Key 21st-Century Issues: Supremacy of Dollar, Role of Central Banks
Floyd Norris N. Y. Times News Service, THE JOURNAL RECORD
NEW YORK -- Money is a funny thing. Everyone knows what it is. But money is something that can change a lot over time.
A century ago, there was little question about what money was. It was gold, period. Or, to be a little more exact, it included national currencies like dollars and pounds, but only to the extent they were convertible into gold. There was but one real money.
Now there are dozens and dozens of national currencies, none of them tied to gold. But there is a hierarchy of currencies that in practice significantly reduces the real number. That hierarchy is based not on relative value, which can and does fluctuate, but on their function in the world economy. The U.S. dollar is clearly No. 1.
At the same time, the nature of money is changing. With no anchor in precious metals, the task of maintaining the value of currencies has fallen to central banks, few of which even existed in 1900. It was the central banks -- most notably the Federal Reserve in the United States and the Bundesbank in Germany -- that were given credit for slaying the inflation dragon in the 1980s, leading to what might be called the cult of the central banker.
The big questions for the international monetary system in the 21st century will revolve around those points: Will the dollar maintain its supremacy, or will the euro, and perhaps even the Japanese yen, gain comparable status? How will other countries manage the value of their currencies? And, perhaps most important, will central bankers maintain their power and prestige, or will they stumble and take the blame for some economic problem?
The current supremacy of the dollar does not reflect a brilliant record as a store of value. If one uses consumer price inflation as a measure, a 1999 dollar is worth about a nickel in 1900 money. Measured against gold, the dollar is down 93 percent.
Instead, the dollar's primacy reflects the United States' role as the world's largest economy, with capital markets that lead the world. The dollar is the most likely currency to be held as official reserves by other countries. It is the premier currency of international lending. Companies from Brazil to Indonesia owe dollars, not reais or rupiahs. When the real and rupiah were devalued in the crises of the late 1990s, local companies that had thought they were in good shape found themselves in severe financial difficulty.
The euro, the currency of 11 European countries, was created in part to challenge the dollar's supremacy. Its first year has not been a smooth one, and the value of the currency has fallen. But the euro's use in international borrowing has risen.
Some major economies, such as Britain and Japan, can easily keep floating exchange rates with the dollar and the euro, in part because those countries have capital markets that can allow companies to borrow in local currencies.
But for many other currencies, the options are not so clear. Until the Asian currency crisis, many countries opted for a sort of nonbinding fixed rate. Their currencies were tied to the dollar, sometimes with a planned gradual depreciation.
The Asian crisis, however, saw many such currencies plunge in value and led to a growing consensus that countries must choose one of two options. They can choose freely floating exchange rates that rise or fall against other currencies moved by market forces, a plan that gives governments maximum flexibility but can make it hard for businesses to plan their affairs. Alternatively, they can adopt an absolute fixed rate vs. …