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Europe's Dollar Envy

Currencies can become the focus not just for commercial transactions, but for diplomatic and political wrangles. When this happens, commercial transactions become more difficult and subject to greater uncertainty. The politicization of money during the interwar depression was economically devastating. But there have been more recent occurrences of nasty currency wars.

In the 1960's the international monetary order became the focus of a political tug-of-war. Each side had quite different theories and explanations of what was going on. The Europeans--in particular the French--complained about what General Charles de Gaulle termed the "exorbitant privilege" of the US dollar. The General and his monetary guru, Jacques Rueff, argued that the US used the dollar's status as the major reserve currency of the Bretton Woods fixed exchange-rate regime in order to run deficits and pay for its overseas military adventurism (at that time in Vietnam).

France responded with calls for monetary reform that would end the peculiar role of the dollar and tried to revive the largely discredited gold standard. Europeans began a long discussion of the advantages of monetary union, achievement of which would allow them to look the dollar in the face.

But from the American point of view, the international role of the dollar was a trap. Other countries could change their exchange rates, and in this way could maintain greater export competitiveness. The US government was powerless in the face of an undervalued yen, fueling the belief that the rest of the world was using the dollar to attack America's manufacturing base.