The Dollar’s Last Days?

CAMBRIDGE – Zhou Xiaochuan, the governor of the People’s Bank of China, recently suggested that replacing the dollar with the International Monetary Fund’s Special Drawing Rights as the dominant reserve currency would bring greater stability to the global financial system. The idea of reforming the system by introducing a supranational reserve currency is also, it appears, supported by Russia and other emerging markets. And a United Nations advisory committee chaired by the Nobel laureate Joseph Stiglitz has argued for a new global reserve currency, possibly one based on the SDR.

Transforming the dollar standard into an SDR-based system would be a major break with a policy that has lasted more than 60 years. The SDR was introduced 40 years ago to supplement what was then seen as an inadequate level of global reserves, and was subsequently enshrined in the IMF’s amended Articles of Agreement as the future principal reserve asset.

But the world soon became awash in dollars. So, instead of becoming the principal reserve asset of the global system, the proportion of SDRs in global reserves shrank to a tiny fraction, rendering the SDR the monetary equivalent of Esperanto.

Although the euro, created in 1999, turned out to be a more serious competitor to the dollar, its share in total international reserves has probably remained below 30%, compared to 65% for the dollar (these shares are in part estimates, as China, the world’s largest holder of reserves, does not report the currency composition of its holdings).