The international monetary system is a topic that encompasses a wide range of issues—reserve currencies, exchange rates, capital flows, and the global financial safety net, to name a few. Some are of the view that the current system works well enough. I take a less sanguine view. Certainly the world did not end with the crisis that began in 2008 and a recovery is under way. But, it is not the recovery we wanted—it is uneven, unemployment is not really going down, there are widening inequalities, and global imbalances are back. Reform of the international monetary system may be wide-ranging and complex. But concrete reforms are needed to achieve the kind of well-balanced and sustainable recovery that the world needs, and to help prevent the next crisis.
The dollar has been the cornerstone of the international monetary system since the Second World War. It is the most important reserve currency, accounting for at least two-thirds of reserve assets, according to the IMF’s Composition of Foreign Exchange Reserves database. Among central banks that do not report this information to the IMF, it is estimated (e.g. by Brad Setser) that 70 percent is held in dollar assets.
The bulk of foreign exchange transactions involve dollars, and significantly more trade gets settled in dollars than involves the United States. Goldberg and Tille examined 23 advanced and emerging economies in Asia and Europe and found that all settled a greater proportion of their trade in dollars than their trade with the United States. The divergence was particularly stark for emerging Asia, where trade with the United States only accounted for about 20 percent of total trade but the bulk of total trade was settled in dollars. ( “Vehicle Currency Use in International Trade,” Journal of International Economics, Issue 76, Vol. 2, pp. 177-192, December 2008).
The recent crisis has prompted an abundance of commentary on the future of the international monetary system and potential alternative reserve currencies. Those calling for a re-examination of the dollar’s role include Italian economy minister Giulio Tremonti, People’s Bank of China Governor Zhou Xiaochuan, Ousmène Jacques Mandeng of Ashmore Investment Management Limited, and Nobel Laureate Joseph Stiglitz. What does all this mean for the future of the international monetary system and the role of the dollar?