In “Dollar Hegemony: A Power Analysis,” Carla Norrlof dismisses present day predictions of the decline of the American dollar hegemony and presents her central argument that the unmatched monetary capability, currency influence, and the channels of power afforded to the U.S. as the monetary hegemon ensure the continuity of the dollar hegemony for the foreseeable future. Norrlof establishes her claims through a quantitative comparison of the monetary capabilities and the currency influence of the U.S. and other countries and an examination of the three faces of power of the U.S., claiming a lack of existing comprehensive research on power relations systems in studying the dollar hegemony.
Norrlof constructs empirical measures of monetary capability through weighted shares of GDP, commercial and capital markets as well as military spending, and her comparison depicts the U.S. as being the unmatched leader in monetary capability with the Euro-zone and China trailing behind. Norrlof also compares currency influence, or how widely used a currency is in the world, and again finds the U.S. an unchallenged leader in currency influence. Monetary capability and currency influence are the two requirements of a monetary hegemon, and these comparisons show no signs of a hegemon in decline, according to her. Furthermore, Norrlof addresses the issue of U.S. government debt, which is often cited as an evidence of the decline of the dollar, and states that the “United States runs no risk of becoming insolvent as a result of growing sovereign debt because the United States does not pledge to convert its currency into any other currency, gold or metal at a fixed rate and can therefore issue debt without worrying about running out of money” (11), dismissing the concern.
In the next section of her analysis, Norrlof identifies the three faces of power. The first face of power is identified as bargaining power, the power to persuade and influence decisions, such as offering U.S. military protection in exchange for that country’s support of the dollar. The second face of power is structural power, the power to change the rules of the game and the system to limit or completely alter the set of strategies available to other agents. An example Norrlof gives is the U.S.’s ability to limit other countries’ decision making strategies into agreeing to the establishment of the WTO by leaving GATT, rendering the organization futile. The third face of power is identified as expectations and belief in the American continuity of power, a more ambiguous type of power that manifests itself in group behavior to bandwagon the world into continuing its usage of the dollar.
However, Norrlof’s argument is unconvincing or at least inconsistent at times. She identifies the third face of power as “the most compelling” explanation “for understanding the dollar’s resilience as the world’s first currency” (22). However, earlier in her article, she criticized and dismissed the possibility of network externalities as an unsatisfying and incomplete answer, stating that the “significance of network externalities is increasingly disputed” (3). However, it seems that Norrlof, too, is actually putting forth an argument of network externalities as the third face of power, stating “Once a critical mass believes the United States has the wherewithal to continue supplying the world’s first currency, network externalities, (i.e. the utility of using a currency because everyone else is using it) kick in to reinforce the logic of continued dollar use” (23). Therefore, it is unclear why Norrlof initially chose to portray an explanation as unsatisfactory that she later describes as the most compelling explanation for continued American dollar hegemony. Furthermore, Norrlof’s argument is weakened by the replacement of empirical evidence with speculative discussions of power relations in the latter half of her analysis. While her arguments regarding the monetary capability and currency influence of the U.S. are made convincing by her empirical comparisons of the data of other countries, her arguments of the power relations of the U.S., while believable, are hardly supported by substantial evidence and seem to unfoundedly speculate the persistence of the dollar hegemony without careful consideration of the possibility of a pluralistic, multipolar monetary order.
In this regard, Eric Helleiner’s comprehensive overview of the establishment and the failure of the Bretton Woods system and the new international monetary order in “The Evolution of the International Monetary and Financial System” fills in the gaps left by Norrlof’s narrow predictions of the continuity of the American hegemony. Helleiner takes a more historiographical approach to his examination of the international monetary system, examining the trends of globalization, embedded liberalism, and the disintegration of the gold standard. The collapse of the gold standard and the monetary disunity that followed seem to signal that a break in the status quo is, indeed, possible, and Helleiner acknowledges the possibility of a multipolar currency system in the future.
Helleiner also discusses the consequences, both beneficial and harmful, of the potential decline of the American monetary hegemony but makes no decisive prediction regarding the future trajectory of the dollar hegemony, unlike Norrlof. Instead, Helleiner presents an overview of the challenges to the dollar hegemony that have appeared in recent years, such as the creation of the euro in Europe and other currency unions in Africa and South East Asia that could potentially reduce the power of the dollar in many developing regions of the world. Another possible challenger to the dollar hegemony is the Special Drawing Rights (SDRs) issued by the IMF, currently a form of reserve currency only. As Helleiner outlines, SDRs have recently gained considerable support from many international figures, including Zhou Xiaochuan of the Chinese central bank, Brazil, Russia, and the United Nations’ Stiglitz Commission, who advocated for an increased role of the SDRs in the international monetary system. While Helleiner states that it is unlikely for the SDRs to be used more prominently in the international system for the time being, he leaves open the possibility that a contender to the dollar could enter the world market in the future, a possibility only acknowledged in passing by Norrlof.
IPE, Section 61 (Winter 2015) 