This essay was first published by Phenomenal World.

Amidst the turbulence of the Second World War, hundreds of delegates from the Allied Nations met in Bretton Woods, New Hampshire to construct a post-war economic system. While it might strike one as odd that post-war choreography began in 1944, a year before the war ended, the truth is that states were planning peacetime from the moment the war began. The West feared replicating the blunders of the Treaty of Versailles and wanted to establish the next post-war order with prudence.1 One principal task for Bretton Woods attendees was to implement an international monetary system. Several proposals existed, including Keynes’ Bancor, which would have established an International Clearing Union to issue a supranational currency, oversee currency exchanges, and correct global imbalances. The war had weakened Europe, however, and strengthened the US. US negotiators exploited their influence. While the adoption of the dollar as the global reserve asset would give the US a significant upper hand, Europeans eventually relented because they could still convert dollars to gold and were assured that the arrangement was temporary.

Twenty-seven years later, a new crisis fractured the postwar economic peace enjoyed by the West. Rising inflation drove many countries, particularly European ones, to convert their US dollar reserves into gold. President Richard Nixon faced a choice between devaluing the dollar or pumping it up through perilous austerity measures. Global markets predicted that Nixon’s political savvy would drive him toward the former, but he shocked the world by taking a surprise third route, severing the dollar from the gold standard. There is a great deal of disagreement as to his decision’s long-term ramifications, but little debate about the global economic turmoil that immediately followed. Through it all, the dollar’s global hegemony endured, and it remains to this day. 

With every global crisis since, the world has felt afresh the failure to create a truly international monetary system. After the global financial crisis of 2008, many discussed how dollar centrality and the overvaluation of the dollar contributes to the deindustrialization, trade deficits, and over-financialization of the US economy, even as the Federal Reserve continues to serve as the world’s central bank, giving it immense structural power. 

Today, the correlated crises of the Russian invasion of Ukraine and mounting inflation further expose the dollar’s global dominance. Neither Russia nor any other country can free itself from the dollar. The Federal Reserve’s measures to tighten monetary policy and raise interest rates are strengthening the dollar at the expense of many other global currencies. Those who borrow in dollars—particularly countries like Sri Lanka, Lebanon, and Argentina—are feeling the global imbalance of monetary power most acutely. 

The dollar may face its greatest challenge of the past century from the extraordinary polycrisis now unfolding, which is already reshaping the world economy. 

The climate crisis

The climate crisis offers a new angle from which to evaluate US dollar hegemony, since carbon emissions are tied to economic activity.

Dollar hegemony constrains the rest of the world’s ability to finance the green transition because other countries have less control over their own monetary policy.2 My research3 suggests that dollar hegemony is an external constraint on US decarbonization, as well. This is because dollar hegemony:

1. drives up the carbon-intensity of the US growth model;

2. obscures the responsibility for emissions in trade; and 

3. undermines American green manufacturing in the global arena. 

America’s growth model is driven more by household consumption than exports.4 The dollar’s role as the world’s reserve currency helps increase household consumption domestically. How does that work? The high demand for the dollar, and its resulting overvaluation,5 raises the relative price of American goods in global markets, costing US exports in market share and competitiveness. As a result, the US has become the largest global importer and source of demand.6 In effect, the world transfers its consumption to the US.

Most crucially, household consumption in the US is comparatively carbon-intensive. On average, American households consume more electricity, drive more, and enjoy cheaper fuel per capita than comparable wealthy democracies. Much of that energy consumption comes from fossil fuels. Plotting US trade data against carbon emissions confirms the wider world’s role in American consumption—more imports, more emissions. 

Germany, the paragon exporter, complements this dynamic perfectly. The German growth model suppresses wages and household consumption to maintain export competitiveness.7 Thus, when plotting the German current account balance against its emissions, one sees emissions decrease with trade surpluses.

Footnotes

1. Frieden, Jeffry A. 2020. Global Capitalism. New York City: W. W. Norton & Company. (Back)

2. For more see further discussion in Pettifor’s The Case for the Green New Deal. Also see recent scholarship by Althouse and Svartzman on global imbalances and finance-dominated capitalism. My work is complementary but focused primarily on the US dollar.  (Back)

3. For the working paper, please email daniel_driscoll@brown.edu. (Back)

4. Baccaro, Lucio, Mark Blyth, and Jonas Pontusson, eds. 2022. Diminishing Returns: The New Politics of Growth and Stagnation. Oxford, New York: Oxford University Press.  (Back)

5. Note that a significant portion of US dollar-denominated asset creation takes place offshore in private hands. This may further increase global dependence and demand for US dollar-denominated assets. It also may contribute to the currency’s overvaluation. (Back)

6. Klein, Matthew C., and Michael Pettis. 2020. Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace. Illustrated Edition. New Haven: Yale University Press. (Back)

7. Baccaro, Lucio, and Chiara Benassi. 2017. “Throwing out the Ballast: Growth Models and the Liberalization of German Industrial Relations.” Socio-Economic Review 15(1):85–115. (Back)

8. Riofrancos, Thea. 2022. “The Security–Sustainability Nexus: Lithium Onshoring in the Global North.” Global Environmental Politics 1–22. (Back)

9. What is the point of rebalancing if it only shifts emissions to another country? (Back)