The Money Trap

The Instability of the International Currency System Is Decades Old

The US dollar is central to the era of managed international currency, which began with the 1945 Bretton Woods agreement. The dollar has remained the world’s principal monetary unit ever since. “Most of the world outside Europe is on a de facto dollar standard.” But playing such a role involves certain conflicts of interest with the dollar’s day job as America’s domestic currency.

At a basic level, the monetary policy that a US administration believes is necessary to address its internal objectives may produce harmful side effects in other countries. For example, economists now widely think that former Federal Reserve Chairman Paul Volcker’s 1979 push to tackle inflation was a positive force in reshaping US economic fortunes for the 1980s. However, coming as it did after a period of plentiful international capital, it helped generate – through the transmission of the dollar’s central role – that decade’s debt crisis in the developing world. The harsh monetarist medicine “was, and indeed had to be, an exercise in monetary unilateralism.”

At the other extreme, the historically loose monetary stance...