The Evolving International Monetary System: Will Dollar Hegemony Outlive the Digital Revolution?

Abstract

Will the US dollar be replaced as the predominant global reserve asset? What are the international monetary system’s structural vulnerabilities, inherent flaws, and challenges? In this chapter, we discuss the past, present, and future of the international monetary system. Revisiting the history of the Bretton Woods system, including its origins, features, readjustment attempts, and eventual collapse, we explain why the current monetary order that flows from it is not sustainable. Since Nixon ended the convertibility of the US dollar to gold in 1971 leading to the end of the gold-standard era, the international monetary system has undergone tremendous changes and became a system without a hard anchor. In the process, the US dollar’s hegemony has been increasingly consolidated. Under the US dollar’s hegemony, the international monetary system has systemic imbalances between the United States and other countries, relies on the symbiotic relationship between China and the United States, and faces various threats ranging from expansionary US domestic fiscal policies to China’s economic transition and to geopolitical conflicts. Looking forward, digital currencies provide a convenient and efficient technical solution to guide reform of the international monetary system. Yet, any attempt to reform the current international monetary architecture cannot be successful without prudent thinking, reasonable adjustment methods, and mutual trust between China and the United States in international monetary cooperation.