Power does not guarantee security. Preserving the global order is costly. Restraining the forces that aim at destabilizing the global order is even costlier. The fate of the dollar and the fate of global currency stability largely depend on the internal politics of superpowers as well as on the foreign policy paths that they choose. US foreign policy has evolved from limited power (1776-1870) to great power (late 19th century to 1945), and from superpower (1945-1990) to its unipolar hyperpower (1990-2014) period. The trajectory of the dollar has followed a similar path; however, the dates do not exactly coincide with the power’s trajectory. In the last ten years, an effort is underway (led by China and Russia) to change the balance of power as well as to limit the role that the dollar plays in international markets.
The notion that the US has had a tradition of isolationism is an illusion. The birth of the nation required foreign assistance provided by countries such as France. Moreover, the security and success of the States Union demanded international commerce and foreign relations that could accommodate the goals of expansion, growth, and wealth creation. Americans’ underlying faith in the nation’s destiny surpasses party ideology. In Jefferson’s words, the vision is for an “empire of liberty” destined to manifest itself across the continent and beyond. We can call such a vision a cornerstone reality/principle #1 of America’s foreign policy. The execution of such a vision requires a currency that accommodates freedom of commerce, hence the necessity to have a foreign policy anchored on preserving the status of the dollar.
Jefferson also rejected realpolitik and decried any traditional diplomacy which is empty of the new nation’s ideals. The dawn of the novus ordo seclorum/new world order required an enlightened diplomacy based on freedom that would serve the people and not special interests. We can call such a principle the dividend of peaceful free commerce for all, or principle #2.
The transition from weak to great power required two things: growth and taking advantage of global conditions. Rejecting European-style diplomacy that served the few is a necessary but not a sufficient condition to achieve the status of a great power. Such distinction also requires a dose of stable growth. The conflicts of the 19th century provided the means to conquer the continent and expand the nation’s power. This preserved the new nation’s goal of security through strength and growth, and we can think of it as foundational principle #3. However, such expansion can be volatile and unstable unless the nation demonstrates global leadership in moments of an international crisis. Welcome to World War I, and the leadership that the US provided following the re-election of Woodrow Wilson. Such leadership, however, requires a matching between means and goals. Unless the nation has an economic policy and currency that can advance such global intervention, chances are that not only will its goals be endangered but also that the previous three foundational principles will be canceled. Such matching can be called principle #4 of state crafting. The side-effect of such a principle is the fact that war may end up becoming the engine of finance.
The illusion/myth of America’s isolationism betrays a great nation’s founding aspirations of spreading liberty and the ethos of the mission that calls for imparting the blessings of freedom to others. John Quincy Adams and Henry Clay’s eloquent arguments of supporting overseas rebellions against tyrants and autocrats is a call to “benignant sympathy of our example” by creating a society at home worthy of emulation, as well as acting/intervening based on the principles of justice, truth, and fairness. We can call this principle #5, pragmatistic idealism practiced first by Benjamin Franklin, i.e. putting into practice what Jefferson called in the Declaration of Independence a “decent respect for the opinion of mankind.” Such a principle stands against any notion of amoral realism, as the policy of amoral realism is unsustainable and betrays the nation’s founding principles.
Pragmatistic idealism requires checks and balances, a.k.a. gridlock which can restrain delusions of omnipotence and abuses of truth and justice. The executive branch of the government needs to be limited by an independent legislative branch that has the nation’s (and not local) interests in mind. We can call this principle #6.
Finally (at least for this discussion), the nation’s power, influence, and impact around the world cannot be separated from the practice and execution of soft power through economic, financial, and commercial means. This is principle #7 in statecraft, given that geoeconomics is nothing but war by using economic instruments to achieve the nation’s goals. After all, Jefferson did not send troops to conquer territory that belonged to France. He simply bought it! Using the threat of sanctions, Lincoln prevented the British from supporting the Confederacy. However, such a principle, while aiming at the buildup of international alliances against rogue nations, cannot ignore the previous principles. An excellent example is President Eisenhower’s intervention in support of Egypt and against a modern traditional ally such as the United Kingdom, as he threatened Britain with the collapse of the British pound. And here comes the role of the dollar: The nation that controls the international reserve currency makes the rules, and those rules are respected and observed as long as the nation that controls with its currency the international flow of funds is perceived as a nation that honors justice and fairness.
Preserving the power that the US exerts on the world may require a radical commitment to its founding principles while reorganizing fiscal and foreign policy priorities. Unsustainable deficits that exacerbate the debt burden require restraint. A commitment to preserving the status of the dollar may require a mixture of fiscal discipline and monetary restraint that attracts capital without undermining the long-term viability of being able to achieve national objectives through the active – and not on an ad hoc basis which sends messages of a schizophrenic, unreliable, and non-committal policy – exercise of soft power which in turn sends messages of stability, loyalty, and consistency, rather than messages of confusion and of a purposeless mission.
At this juncture, the projection is that the dollar will be relatively stable for the foreseeable future not because of a disciplined policy but mainly because of the weaknesses of the other powers which face more serious economic problems as they exercise rogue policies (Russia, China) or face a leaderless reality (EU).
Statecraft and the Dollar’s Trajectory: From the Impulse of Passion to the Paths of Prudence
Author : John E. Charalambakis
Date : July 9, 2024
Power does not guarantee security. Preserving the global order is costly. Restraining the forces that aim at destabilizing the global order is even costlier. The fate of the dollar and the fate of global currency stability largely depend on the internal politics of superpowers as well as on the foreign policy paths that they choose. US foreign policy has evolved from limited power (1776-1870) to great power (late 19th century to 1945), and from superpower (1945-1990) to its unipolar hyperpower (1990-2014) period. The trajectory of the dollar has followed a similar path; however, the dates do not exactly coincide with the power’s trajectory. In the last ten years, an effort is underway (led by China and Russia) to change the balance of power as well as to limit the role that the dollar plays in international markets.
The notion that the US has had a tradition of isolationism is an illusion. The birth of the nation required foreign assistance provided by countries such as France. Moreover, the security and success of the States Union demanded international commerce and foreign relations that could accommodate the goals of expansion, growth, and wealth creation. Americans’ underlying faith in the nation’s destiny surpasses party ideology. In Jefferson’s words, the vision is for an “empire of liberty” destined to manifest itself across the continent and beyond. We can call such a vision a cornerstone reality/principle #1 of America’s foreign policy. The execution of such a vision requires a currency that accommodates freedom of commerce, hence the necessity to have a foreign policy anchored on preserving the status of the dollar.
Jefferson also rejected realpolitik and decried any traditional diplomacy which is empty of the new nation’s ideals. The dawn of the novus ordo seclorum/new world order required an enlightened diplomacy based on freedom that would serve the people and not special interests. We can call such a principle the dividend of peaceful free commerce for all, or principle #2.
The transition from weak to great power required two things: growth and taking advantage of global conditions. Rejecting European-style diplomacy that served the few is a necessary but not a sufficient condition to achieve the status of a great power. Such distinction also requires a dose of stable growth. The conflicts of the 19th century provided the means to conquer the continent and expand the nation’s power. This preserved the new nation’s goal of security through strength and growth, and we can think of it as foundational principle #3. However, such expansion can be volatile and unstable unless the nation demonstrates global leadership in moments of an international crisis. Welcome to World War I, and the leadership that the US provided following the re-election of Woodrow Wilson. Such leadership, however, requires a matching between means and goals. Unless the nation has an economic policy and currency that can advance such global intervention, chances are that not only will its goals be endangered but also that the previous three foundational principles will be canceled. Such matching can be called principle #4 of state crafting. The side-effect of such a principle is the fact that war may end up becoming the engine of finance.
The illusion/myth of America’s isolationism betrays a great nation’s founding aspirations of spreading liberty and the ethos of the mission that calls for imparting the blessings of freedom to others. John Quincy Adams and Henry Clay’s eloquent arguments of supporting overseas rebellions against tyrants and autocrats is a call to “benignant sympathy of our example” by creating a society at home worthy of emulation, as well as acting/intervening based on the principles of justice, truth, and fairness. We can call this principle #5, pragmatistic idealism practiced first by Benjamin Franklin, i.e. putting into practice what Jefferson called in the Declaration of Independence a “decent respect for the opinion of mankind.” Such a principle stands against any notion of amoral realism, as the policy of amoral realism is unsustainable and betrays the nation’s founding principles.
Pragmatistic idealism requires checks and balances, a.k.a. gridlock which can restrain delusions of omnipotence and abuses of truth and justice. The executive branch of the government needs to be limited by an independent legislative branch that has the nation’s (and not local) interests in mind. We can call this principle #6.
Finally (at least for this discussion), the nation’s power, influence, and impact around the world cannot be separated from the practice and execution of soft power through economic, financial, and commercial means. This is principle #7 in statecraft, given that geoeconomics is nothing but war by using economic instruments to achieve the nation’s goals. After all, Jefferson did not send troops to conquer territory that belonged to France. He simply bought it! Using the threat of sanctions, Lincoln prevented the British from supporting the Confederacy. However, such a principle, while aiming at the buildup of international alliances against rogue nations, cannot ignore the previous principles. An excellent example is President Eisenhower’s intervention in support of Egypt and against a modern traditional ally such as the United Kingdom, as he threatened Britain with the collapse of the British pound. And here comes the role of the dollar: The nation that controls the international reserve currency makes the rules, and those rules are respected and observed as long as the nation that controls with its currency the international flow of funds is perceived as a nation that honors justice and fairness.
Preserving the power that the US exerts on the world may require a radical commitment to its founding principles while reorganizing fiscal and foreign policy priorities. Unsustainable deficits that exacerbate the debt burden require restraint. A commitment to preserving the status of the dollar may require a mixture of fiscal discipline and monetary restraint that attracts capital without undermining the long-term viability of being able to achieve national objectives through the active – and not on an ad hoc basis which sends messages of a schizophrenic, unreliable, and non-committal policy – exercise of soft power which in turn sends messages of stability, loyalty, and consistency, rather than messages of confusion and of a purposeless mission.
At this juncture, the projection is that the dollar will be relatively stable for the foreseeable future not because of a disciplined policy but mainly because of the weaknesses of the other powers which face more serious economic problems as they exercise rogue policies (Russia, China) or face a leaderless reality (EU).