SDR’S AND THE NEW BRETTON WOODS – PART ONE
May 09, 2013
The SDR as a Successor to Bretton-Woods
The banking crisis of 2008 and 2009 has shown that an independent currency is necessary. A long-term overhaul of the global financial system could elevate the "Special Drawing Rights" (SDR) of the IMF to a global currency and acting base unit for the international financial framework. The advantage would lie in the strongly reduced dependency on a single national economy for stability and a possibly more objective reflection of economic (power) dynamics.
As the collapse of Lehman brothers and the subsequent financial crisis have shown, one obstacle towards a stable global financial system is the intricate interconnection of national economies. Seeing how international trade generally generates greater global wealth and higher living standards, the problem does not lie in the interconnection itself, but in its fragility.
The gold standard of Bretton-Woods established in 1947 was a first global attempt to ensure greater stability in the financial sector, specifically in exchange rates. Although the system worked well in the beginning, it had to be scrapped once the international economic tableaux changed. Economists recognized then that a fixed rate could not meet the demands of a dynamic world economy that was changing and evolving at increasingly higher speeds. Therefore, the gold-standard was replaced by the US dollar as global base unit in 1973.
Under this status quo, it became possible for states to de- or appreciate their currencies as needed, in order to create balance in international transactions and exchanges. However, as a negative side effect, it has elevated the US to a position of immense privilege, which in turn threatens the balance (and therefore stability) of the financial system.
With the US-dollar as base unit, the US was able to accumulate a massive amount of foreign currencies, which has turned it simultaneously into a "lender of last resorts" and a state "too big to fail." This position of financial power has allowed the US to build a huge national budget deficit with very little consequences, as well as to establish far-reaching and long-lasting dependencies of other nations upon the US economy.
Aside from the vast political asymmetry this creates worldwide, such a system can work in the abstract so long as the US economy is in fact "too big to fail." However, as the banking crisis of 2008 and 2009 has shown, it is not. When the US economy falters and the US dollar fluctuates, the foundation of the current financial framework goes reeling. As in the case of the Lehman bankruptcy, the effects ripples outwards and negatively affect numerous other economies.
A way to resolve this dilemma is to establish a different currency as base-unit for the financial system. Any other national currency, though, would result in similar problems. Therefore an independent currency is needed. This is where the "Special Drawing Rights" (SDR) of the IMF come in: conceived as a mostly objective aggregate of several currencies, it is right now only intended for use within the IMF.
A long-term overhaul of the global financial system could elevate the SDR to a global currency (possibly aggregated from the US dollar, the Euro, sterling pound and the Yuan) and acting base unit for the international financial framework. The advantage would lie in the strongly reduced dependency on a single national economy for stability and a possibly more objective reflection of economic (power) dynamics, since the IMF would technically always be able to switch the currencies chosen for the basket of currencies.
Such a reform would drastically increase the importance of the IMF and the role it plays in the financial system and might subsequently demand a reform of the institution itself. The shift in political weight would likewise require undoubtedly difficult adjustments and reforms world-wide. Yet in the end, it would set global financial stability on multiple pillars, instead of just one, which would mean an improvement over our current status quo.
source
The SDR as a Successor to Bretton-Woods
The banking crisis of 2008 and 2009 has shown that an independent currency is necessary. A long-term overhaul of the global financial system could elevate the "Special Drawing Rights" (SDR) of the IMF to a global currency and acting base unit for the international financial framework. The advantage would lie in the strongly reduced dependency on a single national economy for stability and a possibly more objective reflection of economic (power) dynamics.
As the collapse of Lehman brothers and the subsequent financial crisis have shown, one obstacle towards a stable global financial system is the intricate interconnection of national economies. Seeing how international trade generally generates greater global wealth and higher living standards, the problem does not lie in the interconnection itself, but in its fragility.
The gold standard of Bretton-Woods established in 1947 was a first global attempt to ensure greater stability in the financial sector, specifically in exchange rates. Although the system worked well in the beginning, it had to be scrapped once the international economic tableaux changed. Economists recognized then that a fixed rate could not meet the demands of a dynamic world economy that was changing and evolving at increasingly higher speeds. Therefore, the gold-standard was replaced by the US dollar as global base unit in 1973.
Under this status quo, it became possible for states to de- or appreciate their currencies as needed, in order to create balance in international transactions and exchanges. However, as a negative side effect, it has elevated the US to a position of immense privilege, which in turn threatens the balance (and therefore stability) of the financial system.
With the US-dollar as base unit, the US was able to accumulate a massive amount of foreign currencies, which has turned it simultaneously into a "lender of last resorts" and a state "too big to fail." This position of financial power has allowed the US to build a huge national budget deficit with very little consequences, as well as to establish far-reaching and long-lasting dependencies of other nations upon the US economy.
Aside from the vast political asymmetry this creates worldwide, such a system can work in the abstract so long as the US economy is in fact "too big to fail." However, as the banking crisis of 2008 and 2009 has shown, it is not. When the US economy falters and the US dollar fluctuates, the foundation of the current financial framework goes reeling. As in the case of the Lehman bankruptcy, the effects ripples outwards and negatively affect numerous other economies.
A way to resolve this dilemma is to establish a different currency as base-unit for the financial system. Any other national currency, though, would result in similar problems. Therefore an independent currency is needed. This is where the "Special Drawing Rights" (SDR) of the IMF come in: conceived as a mostly objective aggregate of several currencies, it is right now only intended for use within the IMF.
A long-term overhaul of the global financial system could elevate the SDR to a global currency (possibly aggregated from the US dollar, the Euro, sterling pound and the Yuan) and acting base unit for the international financial framework. The advantage would lie in the strongly reduced dependency on a single national economy for stability and a possibly more objective reflection of economic (power) dynamics, since the IMF would technically always be able to switch the currencies chosen for the basket of currencies.
Such a reform would drastically increase the importance of the IMF and the role it plays in the financial system and might subsequently demand a reform of the institution itself. The shift in political weight would likewise require undoubtedly difficult adjustments and reforms world-wide. Yet in the end, it would set global financial stability on multiple pillars, instead of just one, which would mean an improvement over our current status quo.
source
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