Reserve Reform

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.

Second, the system is unstable, because it makes the major reserve currency’s value dependent on US macroeconomic policy and the vagaries of the US balance of payments and associated domestic deficits. Since the abandonment of gold-dollar parity in 1971, the world has experienced increasingly intense cycles in the value of the dollar and the US current account. The dollar has lost what any reserve asset should have: a stable value. The governor of China’s central bank recently emphasized this basic point.