1
Beyond Exorbitant Privilege: George Shultz, the U.S. Treasury, and the Origins of Dollar Hegemony, 1969-1979
Abstract:
One of the defining features of the modern international economic order has been the endurance of the dollar as the world’s primary international currency and the many benefits that the U.S. garners from it, collectively known as “dollar hegemony.” Although the existing literature posits a number of economic and functionalist explanations for the development of dollar hegemony, especially after the end of the Bretton Woods system in 1971, few scholars have examined the role of policymakers and agency in bringing about today’s international monetary system. I argue that the dollar’s current position is the result of a concerted policymaking process to protect the advantages afforded by dollar hegemony, limit potential rivals, and situate the dollar at the center of a liberalized international financial system. Using newly declassified documents, I develop an original documentary history of U.S. policy on the dollar’s international role. This history traces the dollar’s role in U.S. national strategy and international economic policy and illustrates the governmental action behind the evolution of the dollar’s role.
Keywords: dollar; hegemony; Treasury; special drawing rights; currency; international monetary system; International Monetary Fund; financial liberalization; exchange rates
Introduction
Dollar hegemony, or the system of benefits and privileges afforded to the United States through the use of the dollar as the world’s primary reserve, intervention, and transactions currency, has been one of the defining features of the modern world order. The myriad benefits the US accrues from this system are well documented. To briefly summarize, the dollar’s use as an international currency means that most international trade is settled in dollars, almost all international commodities (most notably oil) are priced in dollars, and most central banks hold their currency reserves in dollars. Taken together, a system in which the dollar holds so central a role increases the demand for dollar-denominated assets (mainly U.S. Treasuries), allowing the U.S. to run sustained budget and trade deficits without facing the interest rate spikes and declining welfare that other countries might. Indeed, contemporary observers have argued that the benefits of dollar hegemony have underwritten American primacy over the past 40 years by funding everything from American welfare programs to military power projection abilities.[1]
The guiding question of this essay is how the world moved from a system of limited dollar privilege under Bretton Woods to today’s system of unconstrained dollar hegemony. I argue that between 1969 and 1979, American international monetary policy was essential to this development. Guided by its mandate to manage the American budget and its corresponding deficits, during the 1960s and 1970s the U.S. Treasury came to see the dollar’s international role as both a necessary component of its duties and a point of hegemonic advantage. Dollar policy evolved from a purely economic issue to an aspect of American national strategy.
After the closing of the gold window and the end of Bretton Woods in 1971, neoliberal policymakers led by Treasury Secretary George Shultz pushed reforms like floating exchange rates and free capital movement that made an anchor currency for exchange intervention and a common currency for financial transactions even more vital. These were jobs only the dollar could do. As the system evolved toward a more permanent dollar standard under Shultz’s reforms, Treasury officials took further action to secure the dollar’s role in international oil trading and stymie the development of the next best alternative, IMF Special Drawing Rights (SDRs). By the end of the 1970s, a combination of neoliberal thinking, hegemonic ambition, and bureaucratic hierarchy allowed the U.S. to guide the international monetary system through the murky waters of reform and toward dollar hegemony.
The broad strokes of this argument are not without precedent, particularly in the international political economy (IPE) literature. In 1982, David Calleo argued that American international monetary policy was driven by hegemonic and isolationist tendencies rather than economic necessity, and Eric Helleiner has since followed suit (albeit with somewhat greater weight placed on economic and functionlist explanations).[2] However, both of these authors were limited in their ability to assess American hegemonic financial strategy in the 1970s because most of the relevant evidence was still classified. Conversely, where the IPE literature has posited the argument without historical evidence, the financial history literature has hardly touched the history of dollar policy at all. Instead, it has focused on questions of economic ideology and particular policy decisions (e.g., the closing of the gold window) rather than the totality of U.S. foreign economic strategy.[3]
The divergence between the international political economy and history literatures has left a lacuna in our understanding of U.S. policy toward the dollar’s international role. Using evidence from government archives and interviews with policymakers from the period, I argue that dollar hegemony was not a product of economic luck but was instead the result of conscious efforts to enhance American political and economic hegemony.
The Beginnings of Dollar Policy
By the time Richard Nixon was elected in 1968, the debate over the dollar’s international role was a well-established feature of international economic discussion. The French maintained throughout the 1960s that the dollar’s special position afforded the U.S. “exorbitant privilege” in its ability to run continuous deficits and fund lavish expenditures simply by printing its own currency.[4] Charles de Gaulle and his Finance Minister, Valéry Giscard d’Estaing, vocally supported a more prominent role for gold in the international monetary system in order to limit American economic dominance.[5] For others, persistent U.S. balance of payments deficits from the late 1950s on represented a clear risk to the international monetary system. By the time Nixon took office in 1969, the U.S. balance of payments and its relationship to the dollar’s role had become one of the most sensitive international issues facing the new administration.
Between 1960 and 1969, the view of the dollar’s key currency role among American policymakers underwent a drastic shift from that of an economic convenience to a point of hegemonic interest. The notion of a U.S. “dollar policy” that sought to preserve the dollar’s international role was born out of discussions of the U.S. balance of payments deficit and the dwindling credibility of the gold-exchange standard. Robert Roosa, the Under Secretary of the Treasury for Monetary Affairs, and C. Douglas Dillon, the Treasury Secretary, stood at the forefront of dollar policy and established it as part of the Treasury’s mandate in the early 1960s. Both came to office with strong beliefs in both the value of a U.S.-centric international economic system and the benefits of the dollar’s role.[6]
Roosa, however, was truly the original architect of American dollar policy. Roosa had worked at the New York Federal Reserve Bank for fifteen years and came to the Treasury with strong convictions about the U.S.’s role in the international monetary system and skepticism about the potential for international cooperation. The experience of most economic policymakers in the immediate postwar period left them with the distinct impression that the U.S. stood alone in its capacity for world economic leadership. Early on Roosa wrote, “Most of us in the Treasury and Federal Reserve felt that so much was still unknown as to the nature and extent of the readiness of other countries to join new multilateral efforts that it was as yet impossible to design a system that would best meet the world’s needs, including the United States.”[7] As a consequence, he and his colleagues saw the dollar’s central role as both an inevitable result of American economic dominance and a source of national prestige, influence, and earnings.[8] Previous experience in international economic dealings and doubts about the capacity of other countries to shoulder international monetary burdens left Roosa with the view that the dollar had to remain the cornerstone of the international monetary system.
As Treasury Under Secretary, Roosa constantly worried about the “hazards of despair and economic disruption” that would result from any challenge to the dollar’s role and devoted substantial effort to the development of a policy to defend the dollar’s role and the deficit spending flexibility and seigniorage benefits it offered.[9] In 1961 and 1962, Roosa designed a comprehensive program to facilitate “improvisation of defenses to protect the dollar” that included publication of U.S. monetary reserves, currency swaps (to limit gold conversions), forward contracts with foreign governments, intergovernmental capital transfers, and coordination in the London Gold Market.[10] Roosa saw the dollar’s role not just as an economic boon but also as a point of national prestige wrapped up in the U.S.’s newly minted role in the postwar world. “It is a role which naturally accompanies our leading economic and political position,” he argued, and as such considered it a central component of the national interest.[11]
The emphasis of early dollar policy on the preservation of this role was as much a product of national pride as of economic value. In a 1962 statement before the Joint Economic Committee of Congress, Roosa argued that difficulties arising from the dollar’s reserve role were “byproducts of our leading position among Western nations” in military expenditure and aid distribution.[12] Under Dillon and Roosa, the Treasury developed an almost knee-jerk opposition to any policy that might diminish the dollar’s role. Between 1961 and 1964, they consistently opposed any proposal to devalue the dollar or to create new forms of international liquidity. In 1962, for example, the Council of Economic Advisers (CEA) and the Department of State endorsed a plan to negotiate a freeze on US gold conversions, actively limit accumulations of dollar reserves by foreign governments, and augment international liquidity with IMF resources. In response, Dillon argued that this would “seriously impair the position of leadership which the United States now has with respect to these countries” and that it would “make it extremely difficult, if not impossible, to contemplate a future monetary system in which the dollar may be used as a key currency.”[13]
The Treasury’s mandate to manage the U.S. budget and balance of payments created a strong institutional incentive for its officials to protect the dollar’s role, as the deficit spending flexibility it afforded the U.S. eased the Treasury’s burden and limited the need to make difficult choices between costly policies. Without as much need to worry about budget deficits (as the dollar’s role ensured demand for U.S. Treasury debt), the Treasury no longer had to worry about whether the U.S.’s expansive security interests would trade off with economic objectives at home, a point clearly not lost on Dillon.[14] The Treasury thus became home to the dollar’s most fervent supporters and the source of a great number of policies designed to buttress its role. The combination of the Treasury’s official mandate with economic and nationalist rationales for defense of the dollar’s role combined to make the key currency role a central objective of American international monetary policy.
By the time Nixon entered office in 1969, however, it was clear that the ad hoc measures introduced over the past nine years were not enough. Prior to the 1968 election, the U.S. Task Force on Balance of Payments Policies was convened to assess the current situation with respect to the balance of payments, the international monetary system, and the dollar’s international role. In October 1968, the task force submitted a first draft that explained that an international monetary crisis was imminent, the new administration would likely have to suspend gold convertibility now or in the near future, and an opening was needed to remake fundamental aspects of the international monetary system.[15] An earlier draft even advocated closing the gold window to create such an opportunity for reform, arguing that this move, combined with limited exchange rate flexibility, would allow the dollar to devalue (boosting U.S. exports) or force countries with currencies pegged to it to absorb additional U.S. deficits without demanding gold, solving the balance of payments problem.[16]
That the dollar’s role was a valuable aspect of the international monetary system is seemingly assumed in the report but not explicitly discussed. This attitude makes sense in light of the lack of plausible alternatives at the time. By this point, France’s attempts to link international reserve assets to gold had failed and SDRs were still on the drawing board. As the report itself notes, even without gold convertibility most countries would probably still peg their currencies to the dollar.[17] The elimination of “largely fictitious” convertibility would likely have no effect on the dollar’s key currency status.[18]
Despite the perceived security of the dollar’s role, the Nixon Administration still faced a looming balance of payments crisis that could shake the international monetary system to its core. In 1969, President Nixon authorized the creation of the Volcker Group, an interagency group headed by Treasury Under Secretary for Monetary Affairs Paul Volcker tasked with forming the administration’s policy toward the international monetary system. Although the Volcker Group was interagency in nature and included members from the Federal Reserve, Department of State, and CEA, it was housed within the Treasury Department and took on the distinct feel of its home agency. When it came to dollar policy, the Volcker Group quickly fell in line with its Treasury predecessors. Its first major publication, an analysis of major options in international monetary reform, took a hardline stance that the dollar’s role was not only highly beneficial but that it might be in the U.S.’s interest to expand it.[19] Nixon, famous for his disregard for the complexities of international economics, left most of the decision-making on international monetary policy to senior officials at the Treasury. The Volcker Group, given a high level of independence to direct international monetary policy through the Treasury, quickly became ground zero for an aggressive dollar policy and a staging ground for international monetary reform.
Although no international monetary system had ever existed without gold or other commodity backing prior to 1971 and a dollar standard was unthinkable to most, in the early days of the Nixon Administration this bold policy was discussed as a potential cure-all to America’s economic woes. The Volcker Group’s assessment of the benefits of the dollar’s existing role was straightforward and blunt. In their June 1969 account of international monetary policy options, they argued that the deficit financing benefits of the dollar’s role had funded over 70 percent of U.S. deficits over the last decade and “permitted the United States to carry out heavy overseas military expenditures and to undertake other foreign commitments, and to retain substantial flexibility in domestic policy.” On the whole, they found, “it has facilitated a role for U.S. leadership and influence more or less commensurate with our relative size and economic power.”[20] The Volcker Group’s analysis set the stage for the dollar’s role to become an essential aspect of American hegemonic policy. While earlier policymakers were generally supportive of the dollar’s role, the Volcker Group became the first to connect the spending flexibility it afforded the U.S. with the ability to project power abroad.