Theorizing dollar hegemony, Part 1: the political economic foundations of exorbitant privilege

By Thomas Palley

PKES Working Paper 2220

August 2022, revised September 2022

This paper explores dollar hegemony, emphasizing it is a fundamentally political economic phenomenon. Dollar hegemony rests on the economic, military, and international political power of the US and is manifested through market forces. The paper argues there have been two eras of dollar hegemony which were marked by different models. Dollar hegemony 1.0 corresponded to the Bretton Woods era (1946-1971). Dollar hegemony 2.0 corresponds to the Neoliberal era (1980-Today). The 1970s were an in-between decade of dollar distress during which dollar hegemony was reseeded. The deep foundation of both models is US power, but the two models have completely different economic operating systems. Dollar hegemony 1.0 rested on the trade and manufacturing dominance of the US after World War II. Dollar hegemony 2.0 rests on the Neoliberal reconstruction of the US and global economies which have made the US the center of global capitalism and the most attractive place to hold capital. It is a financial model and intrinsically connected to Neoliberalism. Consideration of dollar hegemony leads to two further questions. One is whether there is a better way of organizing the world monetary order, which is associated with debate about the possibility of a new Bretton Woods. The other is what is the future of dollar hegemony?

Keywords: Dollar hegemony, Neoliberalism, power, currency competition, capital mobility, Bretton Woods

JEL classification: F00 F02 F30 F33