Dollar's History Points to Future of Global Monetary System

U.S. dollar history shows international monetary system can evolve quickly

But lack of alternatives implies that dollar should remain at system's center

Stronger system requires efforts from advanced, emerging economies

At a discussion on a new book charting the history of the U.S. dollar, participants heard that as the world economy enters a dangerous phase, ensuring the stability of the international monetary system requires implementation of prudent and pragmatic policies.

Against the backdrop of stresses in the core of the global financial system, experts met at the IMF to reflect on lessons for the reform of the international monetary system arising from the book, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, by Berkeley economics professor Barry Eichengreen.

Opening the October 19 seminar, IMF Deputy Managing Director Min Zhu noted there is broad consensus that the international monetary system needs reform. “It’s part of the Fund’s mandate to help foster change,” he stated. “We have been reforming surveillance, strengthening the global financial safety net, and even discussing a framework for capital flow management. But how can we deal with the dollar’s dominance to enhance the stability of the international monetary system?”

Commonly understood, the rise of the U.S. dollar derived from the economic size, trade centrality, and open capital account of the United States—features that then give rise to an “incumbency advantage” and inertia in the international monetary system.

Eichengreen’s new work challenges the view of inertia in the international monetary system, arguing that the dollar overtook the pound sterling in just one decade following the formation of the U.S. Federal Reserve. As such, the system can evolve quickly. Like the dollar one hundred years ago, once the prerequisites are in place, currencies of economies that are large and important in global trade and finance can internationalize rapidly.

No dollar alternatives

Speculating how the system might evolve, Eichengreen said the dollar will remain at its center for a long time, not because of its incumbency but simply because alternatives are absent. “Over the next decade, the euro and the Chinese renminbi could emerge as consequential alternatives,” Eichengreen argued. “This evolution should be welcomed, not feared,” as it could result in greater market discipline of policies and foster a better...