De-dollarization debate: Eichengreen's "Money Beyond Borders" reviewed
Barry Eichengreen provides a definitive account of international currency regimes, from ancient Athens to today's budding competition between Beijing and Washington.
Barry Eichengreen’s new book, Money Beyond Borders: Global Currencies from Croesus to Crypto, spans from Athenian owls to the digital reniminbi to tell the story of international currencies. Emphasis on “international”: his interest is what makes a currency relevant to people and institutions across borders. It’s also a narrative toolkit for thinking about how and why a currency becomes global, and whether the dollar’s number is up.
A prominent American economist and economic historian, Eichengreen begins in Classic Greece, where Athenian owls, tetradrachm coins whose silver content and design barely changed for centuries, became universal within the ancient world because the issuer combined commercial reach, monetary stability, and credible political power. Athens had rich silver mines, a navy, and a network of subject allies; its rulers kept the coin’s quality steady, then mandated its use inside its empire, turbocharged by Alexander the Great’s vast conquests. That mix of reputation and coercion, Eichengreen suggests, is the original “exorbitant privilege.”
From there he moves through the denarius, the Byzantine solidus, and the Islamic dinar. The pattern repeats: trade routes open, a state builds administrative capacity, standardized coinage underwrites commerce, and the currency leaks across borders as a trusted unit of account and store of value. Similarly, international currencies are coalmine canaries of a great power on the wane, whether via debasement, loss of access to mines, or old-fashioned complacency.
Turning points
The hinge to the modern world comes with Florence’s florin and the Renaissance of credit. Here Eichengreen pivots from metal to book money: Florentine houses use double-entry bookkeeping and bills of exchange to turn the florin into a banking unit that often moves without any coin at all. The lessons pertain to the Dutch guilder, London’s sterling bills, and the Eurodollar market: what matters is the institutional complex around a currency: its legal protections, market infrastructure, and a deep, diverse investor base, whose confidence depends on a backstop or lender or liquidity provider of last resort.
Unlike other books about monetary history, Eichengreen is fluent in the detailed mechanics of how financial systems evolved to meet cross-border needs, first to facilitate and settle trade, and then to use the currency to develop purely financial instruments. He combines the sweep of millennia of global history with the nitty-gritty of, say, New York bankers’ acceptance notes, while keeping the book concise.
It is this grasp of financial detail that makes Money Beyond Borders a definitive account. Eichengreen has written other books on topics such as the dollar’s challenge to sterling in the 1920s and its retreat in the 1930s, but here he puts such action in a broader context, asking more fundamental questions.
He brings this insight to Nixon’s 1971 suspension of dollar-to-gold convertibility, one of the landmark decisions creating the neoliberal order that continues to shape our societies. Of note is that many smart people wrote off the dollar in the wake of the end of Bretton Woods, and Eichengreen shows how US economic heft, Treasury market depth, open capital markets, and US military power not only supported the greenback, but enhanced its primacy.
The dollar and US power were also questioned in the aftermath of the 2008 financial crisis, which led to China and others to actively seek alternatives. Yet Treasury learned to turn the dollar into a chokepoint of remarkable power.
Dollar doubts
Today, however, the excesses of that power are one reason why questions about the dollar’s primacy are more pointed than ever.
From Eichengreen’s 2,500 years of monetary history, we can see a pattern: international currencies belong to strong states with administrative capacity, fiscal resources, and a credible ability to defend their institutions, in particular the institution that bestows credibility upon the currency. That is a twofold process: technical, from Roman bureaucratic oversight of mints, to the independence of the Federal Reserve; and geopolitical, from the military expeditions of the Dutch East India Company to Britannia’s ruling the waves.
Dominant currencies have been mostly associated with republics or democracies, because they offer rules that protect property, checks and balances on tyrannical whim, and treat foreigners equally. This isn’t always true: the long dominance of the Mexican dollar had to do with Spain’s felicitous windfalls in the New World, but these ‘pieces of eight’ are also the one example of a global currency that became truly cosmopolitan, delinked from the shrinking power of the Spanish empire. A prospect that Eichengreen missed is whether stablecoins could augur something similar for the dollar.
One reason why silver dollars endured long after Spain’s imperial heyday was because of another iron law for an international currency: it needs market infrastructure and liquidity. The bill of exchange only became a truly international instrument once cities like London built acceptance houses, specialist brokers, and a central bank ready to backstop the market in a crisis. Today, that logic underpins his discussion of the dollar’s framework of New York’s money markets and Fed swap lines, versus China’s efforts to build rival settlement systems, designate renminbi clearing banks, and offer renminbi swaps to foreign central banks.
Today there is no compelling case to assume the world will dump the dollar for renminbi or euros. But foreign investors will accept only so much degradation of US management before something dramatic causes a mass switch. Financialization has eroded previous regimes, and it’s hard to imagine a society more financialized than today’s America, where savings and investment institutions have been suborned into casinos.
But these are the results of policy choices, and policies can change. It’s hard to imagine anything sensible emanating from the Trump administration, but hollowing out takes years, if not decades. The US can still remember how to manage its affairs more prudently. It’s happened before.
Pace of change
China is developing parallel markets, institutions, and its e-RMB. Eichengreen notes that the costs of using the renminbi are considerable, so that only countries such as Russia that are banned from SWIFT and the US banking network will use them to a meaningful extent. The dollar’s network effect is too strong, for now.
But just as the US might, or might not, reform its economic policies, so too could China. It’s hard to see Beijing accepting the tradeoffs necessary to make the renminbi an international currency beyond a small group of countries with few options. Eichengreen explains why the use of eRMB will still require dollars once foreigners want to repatriate their money. He also doubts CBDC network projects such as mBridge will scale.
But China is making the most of Trumpian chaos to make the case that it’s the adult in the room. It’s offering a yield on its eRMB to tempt foreign banks to hold it. The European Union could also change its stripes; although Eichengreen is skeptical, the EU’s member countries may yet take financial and fiscal integration seriously, which would make the euro a credible player.
Although Eichengreen examines stablecoins, he does so in the context of dollar dominance, not as the wedge leading to a bitcoin nirvana. Despite the book’s subtitle, he only mentions bitcoin once, curtly dismissing it and its ilk as too volatile to serve as a unit of account, a store of value, or a means of payment. Any credible monetary experiment must solve for who bears the risk, who provides the backstop, and the politics and military might behind the promise. Digital assets are relevant as reflections of central bank money (although, see financialization, above).
Should tokenization platforms become important means through which global investors hold dollars, then the Fed, the US Treasury, and the court system will have to ensure the governance, including operational reliability. Regulated and licensed stablecoins could well lead to assumptions of a Fed backstop to prevent a run. Blockchain won’t count if American commitments to rule of law, independent central banking, separation of powers, and support for foreign partners decay too far. Ditto for Chinese digital infrastructure.
What could be different this time? Speed. It took decades for Britain to pass the baton to the United States, from the shock of World War I to the humiliation of the Suez crisis. Before the second Trump administration, it was reasonable to surmise any transition from Washington to Beijing would also take decades. But now things are moving quickly. The internal constraints of the Chinese Communist Party are now the bigger obstacle to regime change.
So far we have some evidence that global investors and foreign central banks are fiddling on the margin, such as their headlong rush into gold (Eichengreen wrote an influential book, Golden Fetters, about how flaws in the gold standard led to the Great Depression). But these are indicators of concern, not of paradigm change.
Eichengreen’s sobering conclusion is that the 1930s provide a scenario in which sterling’s global role crumbled before the US was ready to take on the role of lender of last resort. Multi-polarization and similar language, were it to come about, would not mean a chummy world in which everyone gets to trade freely in their currency of choice. It means less trade, declined foreign reserves among central banks, and less growth or a worldwide depression. As painful as it is to watch the clown show in Washington, the alternative to de-dollarization is worse.