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The Search for a New Currency System - WSJ.com 1 of 2 http://online.wsj.com/article/SB10001424052748703957804575602933... Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.com See a sample reprint in PDF format. WORLD NEWS Order a reprint of this article now 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. View Full Image 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 11/15/2010 11:56 AM The Search for a New Currency System - WSJ.com 2 of 2 http://online.wsj.com/article/SB10001424052748703957804575602933... 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] Copyright 2010 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com 11/15/2010 11:56 AM