Inadequacy of the Dollar as a World Currency: an Anglo-American Reflection

Antonio Mosconi
Research Department, Robert Triffin International

Mark Carney

The growing Challenges for Monetary Policy in the Current International Monetary and Financial System

Speech at the Jackson Hole Symposium, 2019

The current American nationalist policy, threatening the operations of international organizations promoted by the United States itself at the end of the Second World War, has rekindled the debate on the “exorbitant privilege” constituted by the use of the dollar, a national currency, as an international currency. The 75^th anniversary of the founding of the International Monetary Fund, now that the Bretton Woods order has been abandoned for half a century, was the occasion for several contributions to the reform of the international monetary system, some of them quite important.

Mark Carney was already known for his reflections on the green economy and finance. In 2015, he brought attention to the problem of stranded assets in relation to fossil fuels. As chairman of the Financial Stability Board (until 2018), he helped establish the Task Force on Climate-Related Financial Disclosures for understanding the financial risks related to climate change. In 2018, at the One Planet Summit in New York, he announced that climate-disclosures are becoming a dominant trend.

The speech given by him on August 23, 2019, at the Jackson Hole Symposium as Governor of the Bank of England and former Governor of the Bank of Canada, is exemplary in several respects: his fruitful blend of an economist's theory with a central banker's practice; his differing thought from that prevalent in the American financial world; the continuity and development along the lines indicated by Keynes (the bancor), Triffin (firstly the Special Drawing Rights of the International Monetary Fund (SDR), then the euro) and their successors for the adoption of an international currency not tied to a single State.

Mark Carney brings to the “Triffin dilemma” an argument supported by very interesting data: the dollar cannot serve as international currency because its financial use is disproportionately greater than the United States' interdependence with the real economy of many other countries, so that the dollar's financial exchange rate, when applied to the real world trade, causes painful distortions in particular to emerging and developing countries. The United States' share in world trade is 10% and in the world's gross product is 15%. Instead, 1/3 of the countries officially anchor their currencies to the dollar, 50% of the invoices in world trade are denominated in dollars, as well as 2/3 of the emerging countries' foreign debts, of the official monetary reserves and of the global bond-issues. Finally, 70% of the world gross product uses the dollar as the anchoring currency.

While the world economy has seen a realignment of the weight of the different regions, the dollar retains the same importance it had at the time of the collapse of the Bretton Woods system (1971). The role of the dollar has created a gigantic “liquidity trap”. Emerging countries have accumulated huge reserves in safe US dollar assets to protect themselves, in the absence of an adequate global safety net.

The dimensions of sustainable international imbalances and of a potential global economic growth have been reduced. In the short term, central bankers can make use at best of the flexibility allowed by inflation targeting. In the medium term, the structure of the current international monetary (non-) system can be improved. In the long term, however, we need to change the rules of the game. We cannot replace one hegemonic currency with another, because every unipolar system is inadequate in a multipolar world.

The current international monetary and financial system is based on two anachronistic hypotheses: that fluctuating exchange rates will absorb the global shocks and shield employment and domestic products from external developments; and that in such circumstances international cooperation can bring very limited benefits. These hypotheses are outdated due to three fundamental reasons: the impetuous growth of international interdependence, the abnormal weight of the dollar in invoicing (five times the amount of US imports), and finally the stress to the global economy caused by the growing asymmetry at the very heart of the international monetary and financial system.

The definitive solution to this problem, according to Mark Carney, can only be found in the adoption of an international currency independent of any sovereign state, such as Keynes' bancor. However, regrettably, he never mentions the euro, let alone its predecessor, the ECU (the Brexit climate has an impact also on the most serious analyses). Nor does he state that a basket of currencies, such as the one based on the IMF's Special Drawing Rights, could initially bring us closer to the international currency. Carney, instead, is inspired by the announced creation of Libra, proposed by Facebook and linked to a basket of currencies, and proposes a global electronic currency that “would need new rules”. We may add that many rules already exist, but an essential one should be added: the guarantee of the ratio 1 Libra = 1 SDR, to be provided by a global system of central banks.

Translated by Lionello Casalegno