Establishing an International Reserve Currency System with Checks and Balances

Abstract

The current US dollar-based international monetary system was formed after the US’s departure from the gold standard caused the collapse of the Bretton Woods System. The US dollar, as a sovereign currency, is issued in accordance with the needs of the domestic economy of the United States. The US dollar is a major international reserve currency. From the perspective of achieving robust growth of the global economy, the supply of US dollars should not only satisfy the demand of international economic activities for the currency, but also avoid excessive virtualization—the conversion of physical and tangible things into virtual things, that could trigger fluctuations in international markets. Thus, the role of the US dollar in the global economy inevitably contradicts with the sovereign nature of its monetary policies. How can this contradiction be resolved? A return to the gold standard is surely out of the question, and the creation of a super-sovereign currency presents its own set of unique challenges. However, one feasible and good option is to establish a multiple currency system with built-in restraint mechanisms resting on three main pillars—the US dollar, the euro, and the yuan, and consisting of several other major currencies.