Many nations have long regarded the dominant international role of the dollar as bestowing an “exorbitant privilege” on the US. But the privilege has now become a burden. It is time for the US to anticipate, and begin to build, an era in which there will be several global currencies to rival its own.

Seen from abroad, the dollar’s role provides automatic financing for US external imbalances and enables it to live beyond its means. At home it is understandable that US politicians, with their short-run time horizons, welcome this opportunity to evade needed discipline. But such pressure from abroad can be constructive in promoting needed adjustment.

The free fall of the dollar in the late 1970s forced the US to tighten monetary policy and address its budget deficits, commencing the correction of double-digit inflation. In the mid-1980s, large current account deficits and a sharp dollar decline helped produce initial cuts in budget deficits. Most importantly, the recent crash came after record imbalances had seen huge capital inflows into the US, keeping monetary conditions loose and interest rates low.