Managing a Multiple Reserve Currency World

Reforming the international monetary system is a game that any number can play. The second half of the 19 th century saw a series of international monetary conferences designed to place the leading European countries on a common monetary standard. The 1920s saw the Brussels and Genoa Conferences. 1944 saw Bretton Woods. 1967 saw the creation of Special Drawing Rights, which US Treasury Secretary Henry Fowler hailed as “the most ambitious and significant effort in the area of international monetary affairs since Bretton Woods.” 1968 saw the creation of the two-tier gold market, which President Johnson welcomed as “the most significant reforms of the international monetary system since Bretton Woods.” 1971 saw the Smithsonian Agreement, which President Nixon lauded as “the most significant monetary achievement in the history of the world.” The point being, of course, that none of these international agreements fundamentally changed the trajectory of the international system. The most striking feature of the international monetary system from an historical perspective is continuity rather than change. Over this period the international system evolved from a gold standard to a gold exchange standard, to a gold-dollar standard, and then to a dollar standard. It is evolving now into a multiple reserve currency system. International monetary conferences and official initiatives can influence the system at the margin, both for better or for worse, but the “actually existing system” (to invoke language derived from a very different context) reflects a powerful underlying market logic. It is the thesis of this paper that a multiple reserve currency system is coming. The system for which we need to prepare is one in which the dollar, the euro and the renminbi will all be consequential international and reserve currencies. The international monetary system is growing more multipolar because the world economy is growing more multipolar. After World War II, when the United States (US) accounted for the majority of the industrial production of the non-Soviet world, it made sense that the dollar was the principal unit in which exporters and importers invoiced and settled their trade, in which international loans were extended, and in which central banks held their reserves. But this situation makes less sense today when the US accounts for only some 20 per cent of the combined output of countries engaged in international transactions. Because habits die hard, the dollar continues to play a disproportionately important role. But simply because this is true today does not mean that it will be true tomorrow. Countries that trade with and borrow from the euro area will increasingly seek to hold euros as reserves. Countries that trade with and borrow from the PRC will similarly seek to hold renminbi, if not today then in the not-too-distant future.