Edited by Thomas Oatley and W. Kindred Winecoff
Chapter 4: The political economy of the contemporary dollar standard
The world economy is based on a dollar standard. The dollar is the currency unit in which traded commodities - from aluminum to zinc - are priced on most of the world's commodity exchanges. The dollar is the currency most often used to settle international transactions, even when an American resident is not one of the parties. Almost half of the world's governments peg their currencies to the dollar, all governments accumulate dollars as foreign exchange reserves, and most hold on average more than half of their reserves in the dollar. The dollar is thus used by more people and by more governments for more purposes than any other currency. The world economy has rested on this dollar standard for almost 70 years. This dollar standard has powerfully shaped international politics in the post-war era. At the most basic, the dollar's central international role has enabled the United States (US) to extend power abroad - military as well as economic - at relatively low cost. For instance, the dollar standard facilitated US financing of the Vietnam War during the 1960s and the War on Terror during the 2000s. The US's reliance upon this exorbitant privilege to support its foreign policy objectives has contributed to the emergence of large and persistent global imbalances and associated financial instabilities that have driven the post-war agenda of international economic management.
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