Some Seoul Searching

The world could yet end up with a global central bank issuing its own trading currency

As the world awaits the outcome of the Seoul meeting of 20 countries that dominate the world economy, foremost on leaders’ minds would be how to avert a currency skirmish turning into an all-out war. The subject of reforming the global monetary system might finally be broached, now that ideas have started sprouting all over—despite scepticism on any possible consensus. “The G-20 has more cohesion now,” says economist Surjit Bhalla, “However, it remains to be seen how a group with so many differing pulls actually gets its policy act together. I do not see, for instance, any meeting of minds on the two big-ticket items of the value of the yuan and profligacy-versus-belt tightening, given that the US has already chosen the former path.”

The US is clearly happy to throw cash around as a way to get out of trouble. Meanwhile, beyond demanding a flexible yuan, it has also suggested a 4 per cent-of-GDP cap on a country’s trade gap (while also admitting that it would be unenforceable and thus only a whistle blow) to redress the ‘global imbalances’ that worry everyone. Across the Pacific, China remains keen to control its yuan—its latest jump notwithstanding—and has not only grumbled about America’s loose money, but also wondered aloud about an alternate reserve currency, points that some EU members have also made (if with more subtlety).

India has voiced opposition to any protectionist tendencies that all this global tension may lead to, while also expressing hope that problems with the current dollar-centric monetary system can be resolved amicably. The IMF, whose charter may need an overhaul, has made a pitch for a return to the Gold Standard, a currency anchor discarded long ago. More likely would be slow and clumsy moves towards a sort of global currency managed by a global bank under diversified control. This could emerge after much wrangling, especially if the US pushes Keynes’ one-time idea of an International Clearing Union that constrains trade deficits and surpluses via a balance restoration mechanism of penalties (and also centralised cash control, Bancor being the name of the trade currency the economist had proposed). China and others would resist such a proposal, as the US did in its own surplus days (the 1940s), but instead of a soft compromise (trade credit for those in need) that yielded the IMF, the world might end up with the closest thing possible to a global central bank issuing its own trading currency that no single country can manipulate to its own ends. That would be a new paradigm for a post-nationalist world order: a chimera.

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Ninad D. Sheth