Dethroning The Dollar
by James Robertson


The dollar’s decline can lead to confusion. A more international monetary system is required...

“Adapt the financial sector to compete successfully in global markets.” The 2007 Mistry Report makes a sensible response to globalisation. At least for some years ahead, profits from international financial services threaten to go to places such as Singapore and Dubai, with costs to neighbouring countries such as India if they have to use them. But that isn’t the end of the story. As the balance of economic power shifts in the world, two other questions arise. What will come after the US ‘dollar hegemony’? And what will be the eventual outcome of the present world credit crisis for money and banking?


After Dollar Hegemony


The dollar’s dominance has been increasingly criticised in recent years. World trade has become ‘a game in which only the US can produce dollars, while everyone else produces things for dollars to buy’. For using the dollar as the main global currency, the world pays the US an estimated subsidy of well over $400 billion a year. A Pentagon spokesman justified this as a fee to the US global policeman. Most others see it as the richest country in the world forcing poorer countries to pay for its gross over-consumption of global resources.

Active challenges to the dollar’s monopoly power are growing. Iran has threatened to switch its oil trading into euros. Russia’s new President, Dmitri Medvedev, announced in February this year that the rouble will de facto become one of the regional reserve currencies; the new St Petersburg commodity exchange is expected to reach trading of 1.5 trillion roubles this year. And if China were eventually to replace the US as the world’s pre-eminent superpower, would the yuan replace the dollar as the world’s single super-currency — as the dollar replaced the pound sterling in the 20th century?

Clearly, in the next few years, decline of the dollar’s supremacy could lead to international monetary confusion. The world’s businesses, and the world’s people, could find themselves in a messy globalised economy under a divided oligarchy of competing ‘reserve’ currencies, including — among others — the dollar, euro, rouble and yuan. Perhaps, the time has come to make our international monetary system more genuinely international — as proposed by John Maynard Keynes and rejected by the US at Bretton Woods 60-odd years ago.


The Future Of Monetary System


Should we continue to let commercial banks create the major part of their country’s money supply? That is now a more ‘frequently asked question’ after the recent credit boom and consequent credit crunch.

At the national level, in pre-democratic times, kings and rulers profited from creating money. Now, ironically, in more democratic times it is not the public purse that profits, but the commercial banks. They create and put into circulation the greater part of the public money supply as bank account money, credited out of thin air to their customers as interest-bearing, profit-making loans. Only the smaller, more material part of the money supply — coins and banknotes — is issued by agencies of the state. Under these arrangements, coins and banknotes still bring in some public revenue, but the commercial banks enjoy much larger profits from the dematerialised, bank account money they create and lend to their customers.

Meanwhile, in public interest, central banks have to try to control the quantity of the money supply indirectly, by regulating interest rates to influence the demand of businesses and citizens for bank loans.

For some years, national pressure has been growing in some countries for monetary reform on the following lines. The function of creating increases of bank-account money in circulation should be transferred to the central bank. It should become a crime for anyone else to create them, just as counterfeiting banknotes and forging coins are crimes. At intervals, the central bank should decide on how much new money needs to be created to achieve the elected government’s published monetary objectives. The central bank should then create it out of thin air and transmit it to the government’s account as a debt-free gift. The government should use it as public revenue, and put it into circulation as public spending under normal budgetary procedures.

The following are among the arguments supporting this reform. The value from creating the public money supply would become a source of public revenue for the benefit of all, not a source of private profit for commercial banks and their stakeholders. The reform would benefit all non-financial businesses and individuals who are not dependent on the profits of the financial services industry for their incomes and wealth. It would remove many damaging economic, social and environmental consequences that follow from creating most of the public money supply as debt; and first use of newly created money would no longer go to purposes profitable to commercial banks themselves, such as buying existing assets like land.

These arguments are gathering support. It has become clearer over recent months that the international tangle of interbank debt resulting from the credit boom, and the subsequent damage to bank customers, the banks themselves and their national economies, was at least partly due to letting the commercial banks create most of our money as debt.


India’s Role


In 1995, the Independent Commission on Global Governance said the international monetary system should be more genuinely international and less dependent on private capital markets. “The US has had the unique luxury of being able to borrow in its own currency abroad and then devalue its repayment obligations,” and “the international monetary system’s dependence on private capital markets exposes it to the risk of a collapse of confidence in the system as a whole,” it concluded.

Since then, little practical progress has been made. But now the Bric nations (Brazil, Russia, India and China) and other ‘emerging’ countries are flexing their muscles. India and China have just collapsed the seven-year world trade negotiations in Geneva to protect their peasant populations. In May, ministers from India and other Bric countries demanded an international monetary system founded on the rule of law and multilateral diplomacy in “a more democratic, fair and stable world where emerging markets have a greater role and the dominant powers are contained by the same rules as everybody else”.

In fact, most of the people will benefit from fundamental changes in the 1994 Bretton Woods arrangements, and especially from a new genuinely international debt-free currency. It would be issued by a world monetary authority as the main international means of payment. It would provide a more efficient, fairer and more stable basis for our globalised economy, and a new source of public revenue for UN expenditure and per capita distribution to UN member nations.

India would then not need to worry about a rupee/dollar currency futures market in Dubai or Singapore; Mumbai and other Indian financial centres could set up their own rupee/world currency futures markets. And, in a coalition of other like-minded countries, India would have served not only the interests of Indian businesses and people, but would have played a leading part in a historic breakthrough for the world.

[The author is an expert on monetary systems and has written several books, including The Future of Money.]

Return To Site Index