It is symbolic that the recent BRICS summit in Fortaleza, Brazil, took place exactly seven decades after the Bretton Woods Conference that created the International Monetary Fund and the World Bank. The upshot of the BRICS meeting was the announcement of the New Development Bank, which will mobilize resources for infrastructure and sustainable development projects, and a Contingent Reserve Arrangement to provide liquidity through currency swaps.<\/p>\n
The Bretton Woods Conference marked one of history\u2019s greatest examples of international economic cooperation. And while no one can say yet whether the BRICS\u2019 initiatives will succeed, they represent a major challenge to the Bretton Woods institutions, which should respond. Rethinking the role of the US dollar in the international monetary system is a case in point.<\/p>\n
One key feature of the Bretton Woods system was that countries would tie their exchange rates to the US dollar. While the system was effectively eliminated in 1971, the US dollar\u2019s central role in the international monetary system has remained intact \u2013 a reality that many countries are increasingly unwilling to accept.<\/p>\n
Dissatisfaction with the dollar\u2019s role as the dominant global reserve currency is not new. In the 1960s, French Finance Minister Val\u00e9ry Giscard d\u2019Estaing famously condemned the \u201cexorbitant privilege\u201d that the dollar\u2019s status bestowed upon the United States.<\/p>\n
The issue is not merely one of fairness. According to the Belgian economist Robert Triffin, an international monetary system based on a national currency is inherently unstable, owing to the resulting tensions among the inevitably divergent interests of the issuing country and the international system as a whole.<\/p>\n
Triffin issued his warning more than 50 years ago, but it has recently gained traction, as China\u2019s rise has made the world increasingly disinclined to tolerate the instability caused by a dollar-denominated system. The solution, however, lies not in replacing the dollar with the renminbi, but in strengthening the role of the world\u2019s only truly global currency: the IMF\u2019s Special Drawing Rights.<\/p>\n
Following the creation of SDRs in 1969, IMF members committed to make them \u201cthe principle reserve asset in the international monetary system,\u201d as stated in the Articles of Agreement. But the peculiar way in which SDRs were adopted limited their usefulness.<\/p>\n
For starters, the separation of the IMF\u2019s SDR account from its general account made it impossible to use SDRs to finance IMF lending. Furthermore, though countries accrue interest on their holdings of SDRs, they have to pay interest on the allocations they receive. In other words, SDRs are both an asset and a liability, functioning like a guaranteed credit line for the holder \u2013 a sort of unconditional overdraft facility.<\/p>\n
Nonetheless, SDRs have proved to be useful. After initial allocations in 1970-1972, more were issued to increase global liquidity during major international crises: in 1979-1981, in 1997, and, in particular, in 2009, when the largest issue \u2013 the equivalent of $250 billion \u2013 was made.<\/p>\n
While developed countries, including the US and the United Kingdom, have drawn on their allocations, the major users have been developing and, in particular, low-income countries. In fact, this is the only way in which developing countries (China aside) share in the creation of international money.<\/p>\n
Several estimates indicate that, given the additional demand for reserves, the world could absorb annual allocations of $200-300 billion or even more. This has prompted many \u2013 including People\u2019s Bank of China Governor Zhou Xiaochuan; the United Nations-backed Stiglitz Commission; the Palais-Royal Initiative, led by former IMF Managing Director Michel Camdessus; and the Triffin International Foundation \u2013 to call for changes to the international monetary system.<\/p>\n
In 1979, the IMF economist Jacques Polak, who had been part of the Dutch delegation at the Bretton Woods conference, outlined a plan for doing just that. His recommendations include, first and foremost, making all of the IMF\u2019s operations in SDRs, which would require ending the separation of the IMF\u2019s SDR and general accounts.<\/p>\n
The simplest way to fulfill this vision would be to allocate SDRs as a full reserve asset, which countries could either use or deposit in their IMF accounts. The IMF would use those deposits to finance its lending operations, rather than having to rely on quota allocations or \u201carrangements to borrow\u201d from members.<\/p>\n
Other provisions could be added. To address developing countries\u2019 high currency demands, while enhancing their role in the creation of international money, a formula could be created to give them a larger share in SDR allocations than they now receive.<\/p>\n
The private use of SDRs could also be encouraged, though that would likely be met with strong opposition from countries currently issuing international reserve currencies, especially the US. Keeping SDRs as pure \u201ccentral bank money\u201d would eliminate such opposition, enabling them to complement and stabilize the current system, rather than upend it.<\/p>\n
Just as the Bretton Woods framework restored order to the global economy after WWII, a new monetary framework, underpinned by a truly international currency, could strengthen much-needed economic and financial stability. Everyone \u2013 even the US \u2013 would benefit from that.<\/p>\n
By Jos\u00e9 Antonio Ocampo, former United Nations Under-Secretary-General for Economic and Social Affairs and former Finance Minister of Colombia, is Professor and Member of the Committee on Global Thought at Columbia University.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" It is symbolic that the recent BRICS summit in Fortaleza, Brazil, took place exactly seven decades after the Bretton Woods Conference that created the International Monetary Fund and the World Bank. The upshot of the BRICS meeting was the announcement of the New Development Bank, which will mobilize resources for infrastructure and sustainable development projects, … Continue reading “Why the world needs a new reserve currency”<\/span><\/a><\/p>\n","protected":false},"author":2961,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[492],"tags":[650,5348,9745,9420,8940,9746,9747],"class_list":["post-15272","post","type-post","status-publish","format-standard","hentry","category-opinion","tag-brazil","tag-bretton-woods","tag-brics-summit","tag-fortaleza","tag-international-monetary-system","tag-new-development-bank","tag-us-dollar"],"cc_featured_image_caption":{"caption_text":false,"source_text":false,"source_url":false},"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/praag.org\/index.php?rest_route=\/wp\/v2\/posts\/15272","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/praag.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/praag.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/praag.org\/index.php?rest_route=\/wp\/v2\/users\/2961"}],"replies":[{"embeddable":true,"href":"https:\/\/praag.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=15272"}],"version-history":[{"count":1,"href":"https:\/\/praag.org\/index.php?rest_route=\/wp\/v2\/posts\/15272\/revisions"}],"predecessor-version":[{"id":15273,"href":"https:\/\/praag.org\/index.php?rest_route=\/wp\/v2\/posts\/15272\/revisions\/15273"}],"wp:attachment":[{"href":"https:\/\/praag.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=15272"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/praag.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=15272"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/praag.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=15272"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}