the dollar-based global financial system has had benefits for other countries as well. However, as we shall see in Chapter 3, many stakeholders within that system are increasingly questioning whether the costs may now outweigh the benefits.
Although it seems firmly entrenched, the primacy that the dollar enjoys today is, in historical terms, a relatively recent phenomenon. For most of the 1800s, America's economy was predominantly agrarian and inward looking. It was not until 1916, with Europe heavily weighed down by World War I (WW1), that the US economy overtook the British Empire to become the largest in the world.6 Even then, the role the dollar played in global trade and investment was only roughly equivalent to that of sterling up until WW2 and the throbbing heart of international finance continued to be the City of London, whose banking fraternity looked down on their US counterparts as ‘unsophisticated kinsmen, too rich for their own good’.7
While it may be tempting to draw a correlation between the growth of the US economy during and after WW2 and the rise in the dollar's global status, much as it is now speculated that China's economic growth will inevitably lead to the renminbi becoming the dominant global currency, this interpretation would be overly simplistic and inaccurate. If GDP size were the sole factor determining the relative global importance of a nation's currency, then both the euro and the renminbi would already be close to usurping the dollar – a prospect that remains distant today. Instead, the dollar's present dominance is rooted in historical circumstance and perpetuated through four pillars of the US system: the rule of law; international trade and macroeconomic policies; the deepest and most open financial markets in the world; and established capital markets infrastructure supporting the global financial system. All too often, this fourth pillar is overlooked by economists and policymakers. This is a serious oversight for, without a solid understanding and appreciation of the ‘plumbing’ of the global financial system, it is impossible to foresee the impact of market evolutions or to design effective financial policies. Before attempting to diagnose the problems of our current global financial order, let alone determining the feasibility – or even desirability – of any major changes to it, we must first understand how it came about and its structural underpinnings.
The story of the US dollar's rise over the last century is inextricably intertwined with the geopolitics of the era, but it is also one of financial and technological innovation. At certain times, domestic and international policies drove this innovation; at other times, geopolitics were driven by structural shifts in the markets. Some significant factors that contributed to the dollar's dominance actually arose out of American policy mistakes, policy choices by other governments, or financial entrepreneurialism that policymakers initially weren't even aware of. There are, of course, many aspects to American power besides the dollar, and the currency has always had a relationship of symbiosis and mutual reinforcement with these. However, as the other sources of US power have waned, the dollar has become ever more important in relative and, paradoxically, absolute terms. There has been a price for this though – one that the original architect of the dollar's leadership perhaps didn't sufficiently take into account.
An Ad Hoc Position
It is said that success has many fathers and so it is with the astonishing success of the US dollar over the past hundred years, but if any one man can be credited with having laid the foundation stone upon which the dollar's empire was built, that man would be Harry Dexter White. As a senior US Treasury Department official in the 1940s, White was the key architect of the Bretton Woods system that governed the international economic order for almost three decades after WW2.
Born in 1892, White was the son of Lithuanian Jews who had fled the tsarist pogroms in 1885 and settled in Boston. Harry was the youngest of seven children and was educated in local public schools, where he was not an exceptional student. His mother had died when he was aged just nine. His father Jacob was a peddler who made a living dealing in hardware and crockery. Through hard work and thrift, the family had eventually come to own four hardware stores by the time Jacob died, just two months after Harry graduated from high school. After school, he initially worked as a clerk in the family business, but upon President Woodrow Wilson's declaration of war on Imperial Germany in April 1917, the 25-year-old Harry White enlisted in the US Army and was commissioned as an infantry first lieutenant.
Stationed in France in training and supply camps, White had an uneventful war and returned home in November 1918. However, no longer satisfied by the life of a small businessman, he set his sights on an academic career and enrolled at Columbia University in 1922 to study government. He transferred the following year to Stanford, from which he graduated ‘with great distinction’ in economics.8 From Stanford, he moved on to pursue a PhD at Harvard and it was there that he appeared to develop a fascination for the relationship between the workings of the international monetary system and the performance of the real economy. He taught for six years at Harvard but, aged 40 and unable to secure a tenured position, he took up an assistant professorship at Lawrence College in Appleton, Wisconsin in 1933.
Harry White's path from Wisconsin to the US Treasury came via an invitation in the summer of 1934 from Jacob Viner, a respected University of Chicago economics professor. Viner was at the time advising Treasury Secretary Henry Morgenthau and asked White to assist him on a three-month study of monetary and banking legislation and institutions. Once in Washington, White never looked back. Following completion of the Viner study, he took another temporary position with the US Tariff Commission but returned to the Treasury just three weeks later when a position as principle economic analyst in the Division of Research and Statistics opened up. This was again a temporary position paid for, fatefully, out of profits from an emergency fund set up to stabilise the dollar's exchange rate. Remarkably, White's employment at the Treasury would continue on this tenuous ad hoc basis for another 12 years until he was finally made a fully-fledged civil servant in 1945.9
In the early 1930s, the world was mired in the Great Depression and the prevailing monetary orthodoxy for countries to tie the value of their currencies to a fixed quantity of gold had broken down. With great reluctance, Britain had abandoned the gold standard in September 1931 and devalued sterling. Twenty-five other nations followed suit shortly thereafter. The US held out for a time but was ultimately forced to give up the dollar's fix to gold in April 1933, shortly after President Franklin D. Roosevelt took office. There followed a period during which the dollar's exchange rate seemed to fluctuate arbitrarily, as the President took to setting a target exchange rate from his bed each morning, mostly based on whim rather than scientific method. While the thought of befuddled bankers rather tickled Roosevelt's sense of humour, concerns were raised from within the Federal Reserve and the Treasury, where some considered FDR to be acting beyond his presidential authority in buying gold at a price above the level fixed by statute. Roosevelt ultimately relented and, under the Gold Reserve Act, re-fixed the dollar's exchange rate to gold in January 1934 at $35 per ounce, 59.06 percent below its previous level.10
As countries battled with the Depression era's high unemployment, they turned to competitive devaluations and tariff barriers in an effort to make their exports more competitive and to limit imports. These ‘beggar-thy-neighbour’ policies led to a collapse in global trade, significantly worsening the economic hardship. In the subsequent years and decades, the international trade and monetary policies of the interwar years became widely viewed as a major factor contributing to the outbreak of WW2.
At the Treasury, Harry White gained a reputation as an able economist and carved out a critical role for himself in international policy. He was also known to be quick-tempered and impatient, though he ‘was meticulously civil to anyone in a position to afford him access to the powerful’.
