Emerging states such as China, Russia, and Brazil have finally had enough of the rule of the dollar. When Alistair Darling meets his counterparts at the G20 finance ministers' meeting this weekend, he should join them and right this "exorbitant privilege" that allows US overconsumption to be subsidised by the rest of the world.
The centrality of the dollar was built into the postwar Bretton Woods economic system, but in the early 1970s Europeans became concerned that the US, by printing money to fund the Vietnam war, was endangering their own dollar holdings, which were losing value compared to gold. In 1971 a French battleship arrived in New York full of dollars to exchange for gold, with the British following suit.
Four days later, President Nixon took radical action. The "Nixon Shock" was that from then on the dollar would not be linked to the value of gold. Rather the dollar was the new gold – and it alone was used to facilitate trade, measure international prices and allow countries to build up protection for their economies.
Following the Asian financial crisis of 1997, dollars become increasingly important to developing economies. Burned by their experience of taking International Monetary Fund (IMF) loans and the devastating impact of the economic conditions that institution imposed on them, they started buying dollars (in the form of US Treasury bonds) as an insurance policy against ever having to go to the IMF again.
In effect this meant that poor countries were, and still are, lending money to the US at very low rates of interest. Rather than ploughing money into their own economies, they are fuelling consumption in the richest country on earth. In 2007 total dollar reserves held by developing countries amounted to $3.7tn (£2.3tn).
Radical developing world leaders such as Hugo Chávez have long bemoaned the impact of "dollar imperialism", especially the pricing of oil in dollars, which means that countries can't buy oil without propping up the US economy. But he has now been joined by China, fearful of the collapse in value of its own massive reserves estimated at nearly $2tn, and Nobel-laureate Joseph Stiglitz, who recently chaired a UN commission that recommended the replacement of the dollar as global reserve.
Last week Stiglitz told Americans that it was not merely that "there is something a little unseemly about poor countries lending the United States trillions of dollars, now at an interest rate of close to zero" but it also damaged the US because "we are exporting T[reasury]-bills rather than automobiles, and exporting T-bills doesn't create jobs."
Reformers are not asking for the dollar to be replaced by an alternative national currency. That would simply tie the global reserve to the domestic politics of a different country. But they do believe the IMF's own "currency" known as special drawing rights (SDRs) could show the way to a better solution.
SDRs give countries a level of theoretical reserves that can be traded for hard currency on payment of interest. Last week the IMF took the unusual step of issuing $250bn worth of SDRs at the behest of the G20 as a way of helping ease the global economic crisis.
But for SDRs to play the role of global reserve currency would require that they be controlled by a very different institution from the current IMF. As things stand, SDR issues are rare and when they are made they reflect the voting share of countries in the IMF. Hence of last week's $250bn, less than $100bn will go to developing countries and a measly $19bn to low income countries. The IMF ignored civil society pressure that the distribution should be fairer, that interest rates for use of SDRs by low income countries be eliminated and that transfer of SDRs from rich to poor countries be encouraged.
But this doesn't mean the IMF's action has nothing useful to offer. A new institution – a global reserve bank – could be established that would regularly issue an international currency like the SDR to those who need it most and at times (such as recession) when it is needed most.
The global reserve currency would no longer be tied to the volatile exchange rate of a national economy, making it more stable, and poor countries would not have to spend precious funds insuring their economies against collapse. And, if tied to a new global framework, such a mechanism could ensure that debtor and creditor countries share responsibility for returning the economy to equilibrium by discouraging large deficits and excessive surpluses.
These ideas are not a million miles from those of John Maynard Keynes in 1944; ideas that were squashed by the US when it created the IMF. With the age of the dollar nearing its end, we must ensure that its replacement helps create a fairer and more stable world.
This article was first published on the Guardian Comment is Free.
