What Will Dethrone the King Dollar?

Seventy years ago, on July 22, 1944, the Bretton Woods agreement was signed, bringing into existence the International Monetary Fund and the World Bank, and ensuring the international dominance of American currency — the dollar. At the turn of the 1970s, equality of exchange rates and the fixed-price convertibility of dollars into gold were abolished. During the 1980s and early 1990s, the restrictions on flow of capital — in place since the war, except in the U.S. — were next to be abolished.

Neither the emergence of rivals — the mark, then the euro, the yen and now the Chinese Yuan — nor full-on attacks, such as central banks converting reserves of dollars into gold in the 1960s, nor the sometimes severely dysfunctional American economy — inflation and public deficits in the 1960s and 1970s, the near-collapse of the financial system in 2008 — nor regional monetary institutions that essentially compete with the IMF, such as the Chiang Mai Initiative in Asia, nor American indifference to other people’s problems has succeeded in getting the better of the green bill.

The starkest illustration of the dollar’s primacy has been the increase in the U.S. exchange rate at the height of the 2008 to 2009 crisis. Yet this dominance cannot last forever. Before the dollar, there was the pound sterling, and surely there will be another currency after it. But when will this happen, and what will that new currency be?

The dollar’s primacy is founded on two pillars: American economic dominance, and the confidence inspired by the U.S. economic and financial systems. It seems likely that the drop, and eventual expulsion, of the dollar will be as a result of these two pillars subsiding. For the moment, the current dynamic recovery in the U.S., though fragile and probably resulting in new financial imbalances, does not suggest that the relative, though probably irrevocable decline of American power is speeding up.

As for the dollar’s replacement, there are three possible ways it may occur. The first way is voluntarism. This would involve ensuring a harmonious international monetary public order. It is this approach that is implicit in the idea of international monetary system reform. Effective institutions with sufficient funds — certainly including an international currency — would be given the job of international monetary regulation.

The second way is cynicism. International monetary public order is primarily due to hegemonic economic power and its ability to impose its own model. This method has by and large prevailed since the end of the 19th century. If the dollar is to be replaced, it will be by another international monetary power, one both stronger and more able to inspire confidence than the U.S.A.

The third way is a synthesis, fairly minimalist but practical, of the two previous methods; it would favor regional approaches in the hope that they would complement each other in a multinational framework. This method hears an echo in the expression, “global financial safety net.”

Recent developments indicate that the last two ways are combining, while the first seems to be stuck in limbo. So the agreements on “liquidity swaps” between the U.S. Federal Reserve and various central banks have created an undeniably effective new security net. At the same time, these agreements — institutionalized in the autumn of 2013 — exist outside of any international framework. As such, they reduce the role of the IMF and bolster American power.

Since 2009, there have been a number of initiatives in the field of financial regulation within the G-20. From now on, they are to be coordinated more tightly by the Financial Stability Board. This could be interpreted as the result of American desire to agree to a minimal harmonization, in order to favor the pursuit of a process of financial globalization that has been very beneficial to them up to now.

China, meanwhile, is conducting a policy of internationalization of the Yuan, which would include a raft of liquidity exchange agreements between different central banks. This policy certainly aims to give better structure to an Asian monetary zone and to eliminate the costs and risks inherent in the dealing of commercial and financial transactions in third-party currencies; it seems likely, however, that such a systematic effort contains some element of ambition for monetary hegemony.