The Dollar and the Defense of the West

The world economic system is in deep trouble. The threat to the international economic system has been a long time in the making: the growth of the world economy has depended overwhelmingly on the strength of the U.S. economy and the dollar. Paradoxically, many have thought growth depends on continuous dollar deficits, the source of growing monetary reserves believed essential to expanding world trade. But others have long feared that this dependence on the dollar points toward eventual disaster. Three decades ago Robert Triffin warned that a strong dollar and chronic U.S. payments deficits could not indefinitely coexist. Either the dollar would weaken and the system would break down, or the American payments deficit would end, the supply of monetary reserves would contract and economic expansion of the system would cease.

But no purely economic explanation for today’s gathering crisis is adequate. All along, U.S. deficits have been in large measure a consequence of America’s willingness to carry the heaviest share of the defense burdens of the noncommunist world. An end to the American deficits suggests an end to the American burdens. This gives the present financial crisis a geopolitical and historical dimension. It appears a crisis, not only of the dollar, but of American "hegemony" and of the global political economy which that hegemony has built. This creates the grim possibility that the United States, the country that created the postwar global economy, is now on a course fated to destroy it. As Professor Paul Kennedy’s recent book reminds us, history is full of examples of hegemonic powers that brought themselves down because they were unable to sustain a viable relationship between geopolitical pretensions and economic resources. His is an ancient and recurrent lesson among historical moralists: a country with too-great power grows overextended and then self-destructive.

If this course is to be averted, it must be understood that the solution to America’s dollar problem is not purely economic but also geopolitical. Furthermore, the adjustments needed cannot be made by the United States alone, but must also involve its major allies. There are few alternatives: the current method of financing the Pax Americana makes a weak and fluctuating dollar inevitable and has increasingly destructive consequences for the world economy.

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