For many years the world has lived under a global monetary system based
on the US dollar, which has the only support from the Government. The dollar
currency is considered largely the dominant currency; “the heart’ of the global
This system needs to be reformed; it helped the generation of
installments imbalances, inflationary weights on the world economy.
In September 2008, the dollar temporary strengthening but one year later
in 2009 the most pressing current crisis happens. The dollar weakened thanks to
the large fiscal deficits that the US suffers during the current crisis.
In the same year, Zhou Xiaochuan (Chinese Central Bank Governor)
proposes to the G20 to change the global reserve system. This need for change
came from the major creditor of US Government regarding the security of the
Thanks to this proposition the G20 issue $251 billion dollar in SDRs
(Special Drawing Rights).
The current system has three basic flaws. The main one is about the
recessionary weight of adjustment to installments imbalances falls on deficit
countries. Thus, Keynes proposes to create
an ICU (International Clearing Union) a sort of system symmetric, so by forcing
surplus countries to finance deficit countries, but unfortunately, they
The second flaw is called also Triffin dilemma and regards the use of
major global currency, the US dollar used as major currency. The Belgian
economist Triffin conceived this conflict of economic interests in the 1960s.
The main problem regards providing liquidity to the countries. So the world
becomes hostage to trust in the main reserve currency.
The third flaw is about the growing inequity of the system. In fact, the
foreign exchange reserve is mostly held in dollar assets. De facto, there are
external exchange reserves that are widely in dollar. So, the industrialized
countries imply that the aggregate on alternate as to the developing countries
is anything other than a loan at small rates in connection to the wealthy
The instability of capital flows and, in particular, the fear of a
“sudden stop” in external financing leads to a defensive and
precautionary demand for foreign currency reserves from developing countries as
” self-insurance “or” self-protection “against financial
crises. Better “group insurance” in the form of larger and less conditional
International Monetary Fund (IMF) borrowings might help to deter developing
countries from keeping such reserves.
Essentially there are three main alternatives to reform the actual
The first one is a multi-currency arrangement. The second is moving
gradually into a system based on global reserve assets and the third one is the
creation of a new institution that would issue a global currency and serve as a
bank of the world’s central banks. The multi-currency arrangement features of
which are already present in the current system. The fact is clearly during the
recent crisis there is no alternative, but especially, developing countries
benefit from the diversification of reserve assets in foreign currencies.
However, no other system failure would be compensated, in particular, it
would continue to be unfair.
An alternative would be an architecture based on truly global reserve
assets. In the 1960s, it was launched the creation of Special Drawing Rights
(SDRs), then included in the IMF Articles of Agreement.
The initial allocation made in 1970 was equivalent to 10 percent of the
world’s non-gold reserve but with the time this weakened to 0.5 percent.
Nowadays, it represents 5 percent of global non-dollar reserves.
The SDRs allocation follows two main different approaches. The first one
would be to issue them in a countercyclical way so they would be widely emitted
during times of crisis, but would be rare during periods of prosperity. The
second approach would be a regular allocation of SDR reflecting the aggregate
A way to match the counter-cyclical issuance of SDRs with the objective
of less adjustment pressure on deficit countries would be to link them to IMF
financing and thus improve “collective insurance” against crises.
One way to do this would be that during crises, the IMF creates
additional SDRs, which will be automatically destroyed when the loans are paid.
The combination of the SDRs allocation with the Fund’s is one of the best
alternatives that could happen. So, they will use the unused SDRs from the
countries as a deposit with the IMF, so that fund cold be lent to the countries
Whatever the reform, it will have to increase the size of the IMF. An
alternative could be increase the quotas and move towards a completely SDR
based IMF. However, whatever system is introduced, it will have to continue to
solve the problem of quota distribution, which, despite the recent
improvements, does not reflect the realities of today’s global economy.
These proposals should be accompanied by other reforms,
of which one essential element is the improvement of the macroeconomic
coordination policy, basing it institutionally in the IMF rather than using ad
hoc agreements (for example during the G7-8 or 20).
Any solution adopted will involve the reduction of the condition with
the IMF loans so this will led to the stigma with the use of the fund.
The most desirable reform and the most viable imply, therefore, to move
towards an IMF based on SDRs with a countercyclical focus.
With the idea of the creation of the “Substitution account” in the IMF
in the 1970s, could be useful for the next reform.
This account would allow countries to convert their reserves into
dollars, based on SDRs issued by the IMF. The IMF of the future should be
conceived as the head of a network of regional funds.
These agreements not only allow for forms of group insurance but also a
policy of macroeconomic coordination and the possibility for small countries to
Concluding, according to the author the current global reserve is based
on basics defects that must be reformed. The author argued that the best
solution of this problem is the creation by the SDRs by transforming it into
the largest global reserve assets. However, the SDRs could be used to improve
the insurance against the crisis.
The actual system has costs for the US so they can gain by avoiding speculation
and be able to run its policies with large independence.
Anyhow, the dollar (and euro) will remain the major’s