debts across borders. “Dollar-denominated assets of banks outside of the United States peaked at $10 trillion before the crisis, an amount equal to the total assets of the US commercial banking sector” (Shin 2012). When the US Federal Reserve operated domestic liquidity programs known as the Term Auction Facility (TAF) and the CPFF during the 2008–2009 crisis, foreign banks tapped more than half of these dollar sources through their branches in the United States. Broz (2015: 327) noted that “15 of the 30 largest borrowers at the discount window were branches or agencies of foreign banks.” Consequently, the United States is empowered in a systemic way that maintains US treasuries as “risk”-free assets. The financial crisis has led many countries to accumulate US dollar assets further to protect themselves against financial vulnerability (Aizenman et al. 2011).
This paper argues that the US dollar’s exorbitant privileges should be reconsidered with respect to the external role of the US dollar as a money of account. It shows that the Triffin Dilemma debate does not pay due attention to the US dollar’s increasing role as money of account in integrating global money and financial markets. The Triffin Dilemma is indeed grounded on the primacy of the US dollar as a safe international currency used in world trade. Therefore, Robert Triffin was misled in his understanding of US deficits as dangerous to the US dollar and the US economy. Others hold different views on US deficits but did not constructively engage in the US dollar’s external role, which produced external dollar claims seen as US deficits. The US dollar’s privilege is not adequately understood in the economic literature primarily due to a lack of conceptual understanding of money as money of account.
This paper developed two subsets of argument to characterize the US dollar’s global role beyond its reserve status. First, the contemporary pattern of financial globalization has institutionalized the infrastructural role of the US dollar as money of account in the offshore market. Foreign states and private actors have actively used the dollar as money of account to issue various forms of debt offshore. These dynamic processes of creating dollar debts make foreign actors dependent on US dollars as means of payment. The second argument is that the inherent monetary process of financial globalization has necessarily extended the US Federal Reserve’s role as a world monetary authority. The US monetary authority has played a major role in the development and growth of global financial markets, underpinned by dollar-denominated debts. Therefore, contemporary US monetary power can be better understood well beyond inter-state relations.
The post-Bretton Woods monetary system is not Bretton Woods II, which primarily focuses on the narrow relationship between surplus East Asian countries and US current account deficits in the sphere of international trade. This relationship is an updated version of the Triffin Dilemma during the Bretton Woods period. The US dollar is narrowly defined as a safe medium of exchange in world trade. As discussed in section 2, it is somewhat problematic to assume that an expanding world trade determines the demand for dollar accumulation. The US dollar reserve role explains the supply and demand of monetary relations without revealing much about the US dollar’s external role as money of account in global money and financial markets. According to the Bretton Woods II thesis, the sustainability of the post-Bretton Woods system depends on countries’ willingness to purchase US official debts. Rather, the dynamic process of dollar debt creation offshore increases the world demand for US Treasury Securities as safe assets in financial globalization. Specifically, the process of dollar debt creation in global finance enforces surplus East Asian countries to accumulate dollar assets to manage exchange rates and domestic financial markets. Thus, Bretton Woods II ignores the significance of the US dollar as money of account in global financial markets.
Contrary to the conventional IR/IPE monetary power, which was as a comparable property within inter-state relations, Susan Strange noted that hegemonic power was better qualified as the financial capacity to provide international liquidity and act as an international lender of last resort than dominance in world trade (1987: 563). Financial power rather than trade dominance is a superior characteristic of a hegemonic state. Fields and Vernengo argued that the US as a monetary hegemon provides “a default risk-free asset to facilitate global accumulation” (2013: 747). To complement Strange’s ideas on US monetary power, the infrastructural power of the US dollar as money of account, shared between US actors and foreign actors, not only enables the United States to greatly influence the valuation of dollar debts in global financial markets but also enforces other states to accumulate dollar assets such as US treasuries. In this way, the United States is a “structurally advantaged hegemon” (Stoke 2018: 141). Therefore, unlike other states and private banks, the United States does not face a dollar liquidity problem and, therefore, no default risk on sovereign debt.
What does US monetary power mean to countries like China holding a large number of US treasuries? China’s holding of US treasuries is often seen as a direct threat to the US dollar’s reserve role if China were to dump them on global markets (Arrighi 2005; Cohen 2008: 462). They underestimate the capacity of the US Federal Reserve to influence the valuation of US dollars and dollar assets/debts. The US monetary authority can directly purchase as many US treasuries as dumped by the Chinese state, which is likely to risk Chinese financial markets. In other words, China’s extensive holdings of US treasuries can be seen as a “dollar trap” (Prasad 2014).
Furthermore, as the case of Korea in 2008 and 2020 demonstrates, the considerable accumulation of dollar reserves does not guarantee the stability of the Korean won and its financial markets. Unlike the sphere of world trade, China’s integration into global money and financial markets does not guarantee the secured process of RMB internationalization. In global money and financial markets, underpinned by the US dollar’s dominance, there is “no level playing field” for banks and financial institutions from the developing world (Park 2009).
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