From the November/December issue of The National Interest.
THE DOLLAR is in trouble. That's clear, and it's been true for a while.
The cornerstone of the global economic system has long been the greenback. In the aftermath of the Vietnam War and the oil shocks that brought on inflation, the value of the dollar relative to other currencies could not be maintained, so countries moved away from pegging their currencies to America's. But still, the almighty dollar was used by countries all over the world for their reserves. The reserves provided backing for the currency and the country. They were a bank account that could be drawn upon in times of need. If oil prices shot up, a crop failed or lenders demanded their money back, there was a stockpile of money that could be used.
There was a longtime confidence in the dollar, even more when then-Chairman of the Federal Reserve Paul Volcker brought down inflation in the early '80s. The dollar was a good "store of value." And the fact that others were willing to hold American dollars was a big advantage to the United States-it could borrow cheaply abroad.
To assure the dollar's standing, by the '90s, America officially had a strong-dollar policy. Speeches by then-Secretary of the Treasury Robert Rubin affirmed our determination to maintain the value of the dollar. And for much of the period, the dollar was indeed "strong." But it had little to do with the speeches, though I sometimes suspect not only that the secretary of the treasury but also the financial markets thought so.