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NOVEMBER 9, 2010
The Search for a New Currency System
Dollar's Reserve Role Causes Angst, but Alternatives Fall Flat; Some Seek a Multicurrency Option
By DAVID WESSEL
More than 60 years after the victors in World War II devised new rules for currencies at Bretton Woods, N.H., and more than 30 years after Richard
Nixon blew up that regime, the search is on for a new way to manage the tensions that come from countries using their own national currencies.
But there is more agreement on the shortcomings of the current regime, in which currencies trade relatively freely against each other, than on what
should replace it.
The arguments aren't new. They recall debates at Bretton Woods between Britain's John Maynard Keynes and the U.S.'s Harry Dexter White. Back then,
the U.S. had a big trade surplus, Britain was a big borrower and global financial heavyweight and China was inconsequential. Today, the U.S. has the big
trade deficit and is the big borrower, China has the big surplus and Britain is on the sidelines.
Dividing Line
The latest spark for angst about global currencies was the Federal Reserve's decision to print $600
billion more to buy U.S. Treasurys. A byproduct of that decision is likely to be a weaker U.S. dollar.
Despite Fed Chairman Ben Bernanke's efforts to explain that the move was intended to strengthen the
U.S. economy to the benefit of all, he drew criticism from many quarters—including Monday from
Republican Sarah Palin and the prime minister of Luxembourg. Posturing officials around the world in
advance of this week's summit of leaders from the Group of 20 major economies in Seoul have added to
the fireworks.
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Since Fed Chairman Bernanke's remarks on
quantitative easing in late August, major G-20
currencies have risen sharply against \the
U.S. dollar—with one notable exception—the
yuan. Percentage change in the number of
U.S. dollars each currency buys.
The president of the World Bank, Robert Zoellick, a veteran of both Bush administrations, jumped into
the fray Monday with an eyebrow-raising op-ed piece in the Financial Times that suggested a back-tothe-future approach: Tying global currencies to gold.
"The scope of the changes since 1971 certainly matches those between 1945 and 1971 that prompted the
shift from Bretton Woods," he wrote. "Although textbooks may view gold as the old money, markets are
using gold as an alternative monetary asset today."
While a return to the gold standard is unlikely—and, in the view of scholars who see the rigidities of the
gold standard as a contributor to the Great Depression, unwise—the suggestion underscored widespread
discomfort with today's arrangements.
At its root, the problem is that the use of the dollar for trade in everything from bonds to oil gives the currency an outsize role in the world economy, and
makes the world economy sensitive to U.S. domestic monetary policy. As Nixon Treasury Secretary John Connally famously put it: "Our currency, your
problem."
The French, who chair the G-20 next year, have vowed to devise an alternative.
"It's in everyone's interest that the U.S. continues to grow, but everyone is aware of their responsibilities and no one wants excessive volatility on
currency markets," an official from the Élysée Palace told reporters recently. One solution, the French said, is to diversify global reserves away from the
dollar and create a new "framework of coordination."
Back in 1969, amid tension between the dollar's peg to gold and what was—by the standards of the day—a large budget deficit, an alternative to the
dollar was created. Known as Special Drawing Rights, and overseen by the International Monetary Fund, this dollar substitute plays little role outside
official transactions.
In 1971, President Nixon severed the dollar's tie to gold altogether, moving the world toward a regime in which markets, with occasional intervention
from governments, set exchange rates in nearly every major economy—except China.
While the U.S. isn't buying or selling dollars on foreign-exchange markets to influence the dollar's value, a dozen countries are intervening to depress
currencies that already are undervalued, according to a new analysis by the Peterson Institute for International Economics in Washington. The
countries, which the think tank says should be "censured" by the G-20, include China, Malaysia, Singapore, Switzerland and Taiwan. The institute says
intervention by several of the countries—including Brazil, Indonesia, Israel, Japan, South Korea and Thailand—is justified because their currencies are
overvalued.
Today's debate, and speculation that the U.S. has peaked as a world economic power, have led to predictions that the dollar inevitably will surrender its
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role as the world's reserve currency.
So far, though, there doesn't appear to be a better alternative.
Markets aren't confident that the euro will exist in a decade's time, markets for Japanese yen aren't nearly large enough or liquid enough, and the
Chinese are hesitant to assume the hassles that accompany the use of a country's currency as a store of value and medium of exchange around the world.
Barry Eichengreen, an economic historian at the University of California at Berkeley, argues that the world may end up with more than one full-fledged
international currency. The old logic—that importers and exporters want a common unit of account and that both official and private investors will rely
on the currency with the most liquid markets—is outdated, he says.
The notion that importers, exporters and bond traders all need to use the same currency "holds less weight in a world where everyone has a mobile
phone that can compare currency values in real time," he says. The global economy is now so big "there is now room for deep and liquid markets in more
than one currency."
And then there's history. Before 1914, there were three international currencies: the British pound, the French franc, and the German mark.
—Nathalie Boschat
contributed to this article.
Write to David Wessel at [email protected]
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