Towards a New International Monetary System

Abstract

One of the important reasons for the onset of the global financial crisis of 2008 has been that the international monetary system is US dollar-centric. In this chapter, this issue is discussed in detail. The current international monetary system or what is also called a “nonsystem” owes its existence to the collapse of the Bretton Woods System in 1971 when the USA discontinued conversion of US dollar into gold. In the current system, exchange rates are flexible and capital is mobile across countries. In recent years, international capital mobility has increased due to huge increase in the international trade and investment through multinational corporations, large increase in remittances and growth in outsourcing of business. In the present unipolar world, the US dollar is the most preferred currency in international trade and reserve building by the central banks. This creates a perpetual hunger for the national currency of a single country. In order to satisfy the huge worldwide demand for dollar, the US Federal Reserve has to follow an expansionary monetary policy. This reduces rates of interest and leads to reckless investment in risky assets, creation of bubbles, their inevitable bursting, and the resultant crises. In 1969, Special Drawing Rights (SDR) was created as an alternative unit of account for international payments. However, the SDR has not succeeded as an international currency for a variety of reasons which have been taken up in this chapter. Global financial crisis of 2008 exposed the problems of dollar-centric international monetary system. The world economy is no longer unipolar. The share of China and other emerging economies has increased in world GDP and trade. BRICS countries have held several meetings and emphasized the urgency of reforming the international monetary system in view of the multipolarity of the world economy.