The WSJ reports that People’s Bank of China Governor Zhou Xiaochuan has:
called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy.
This is not a new idea. In fact, it’s what John Maynard Keynes was out to accomplish at the 1944 Bretton Woods conference where the International Monetary Fund was created. Keynes wanted the IMF to issue a new global currency, the bancor. The U.S. thwarted that plan, although the IMF did later create something called “special drawing rights” that amounts to a sort of proto world currency.
Zhou’s proposal was treated in the WSJ and the NYT as another Chinese attack on the dollar, and I guess it is. But it also points the way toward a global monetary regime that, in theory at least, would better serve the long-term interests of the U.S. than the current dollar-denominated one.
The advantage of having your country’s currency as the world’s reserve currency is that you don’t really have to play by the rules: You can run big deficits financed by the rest of the world, you can spend more than you earn, and to a certain extent you can escape the consequences of your profligacy by devaluing your currency when you run into trouble. The obvious disadvantages are that running big deficits and spending more than you earn aren’t really great long-term economic strategies.
Meanwhile, that thing about escaping the consequences of profligacy by devaluing has its limits. At some point it will presumably stop working: The rest of the world will give up on you and pick another currency to keep its reserves in. Until that day happens, while your currency remains the global standard, you’ll struggle with issues of economic competitiveness and overindebtedness—because countries around the world are going to be more interested in buying your currency than anything else you produce. (I’m channeling Joe Stiglitz here, and he says he’s channeling Keynes.)
What Zhou is offering is an orderly way out of this quandary:
A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country’s currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
One big issue here, of course, is that by allowing a “super-sovereign” currency to take over the global role of the dollar, the U.S. would be ceding a bit of sovereignty to the IMF. My feeling is that we’ve already ceded that sovereignty to global financial markets, and giving the IMF the role of global central bank would actually improve our ability to control our destiny over the long run. But I sort of doubt that argument will go over too well in Congress.
Which raises the second big problem with any such global currency regime. The last two such regimes—the gold standard and the Bretton Woods system—collapsed in part because because of the unwillingness of the world’s biggest economic power, the U.S., to play by the rules. Who’s to say we—or China in a decade or three—will be willing to play by the new IMF rules Zhou is proposing when they don’t appear to serve the nation’s short-term interests?