Who is in control of the international monetary system?

Abstract

Although the financial and economic crisis did not directly hit the international monetary system, it has lead to the rethinking of the overall architecture that underpins the world economy. Can the current system of floating currency blocs with dollar-based trade and reserves withstand the strains of the global adjustment ahead? It is time to consider alternatives. This article argues that the existing system needs to evolve into a multicurrency one in which a number of international currencies, ideally representing the main trading areas, have the function of storing value and providing the unit of measure. A multicurrency system would respond more flexibly to the demand for liquidity and would provide a way to diversify the accumulation of reserve assets. It is also more appropriate for the increasingly multipolar world economy. The article discusses how in today's larger and more integrated world economy the dependence on the dollar as the basis of both trade flows and financial reserves has become excessive, creating some fundamental imbalances. However, while the rationale for change is clear, the current system is locked in a form of stable disequilibrium where the status quo carries the lowest risk for most players in the short-term. Any abrupt move away from the dollar could trigger trade flow disruption and exchange value losses. Policy cooperation should keep the imbalances under control and manage the transition to a more stable system. The system will evolve, albeit gradually. Looking at the steps taken by some countries, notably China, there is the gathering impression that this decade is one of transition, rather than a ‘Bretton Woods moment’. Any reshaping will have to bring in the views of the ‘rising powers’, China in particular, and their concerns about the limitations of the existing system and the increasingly asymmetric burden of adjustment that it imposes.