The forum, which is co-sponsored by the Princeton Institute for International and Regional Studies, the Center for International Security Studies and the Wilson School, is held annually in honor of the late Cyril Black, who served as director of Princeton’s Center of International Studies and as a member of the University faculty for half a century.
This year’s forum also included G. John Ikenberry, the University’s Albert G. Milbank Professor of Politics and International Affairs; Harold James, a professor of history and international affairs at the University; and Hyun S. Shin, Princeton’s Hughes-Rogers Professor of Economics.
Each speaker commented on a part of “Exorbitant Privilege,” and Eichengreen delivered a response.
In “Exorbitant Privilege,” Eichengreen follows the fluctuation and condition of the dollar throughout the 20th century and suggests that there may be more than one international currency. Eichengreen argues that, rather than the American financial system receiving strength from the dollar, the financial system made America powerful and the dollar simply reflects its underlying strength.
James described Eichengreen’s book as “wonderful” and noted that it could not have come at a better time than in the midst of the current financial crisis.
“If the book is timely, it is timely because there are always concerns about the dollar,” Eichengreen said. He added that he predicts the global financial system will eventually become multipolar, ruled by three blocks — the United States, Europe and China — and that all three currencies will play consequential international roles.
Eichengreen also cited the dual advantages the dollar has historically possessed — liquidity and stability — explaining that “the dollar is a safe haven.”
Shin agreed with Eichengreen and pointed to the fall 2008 collapse of Lehman Brothers as an example of a “flight to safety” response, when foreign investors flocked to the dollar after the financial crisis because of its apparent security.
However, Shin said he questioned Eichengreen’s proposition for multiple international currencies, citing both the fact that foreign banks fund their businesses in U.S. dollars and the power of the incumbency of the dollar as possible preservative factors of the dollar’s strength.
Ikenberry asked about the implications of the dollar’s decline for U.S. foreign policy and global influence, to which Eichengreen responded that, under his predicted model, the dollar would provide less support for U.S. policy initiatives.
Other possible consequences, he explained, could include the proclivity of holders of the dollar to turn to other kinds of currency and the difficulty the United States may experience in borrowing and consuming above its level of production, due to a lack of creditors.
“We have the exorbitant privilege of living beyond our means,” due to the dollar’s status as the currency of both America and the world, Eichengreen said.
In the book’s final chapter, Eichengreen envisions possible disaster scenarios that could result in a crash of the dollar.
However, the only plausible scenario, he said, would be one caused by America itself through dysfunctional politics and other manners that “begin to demoralize foreign holders.”
“Maybe we shouldn’t allow our financial systems to remain as dollar-based as they are,” Eichengreen added.
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