The most basic element of the global system is the choice of the means of payment in
cross-border transactions. It is an element that has been at the centre of the incremental
process that determined international financial and monetary architecture in the past but
slipped into non-priority status as a focus for reform after the collapse of the Bretton
Woods regime in the early 1970s. President Richard Nixon’s decision to end the dollar’s
convertibility into gold ushered in a new international monetary system in which
international payments would be made by private banks in the national currencies of the
so-called ‘strong’ currency countries rather than exchanges of gold by central banks. The
value of the currency most used in these transactions—the US dollar—was no longer fixed
in relation to gold. After 1973, it was allowed to ‘float’ with its value determined by changes
in the supply and demand for the currency.
Since 1973, the dollar has had its ups and downs: a substantial fall at the end of the
1970s, a large appreciation beginning in 1983, an engineered decline after 1985 and
a period of steady strength from 1994 until 2002. In the 1990s, the dollar’s dominant role
in the global economy was unchallenged. Measures of that dominance included the rising
amount of dollar debt owed both to foreign and domestic creditors by borrowers in
countries other than the USA, the share of dollar assets in international reserve holdings,
the amount of US currency held and exchanged outside the USA by residents of other
countries and the impact of changes in US interest rates and the value of the dollar on
developments in other economies around the world.
While the key-currency status of the dollar appeared to offer significant advantages for
the USA, questions about its sustainability have been raised almost since its inception. Any
country that issues the global medium of exchange will experience capital inflows and the
resulting investments in its credit instruments will increase the availability of credit and
allow its residents to spend more and save less. But the steady stream of capital inflows can
only continue if the key currency country is able or willing to run the trade deficits that
allow other countries to earn the currency they hold as international reserves. Over time,
growing imbalances between the external debt of the key currency country and the
surpluses of other countries tend to push the system to breaking point. The ballooning
internal debt of the reserve currency country—particularly of its household sector—strains
its capacity to import and undermines the value of its currency both literally and in terms of
its role in the global economy.
So far, concerns about global payments imbalances have provoked little interest in
monetary reform. There has been a widespread assumption that, after this period of
economic and financial turmoil has passed, the euro will increase its share in the
international monetary system and the current strong-currency regime will continue. But
Europe is unlikely to assume the US role of importer of last resort and if no country or region
is willing to run the trade deficits that provide the opportunity for other countries to earn the
preferred reserve currency, a global system based on national currencies cannot continue.
Over the next decade, it will either be replaced by conscious planning or transformed by the
effort to adapt to the ever-larger crises that are fuelled by an unstable international monetary
regime.
This paper is addressed to those who are likely to be involved in discussing and
determining what might be reasonable objectives and institutional structures for a new
international monetary system. It assumes that policymakers and members of nongovernmental
organisations interested in this issue will benefit from a brief—admittedly
simplified—overview of past systems and how they have come into being. While there are
many outstanding historical analyses of past systems, the focus here is on institutional
634 J. D’Arista
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structures that have had, and are likely to continue to have, dominant roles in shaping
international monetary developments. The overview of those developments is intended to
provide a context for some of the reform ideas that emerged during and after the discussions
at Bretton Woods and some of the proposals that have been offered subsequently that are
part of current discussions. It concludes with an outline of three proposals by the author
intended to expand the debate on the international monetary aspect of the current crisis in
the global system.