Dollar is resilient through crises. Stability cements it’s irreplaceability.

In short, the dollar prevails as a unit of measure, medium of exchange, and store of value vis-à-vis global market participants. Critically, it maintains this asymmetric position on account of four discrete variables: incumbency, stability, liquidity, and a lack of alternatives.

We first encounter the notion of “monetary hegemony” in Michael Hudson’s “Super Imperialism” (1972: 9–60) as one state’s asymmetric relationship with respect to the global economy and its institutions. Adding Cohen’s layer of “acknowledged responsibilities and privileges” (1976: 37–50) – and Germain and Schwartz’s understanding of an “international currency” as one used beyond its political borders (2017: 765–787) – it is clear that the dollar fulfilled this role officially during the Bretton Woods era beginning in 1944. Despite the removal of fixed pegs in 1973 — the “Nixon Shock” — the dollar proved to be sticky. It maintained its incumbency through the Volcker years, as measured by its usage as the IMF’s reserve currency and the de facto currency of trade.

The U.S. has extended Barry Eichengreen’s (2004) notion of “exorbitant privilege,” built on its post-war domination, into a new form of Bretton Woods, wherein growth-targeting economies rely on it to drive currency stability and account surplus. Closing fiscal year 2021, approximately 60 per cent of global reserves and 45 per cent of international transfer of funds comprised dollar-denominated assets (Kofinas and Eichengreen, 2018). This market share originates from a point of incumbency inherited from the Bretton Woods era, and remained largely stable through major shocks, such as the Cold War, 9/11, financial crises, and the COVID pandemic. The dollar has proven itself as the ultimate backstop of the global financial system through a rollercoaster of global political events.The dollar’s reserve stability largely mirrors the United States’ political-economic state. A key component of its appeal as a currency hegemon lies in its democratic privilege. Federally embedded checks and balances do not allow for the state to unilaterally change the rules of the game. An investor-trader will only view a currency as a reliable store of value if she can maintain relative certainty that fiat paper will buy a nearly equivalent (cost-of-capital, time-discounted) basket of goods and services tomorrow, in a year, or a decade. Politically, the US also has a track record of periodic domestic legislation that fuels high consumption consumer growth, from the New Deal to the Great Society, and recently, unprecedented fiscal stimulus in reaction to the pandemic. It further benefits from the so-called “financial reform nexus,” (Seabrooke, 2018), the idea that US policymakers may adjust domestic cost and purchasing power parity on an ongoing basis, in contrast to the restrictions of China’s long-term economic planning cycle, for instance.

The American government has reliably generated demand without eliminating any legislative choke points purposefully built into its governance. Meanwhile, its fiscal and monetary authorities have proved credible and independent. Finally, its sovereign debt issuances face virtually no threat of insolvency – as it is not pledged against another asset or financial instrument (Wray, 1998). In conclusion, the dollar embodies a symbiosis between currency, economy, and democracy… or put in academic terms, by Martijn and Panitch (2009), a “mutually constitutive relationship between the state and financial markets”. Facing the renminbi and cryptocurrencies as challengers, stability is a striking differentiator in favour of dollar hegemony. Market participants may view the Chinese Politburo’s ability to make consolidated and swift changes as unpredictable. Stability and the perception of stability are a self-reinforcing cycle, which Norloff has termed the “third face of power” (2014: 1063). Here, the dollar’s dominance transcends from the empirical to the ideational. Owners of the greenback live in a monetary panopticon, with unrestricted transparency and accessibility.

Explicitly, this accessibility comes in the form of ultra-liquid capital markets. Due to its financial openness paired with its status as the market and lender of last resort, the US maintains asymmetric monetary capability. Its central bank can provide unrivalled capacity for dollar-funding to global markets – where the greatest liquidity crunch in recent history, at the peak of COVID-19-induced uncertainty – serves as evidence. During March 2020, the Federal Reserve extended ca. $440 billion in dollar-denominated swaps abroad, at a maximum spread of 50 bps (FRED Dataset). In doing so, it practiced its role as a lender of last resort and effectively capped dollar costs to foreign counterparties. The scramble for dollars is a symptom of crisis, echoing a “flight to quality” in 2007 and 2011.

Perhaps more interestingly, this phenomenon also serves to highlight the dollar’s dual monetary role; while the Federal Reserve’s mandate is theoretically domestic, its self-assumed obligation to fund dollars abroad has far wider implications. US financial institutions are de facto married to the international order that relies on them. However, the US also has no incentive to promote the official use of the dollar when it is already the crowd’s favourite medium of exchange. Absent formal dollarisation, dollar-denominated bond issuances dominate the public and private markets. The euro, which may succeed in stability, falls short here; it accounted for only 17 per cent of global AAA-rated debt financing (Kofinas and Eichengreen, 2018), on average. Accessibility to the renminbi is equally problematic, given stringent capital controls on RMB-denominated bonds. How useful is a transactional token if one cannot transact with it?