All the jazz about dollar hegemony
Behind the easy sidewalk question — Why is the US dollar everywhere in the world economy? — are serious ‘pocketbook’ issues. Why do we have inflation? Can we avoid financial panics and crises? Are cryptocurrencies as good as gold? What will happen to the peso exchange rate?
In his latest book (Our Dollar, Your Problem, 2025), Kenneth Rogoff provides some answers by surveying the broad landscape of economic events since 1945, when the last world war ended. The book is essential reading because the author was also the chief economist at the International Monetary Fund in 2001-03. He keeps the reader grounded in historical facts. He sheds light on issues of interpretation and controversy that the economics profession has confronted.
Among these issues are how the US dollar came to be the dominant global currency, how the monetary arrangements agreed by the Allied countries in 1944 that provided for the fixed exchange rate system became obsolete, and, importantly, for an aspiring middle-income country like the Philippines, what policy advice should be heeded by the country’s economic managers.
In this connection, Rogoff talks about the Tokyo Consensus as an improvement on the Washington version (more on this below).
Finally, Rogoff discusses the present-day debt and inflation problems in rich and poor countries that portend financial crises in the coming decade.
Rogoff views the dominant role of the US dollar as something that has not been threatened by alternatives like the Soviet ruble, the Japanese yen, the euro, the Chinese renminbi, or cryptocurrencies. The explanations are somewhat unique in each case.
However, the most crucial factor is the size and depth of the exchange and financial markets where the dollar is involved.
Apparently, for whatever reason, people residing outside the US who have their own national currency prefer to treat the US dollar as the vehicle currency for their international transactions.
The Soviet ruble
The Soviet challenge stumbled because its economic progress did not match the West’s. The idea of such a ‘challenge’ was partly fostered by a lack of hard economic information during the Cold War.
The Soviet economic ‘model’ disintegrated, not just because of the limitations of central planning and its associated corruption, but also because its technological innovation lagged behind that of the US.
Its economic transition in the 1990s featured membership in the IMF, hyperinflation, and ‘stabilization’ programs backed by IMF financing.
Soviet-style corruption continued. With better statistics, the Russian economy (the largest of the Soviet republics) is estimated today to be less than a tenth of that of the US.
The Russian ruble replaced the Soviet ruble, but it remains unusable internationally other than for (energy) exports to countries outside the reach of Western sanctions that arose from the war in Ukraine.
International monetary arrangements
To understand the context of the challenges posed by the Japanese yen and the euro, a primer on monetary theory and a brief historical sketch of fixed and floating exchange rates are in order.
Money is money because (and when) it is accepted as such (or as ‘legal tender’ in today’s modern world).
Nevertheless, money is conceptually nebulous (in some textbooks, money is just a ‘veil’ for ‘real’ transactions). Money transactions are intermediate steps that allow a seller of X to acquire Y in a barter deal. An intermediary with ‘money’ facilitates the barter because the parties accept money as an ‘interim’ asset (the medium of exchange).
Money, however, changes hands only temporarily; in the end, money holdings never really move. It is a miracle; money moves forth and back while the goods X and Y change hands.
Historically, humans accepted only precious metals — gold and silver — as money. Certain potentates invented paper money or currency (for example, Kublai Khan foisted tree-bark currency on his subjects with a death penalty for refusal, as Rogoff points out on p. 183).
Such paper money was usually ‘backed’ by precious metals because holders of paper could readily exchange it for gold or silver. When money was not backed by gold or silver, it lost its value through inflation (the general rise of prices quoted in the paper currency).
When the victorious Allied nations agreed in 1944 on post-World War II monetary arrangements, they set up gold and the US dollar as perfect substitutes in their roles as international money.
The US held gold as backing for the US dollar (the dollar was ‘as good as gold’ at an announced dollar price of $35 per ounce), and the rest of the world agreed, in turn, to fix the value of their domestic currencies against the dollar.
This fixed-exchange-rate system known as the ‘gold-dollar’ standard made the dollar the dominant international currency. Countries’ official policies harmonized with what private market participants accepted as global money.
The gold-dollar standard collapsed in 1971, when the US suspended the convertibility of dollars to gold, and countries were free to determine their foreign exchange regimes; they could continue to fix their exchange rates or float by letting market forces determine the exchange rate.
In practice, the world evolved into ‘currency blocs.’ Most of Europe moved towards the euro as its single currency, while a US dollar bloc that encompassed much of the Americas, Asia, Africa, and China emerged.
Other countries, such as Canada and Japan, floated their currencies but allowed themselves to intervene in the exchange and money markets to influence their exchange rates.
Why did the gold-dollar standard collapse? The conventional answer is that under the standard, the US committed to ensuring stable prices via its pledge to redeem US dollars for gold at a fixed price.
Other countries were to stabilize their prices by committing to fixed exchange rates.
When US and global inflation rates began to take off in the 1960s amid a persistent US trade deficit that drained US gold reserves, the world eventually doubted the American commitment to the gold price. Official intervention to preserve the official gold price eventually became untenable.
The demise of the gold-dollar standard did not reduce the international role of the US dollar (after it had become a fiat currency). Rogoff sees international currency use as a natural monopoly. (The conventional definition of a natural monopoly is one where a lone supplier can undercut the price offered by others because of a unique cost advantage.)
In the case of the US dollar, the advantage is due to ‘network effects.’ Once a currency has become dominant, it becomes the least-cost ‘vehicle currency.’ Rogoff cites as evidence the fact that 90 percent of foreign exchange transactions involve the dollar as part of the trade (p. 4).
The Japanese yen
With the benefit of hindsight, the conventional wisdom on Japan points to a major policy mistake: At the Plaza Accord of 1985, Japan agreed to let the yen appreciate to what I would call a ‘point of no return.’
Rogoff thought at the time that the strong yen would lead to a recession in Japan (p. 31). In fact, the Japanese economy continued to grow until 1990. The yen appreciation at first brought forth a wealth effect, inducing a bubble in stock and land prices that set the stage for a full-blown financial crisis that unfolded in 1992.
By then, Japan entered into its ‘lost decade.’ Rogoff cites other aggravating factors — demographics (a declining birth rate meant a shrinking labor force), decreasing returns on investment, and competition from the Asian ‘tigers’ (p. 36).
The hope of some quarters for the yen to challenge the US dollar died.
The euro
Inflation became a major problem for Europe in the 1970s after the collapse of the fixed exchange rate system. Political leaders realized that a single currency for Europe would foster a convergence of inflation rates to the widely desired low level enjoyed in Germany.
In 1999, the euro effectively replaced the legacy currencies of France and Germany at the center of Western Europe’s trading and financial system. It also replaced 18 other national currencies, with seven more waiting in the wings.
As Rogoff notes, the euro maintained the world market share of the legacy currencies in global transactions.
The euro had its problems. It did not become a global vehicle currency. More importantly, the euro was a monetary experiment.
Two economists (Maurice Obstfeld and Peter Kenen) had warned that, as a currency union, the euro needed a lender of last resort, and a mechanism for fiscal transfers within the union. The warnings were prescient.
From 2010 to 2012, a debt-cum-banking crisis emerged in Greece, Portugal, Ireland, Italy, and Spain. The situation was resolved when the European Central Bank (along with the IMF) came to the rescue, and the national leaders effectively sanctioned the needed fiscal transfers.
Certain other circumstances have conspired to blunt any challenge the euro might pose against the US dollar. Currency union did not result in capital market union, with European debt markets remaining “balkanized” (p. 49).
The broader European economy had to finance welfare programs, and in recent years, it has faced the fiscal burden related to the war in Ukraine. Its technology sector has not generally been able to compete with that of the US.
The Chinese renminbi
Despite its hegemonic ambitions, China does not appear to have the political will to allow a dramatic liberalization of capital flows in and out of the country, a key ingredient for a currency to become globally accepted.
Until 2015, there were widespread expectations that China’s economic growth and size would propel it to the status of an economic superpower, rivaling the US and the European Union.
However, Rogoff points to a decline in China’s long-term growth prospects in the last decade. He considers China subject to “the middle-income trap,” meaning, that financial crises eventually arrest spectacular growth (p. 96).
Today, China is still struggling with an overbuilt real estate sector, and its demographics — its low birth rate — have some parallels with Japan’s.
Rogoff also states, “China still trails in other areas, including the rule of law, the depth and liquidity of financial markets, and the pricing of goods” (p. 109).
Cryptocurrencies
Cryptocurrencies cannot compete with ‘legal tender’ national currencies, although they compete with fiat cash in the underground economy.
Based on recent estimates, underground activity, while significant, is unlikely to surpass legitimate transactions.
Governments have tolerated “the curse of cash” (a reference to the use of cash for illegal transactions), and Rogoff contends that governments can develop their central bank digital currencies as a technological alternative to the legitimate use of cash.
He also suggests that the instability in the pricing of cryptocurrencies detracts from their usability as money.
Even if the economics profession were to imagine a parallel crypto standard for ‘dark’ transactions, Rogoff argues that such a standard would pose the same problems as the gold standard (p. 187).
Gold standard regimes are subject to the vagaries of gold supplies in the hands of central banks issuing currencies backed by gold.
For cryptocurrencies to attain viability, they would have to erect parallel mechanisms to stabilize the underground economy, establish a lender of last resort, and be able to inflate the price level in an emergency.
These mechanisms are inconsistent with the libertarian philosophy promoted by crypto advocates.
Policy lessons
For countries like the Philippines, what lessons can be learned? Should we stay within the dollar bloc? How should we formulate our macroeconomic policies?
Given our shared history with the Americans, our trading relationships today, the current uncertainties in China’s economic prospects, and our being a part of Southeast Asia, I believe it pays to stay within the dollar bloc.
But in light of the Asian financial crisis of 1997-98 and the Tokyo Consensus that emerged in its aftermath, pegging to the dollar would not be advisable; instead, the central bank should go with either a ‘soft peg’ or a ‘managed float.’
Speculators in the foreign exchange market would have to behave as though the central bank either has an undisclosed exchange rate target, or has decided to let the exchange rate float.
In the past five years, the dollar-peso rate has fluctuated within a rather wide range, from a low of P59/$ to a high of P48/$.
What exactly is the Tokyo Consensus? Rogoff devotes an entire chapter to this topic. An earlier consensus, dubbed the Washington Consensus, was behind the IMF’s advice and policy conditions when it dealt with the Asian financial crisis.
Debtor countries criticized the Washington Consensus that favored capital account liberalization, ‘competitive’ exchange rates, and ‘austerity’ programs.
Asian countries saw the Tokyo Consensus as an antidote to the ‘painful’ aspects of the IMF programs.
Rogoff enumerates the elements of the Tokyo Consensus, the most important being that central banks would amass foreign reserves without any commitment to maintaining a fixed exchange rate.
While the reserves could be used to intervene in the exchange market, the main motivation was to avoid relying again on IMF financing.
The strategy is not costless. Reserves are mainly in US Treasury instruments that pay a lower interest return than on domestic debt. The idea was “to build up war chests so that they [the countries] could bail out their financial systems if needed” (p. 156).
In effect, the Asian central banks proposed a ‘do-it-yourself IMF program.’ Like the advanced countries, the middle-income countries of Asia would ‘graduate’ from using IMF resources.
The Tokyo Consensus also features the strengthening of domestic bank regulation to avoid homegrown banking crises.
Furthermore, governments would give their central banks ‘independence,’ meaning that they would have explicit powers to maintain price stability, or to target the inflation rate without having to bow to domestic political pressures.
The Consensus is not a panacea. The immutable laws of economics embodied in the famous Trilemma still have to be respected.
Citing Robert Mundell, Rogoff notes that under the Trilemma, countries can achieve only two of three goals — a fixed exchange rate, independent monetary policy, and open capital markets (p. 118). The last goal became desirable under the Washington Consensus for countries considered as ‘emerging markets.’
However, the ‘independent’ monetary policy part of the Tokyo Consensus means that a country’s central bank does not have to align its monetary policy with that of its main trading partners; consequently, the exchange rate would float.
Alternatively, a particular exchange rate target (kept secret) cannot be met without capital controls, such as on inflows.
Rogoff also reports on a rethinking of the Trilemma literature by Helene Rey who argues that because of ‘stampedes’ by foreign investors, a country that favors an independent monetary policy would still need capital controls; in short, “a floating exchange rate is not enough” (pp. 166-170).
Of course, we must consider the exchange rate policy as only one among the macroeconomic policies contemplated by the Philippines.
The stance of monetary policy today has been toward an easing, given the recent low inflation. In an important sense, monetary policy is simultaneously ‘independent’ (from an explicit exchange rate peg or political directives) but ‘dependent’ on the response of domestic inflation to exchange market pressures and self-inflicted policy ‘mistakes’ (such as when a central bank prematurely tightens or relaxes its monetary stance).
The fiscal and debt policies of the government today are possibly ‘neutral’ because the implied debt ratios over the near term do not call for concern on the part of the holders of government debt.
Conclusions
Rogoff has written a thoughtful and somewhat difficult book on the history of international money and what lies ahead. The thoughtfulness comes from his candid insider view of how government policy makers have played out their roles on the stage of international economics, a subject that has generally not been well understood for centuries. Rogoff’s stories feature very few loose ends.
Suppose countries did not pay attention to inflation and excessive debt issuance. In that case, they face a familiar refrain — the more things change, the more they remain the same, in the sense that the risk of financial crises remains.
That, to Rogoff, is the lesson to be learned from the seven decades since 1945, during which the gold-dollar standard gave way to a continuing struggle for ‘macroeconomic coordination’ among sovereign countries.
Today’s Filipino economic managers would be remiss in their ‘continuing education’ if they do not spend serious time in the weeds of Rogoff’s arguments.
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Author’s email: ORoncesval4@gmail.com; Bluesky: @dumaletter.bsky.social
