Reforming the Global Reserve System

Abstract

The current global reserve system evolved out of the unilateral decision by the U.S. in 1971 to abandon the gold-dollar parity and convertibility of dollars for gold for governments and central banks established at Bretton Woods. Although other currencies can compete with the US dollar as international means of payments and potential foreign exchange reserve assets, this competition has been weak due to the “network externalities” in the use of currencies and the fact that the USA has by far the largest market for liquid Treasury securities. Thus, according to the International Monetary Fund (IMF) data on the composition of allocated foreign exchange reserves, in third quarter of 2013, 61.4% were held in US dollars, 24.2% in euros and 14.4% in other currencies. On top of that, over 80% of foreign exchange transactions are managed in US dollars. So, in a significant sense, the current system can be called a fiduciary dollar standard. The other feature is that alternative reserve currencies float against each other – an issue that links to the debate on the exchange rate system (or, rather, “non-system”), an issue that would not be discussed here.