The United States at the Crossroads
Ever since the end of World War II the international monetary system has been centered on the dollar as the principal form of world money. The widespread use of its currency as an international medium of exchange has given the United States a special position in the world economy. On the one hand, we Americans have had to supply the rest of the world with adequate supplies of global liquidity. This responsibility has included lender-of-last-resort interventions to help other countries with excessive external deficits and debt-servicing problems, as evidenced by the dominant U.S. role in funding the IMF or in managing the LDC debt crisis. On the other hand, the United States has derived significant advantages as an issuer of world money, being the only country that can pay for its obligations to other countries in its own currency. One consequence of this so-called seigniorage benefit is the ability to run continuous balance-of-payments deficits that are automatically financed by foreigners willing to hold additional dollars (see the last two sections of chapter 5).
Since the breakdown of Bretton Woods in 1971 we have witnessed a gradual erosion of the dollar's international role. This decline has manifested itself in a variety of ways, most notably in a series of devaluations and a long-term loss of market share to other key currencies. The trend is direct result of America's worsening external position over the past twenty-five years. If it continues, then sooner or later the dollar will have ceased to be the primary form of world money.
Such an outcome is virtually certain, should the community of nations ever decide to introduce supranational credit-money (see chapter 16). But even without this kind of reform it is highly probable that the dollar will no longer dominate the international monetary system when the new millennium starts. With regard to trade, production, and capital flows we have already moved away from U.S. hegemony to a much more polycentric world economy. As the international monetary system adjusts to this new reality, other currencies (e.g., mark, yen, and probably after 1999 Europe's ECU) are bound to become as important as the