NEW YORK – Both China and the United Nations Commission on Reforms of the International Monetary and Financial System have called for a new global reserve system. That issue should be at the top of the agenda when the IMF’s International Monetary and Financial Committee next meet.
The essential idea is quite simple: in the long run, an international monetary system cannot be built on a national currency – a point made a half-century ago by the Belgian-American economist Robert Triffin. Recognition of this fundamental problem was the reason why the IMF’s Special Drawing Rights (SDRs) were created in the 1960’s.
The dollar standard with which the world has lived since the early 1970’s has three fundamental flaws. First, as with all systems that preceded it, it puts the burden of adjustment on deficit countries, not on surplus countries. The main exception is the United States, which, thanks to its reserve currency status, has so far been able to finance its deficit by issuing dollar liabilities that are held by the rest of the world.