IMF Considers Replacing the Dollar as Key Currency

October 14, 2010 - 3:21pm -- jim

IMF Considers Replacing the Dollar as Key CurrencyTelepolis

Introduction of a World Currency Could Follow Attacks on the Dollar Ralf Streck

The attacks of the BRIC-states on the US dollar have left behind traces. Almost unnoticed, the IMF in a study pondered replacing the dollar as key currency with a currency still to be created. The “Bancor” once proposed by John Maynard Keynes as a world currency is discussed. The reasons go beyond the Chinese and Russian proposals [1] to replace the dollar with special drawing rights of the International Monetary Fund (IMF). The considerations go along with the growing influence of China whose voting rights in the IMF have increased. China has moved up to second place to Japan.

The inexorable rise of China is also clearly expressed in the international organization. Reform in the IMF is queued up in the fall after the reassessment of voting rights in the World Bank where China enlarged its influence and displaced Germany from the third circle. [2] The Japanese economic paper “Nikkei” has already announced that the Chinese influence in the Washington organization could rise to the present Japanese level. That would be 6%. This is very likely given the fact that China has already reached Japan’s rank as the second largest national economy. [3]

The shares of other BRIC-threshold countries (Brazil, Russia, India and China) which determine voting rights in the IMF may also be enlarged. Together they already have more weight in the new world economic order. [4] The report names Brazil above all but the shares of Indonesia and South Korea will also be increased. The western hegemony in the IMF will be broken. When China and other countries gain more weight, others lose influence. If Japan falls under 6%, China will advance to second place behind the US which may also lose voting rights. China would leap over Germany, France and Great Britain which are now in third, fourth and fifth place. Great Britain may no longer belong to the five select countries with permanent council seats because they have the most voting rights.

If the demands of China and the BRIC-states are not taken into account corresponding to their economic power, the kingdom of the middle will begin stronger direct attacks on the dollar as the key currency… China is now positioning its renminbi against the dollar and has changed its policy in relation to US government bonds which are increasingly refused. [5] This may be a threatening gesture to counter the attacks from the US.

CHINA AND US ON A COLLISION COURSE AGAIN

In Washington, the reproach is raised again and again that Peking keeps the yuan relatively low to strengthen its competitiveness to American businesses. The tone intensifies again before the congressional elections in the US and the fall meeting of the IMF. Yesterday US president Barack Obama complained [6] “everything has not been done that must be done” in China. On pressure from the US, the coupling of the yuan to the dollar was dissolved in June. A dollar will now be traded at 6.7 yuan, 1.6% more than in June. But that is not enough for the US.

From the US, China is seen as the “scapegoat” for problems with which the US tries to divert from its massive difficulties. China warned the US that upgrading the yuan will not solve American problems. The female spokesperson of the foreign ministry, Jiang Yu, threatened indirectly [7] that “matters could worsen.” She rejected all pressure. “Reform of the currency price can only be driven forward in harmony with economic conditions and balance of payments with each other,” she explained. Washington owes a lot of money to the People’s Republic. That China is the largest creditor of the US has strangely not changed the fact that the US is a mammoth state. Quite the contrary! The huge debt burden was even used “to maintain an effective mechanism and expand the financial hegemony of the country over thee world for decades,” the China Daily commented.

GLOBAL WORLD CURRENCY WITH A GLOBAL CENTRAL BANK

The whole discussion round the key currency and the role of the US now sets the tone at the IMF where the US has 16% of the voting rights. The end of the dollar as the key currency is considered in the Washington financial institution. On the weekend, the Spanish daily newspaper El Mundo referred to a study in an article [8] published in April but largely unnoticed.

In the Second World War, the dollar was appointed the key currency by western states in Bretton Woods cementing the hegemony of the US as the most important economic world power. This should be remembered. However, the newspaper explains, “the serious international financial crisis threatens to change the rules of the game.” It referred to the 35-page IMF study titled Reserve Accumulation and International Monetary Stability. [9]

The report by Reza Moghadam arose in cooperation with the departments “Finance, Law, Monetary and Capital Markets and Statistics.” Consultations occurred with other divisions in the IMF. Therefore this is more than an isolated opinion. The replacement of the dollar was openly discussed in the study. Going beyond the BRIC-proposal, Moghadam envisioned the IMF special drawing rights as a worldwide reserve currency [Attack on the Dollar, 10].

The creation of a world currency is proposed. The name for that currency is Bancor. Before the conference in Bretton Woods in July 1944, the British economist John Maynard Keynes proposed introducing the Bancor as world currency for trade between nations. This currency should handle goods exchange and express their value in gold.

The IMF study follows this proposal as a “tribute” to Keynes. Such a world currency should be a border-crossing money (outside money) like special drawing rights (SDR) and not a “national” or “local” currency. The new currency must go beyond the strong nexus of SDR to dominant currencies. The advantages are described as follows: “A global currency, Bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this global perspective is expected to continue growing.”

A more stable “risk-free” storehouse of value is described which is no longer directly tied to the conditions of one or several national economies. The reserve currencies of countries would not be hoarded any more but would always find a market, even if not always secured. More stability and efficiency will be created and money and the credit system will be de-politicized. In stress situations, a world central bank could serve as creditor “of last resort” to provide the necessary liquidity in the whole system in case of grave shocks. This will happen more automatically than now.” The US Federal Reserve (Fed) now takes this role but this need not always be true. Whether gold should be the backing as earmarked for the dollar in Bretton Woods is left open in the study and therefore unlikely.

In the envisioned system, there will be no country like the US today that could misuse its hegemony to force its way which led to abandonment of the gold standard. No nation will ever have the unique position in the world economy to exchange colorful paper for goods and services while money is devalued worldwide. That is one reason why the US will kick and struggle against such a world currency because its hegemony and special position would largely end. Whether the system proposed by Moghadam is a viable way is left undecided. The attacked dollar of the largest national economy will not be rid of the shivers [US economy with shivers (11)]. It is a clear sign when the key currency and role of the US is openly put in question in the IMF.

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