In three different places there is an interesting discussion of this problem in Robert Gilpin's The Challenge of Global Capitalism: The World Economy in the 21st century (Princeton, 2000). Here is some of it:
"The intl role of the dollar has conferred a nubmer of concrete economic and political benefits on the US that it would forfeit if the dollar were to lose its status as the world's key currency. The intl demand for dollars has meant that the US has been able to finance its huge and continuing trade/payments deficit since the early 1980s at a minimal cost. IN effect, the US govt has been able to assume that other countries would automatically finance the huge American intl payments deficit because others, needing dollars to conduct their intl business, did not demand high interest rates. Moreover, the US has been able to borrow in its own currency and thus avoid exchange rate risks [that also allows for the US to inflate away its debt, and the devaluation of the dollar did indeed reduce the debt owed by the US while simultaneously imposing heavy costs on Japanese and other lenders in the 1990s]. Most of the dollars in circulation are overseas in the hands of non Americans; this so called 'dollar overhang' of about $265 bn is the equivalent of an interest free loan to the US extimated to be worth about $13 bn in saved interest payments."
Writing about loss of confidence in the dollars in the late 60s onward, Gilpin notes:
"America's cold war allies, fearing that a collapse of the dollar would force the US to withdraw its forces from overseas and to retreat into political isolation, agreed to hold overvalued dollars. ALso such export oriented economies as W Germany and, at a later date, Japan wished to keep access to the lucrative American market.
"Throughout the postwar era the US always had one primary partner helping it to defend the dollar and hence the US intl position. In the early postwar period, the American position and support for the dollar were based on cooperation with the British; this 'special relationship' begun between the First and Second World Wars, had been solidified by wartime experience. The Anglo Saxon worked together to frame the Bretton Woods System and reestablish the liberal intl economy. By the late 1960s, however, the relative decline of the British economy forced Great Britain to pull away from its close partnership with the US
"W Germany then replaced G Bri as the formost economic partner of the US and as the mamor supporter of the dollar. Throughout the Vietnam War and into the 1970s, the Germans supported American hegemony by holding dollars and buying American govt securities. Inflationary and other consequences of this new special relationship weakend it in the mid 1970s and eventually led to a fracture in the late 1970s when the Germans refused to support President Carter's economic policies; the Germans then joined the French to sponsor the European Monetary System. Creation of this 'zone of stability' in W Europe was the first of many efforts to isolate the European economies from the wild fluctuations of the dollar.
"In the 1980s the Germans were replaced by the Japanese when, through their investments in the US, the Japanese provided financial backing for Reagan's economic and military policies. In the 1990s, sporadic informal cooperation among American, German, and Japanese central banks supported the intl role of the dollar. This cooperation continued largely due to fear of what would happen to the intl economic and political system if the monetary system were to break down."
see pp. 60-1, 120-21, 222-225 ________________
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