Barry Eichengreen

The Bear of Bretton Woods

By Barry Eichengreen (chinadaily.com.cn)
Updated: 2011-04-12 11:21

In addition, in order for the SDR to become a true global currency, the IMF would have to be empowered to issue more of them in a crisis, much like the US Federal Reserve provided foreign central banks with $120 billion in emergency credits following the collapse of Lehman Brothers. In other words, the IMF would have to be given the powers of a global central bank. It seems unlikely that Ron Paul, the libertarian chairman of the US Senate Banking Committee, who doubts that even the US needs a central bank, would be inclined to agree.

Instead, what will ultimately replace today’s dollar-centric international monetary and financial system is a tripolar system organized around the dollar, the euro, and the Chinese renminbi. Despite all of the current wailing and gnashing of teeth in Europe about its future, the euro isn’t going anywhere. And China, for its part, is working energetically to internationalize its currency – and it is making faster progress than most people appreciate.

The world will be better off as a result. The existence of alternatives to the dollar will mean that the issuers of internationally used currencies will feel market discipline earlier and more consistently. When the US again shows signs of falling prey to financial excess, it will not receive as much foreign funding as freely as it has in the past. After all, central banks seeking to accumulate foreign-currency reserves will have alternatives to acquiring dollars, so foreigners won’t give America so much rope with which to hang itself.

The result will be a safer financial world. After all, the ultimate cause of the 2007-2009 financial crisis was the dangerous inconsistency between our multipolar global economy and its still dollar-dominated monetary and financial system.

The good news is that this will change over the coming decade, bringing international monetary arrangements back into line with economic realities. The bad news is that ten years is a long time. If recent history is any guide, salvation could still be three crises away.

Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and the author of Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.

Copyright: Project Syndicate, 2011. 

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