In March 2009, in the midst of the financial crisis, the normally circumspect governor of China's central bank made waves. In a speech published on the bank's website, Zhou Xiaochuan argued that the world needed a "super-sovereign reserve currency" to be managed by the International Monetary Fund (IMF). The influential banker said that an IMF-issued currency would serve as a "light in the tunnel for the reform of the international monetary system."
Zhou's call was widely interpreted as a jab at the U.S. dollar and the privileges that the United States retains as the issuer of the world's leading reserve currency. The U.S. Treasury Department dutifully pushed back against the suggestion that the dollar should lose its preeminence. "I think the dollar remains the world's standard reserve currency. I think that's likely to continue for a long period of time," said Treasury Secretary Timothy Geithner. For his part, President Barack Obama insisted that the dollar was "extraordinarily strong."
Zhou's suggestion was, in many respects, less remarkable than it seemed. The IMF already has in place the "super-sovereign" currency that he envisioned. Moreover, it is stated IMF policy that this currency -- the awkwardly titled Special Drawing Rights (SDRs) -- should become the world's leading reserve currency. Zhou's suggestion appeared revolutionary only because of the convoluted history of this would-be global currency.
The idea of an IMF currency emerged in the early 1960s. At that time, a group of leading economists -- notably Robert Triffin -- was alarmed at what it perceived as a looming liquidity shortage. The Bretton Woods system established at the end of World War II acknowledged the dominant place of the dollar, but it pegged the dollar to gold. Triffin argued that this limited the dollar's ability to serve as an effective reserve currency. The more dollars the United States pushed into the system, the more doubt there would be about its ability to back the dollar with gold. As John Williamson of the Peterson Institute for International Economics describes it, "The Triffin dilemma posited that the world therefore confronted a choice between running short of liquidity and undermining confidence in the dollar, which was destined sooner or later to produce a crisis."
The solution that financial policymakers hit upon was to have the IMF create a new international reserve currency: the SDR. This new currency's value would be determined by a basket of widely traded currencies, basically hedging against the risk inherent in any one currency. At the time, this basket was comprised of the dollar, the yen, the pound, the franc, and the Deutsche mark (the last two were subsequently subsumed by the euro). The first SDRs -- more than 9 billion of them -- were issued beginning in January 1970. But just as SDRs were appearing, the very reason for their existence seemed to disappear. In 1971, U.S. President Richard Nixon's administration broke the link between the dollar and gold. Just like that, Triffin's famous dilemma ceased to be a dilemma, or at least an acute one. Freed from gold, the United States was able to produce as many dollars as it liked, enough to satisfy the world's demand for reserve holdings.
The SDR, which IMF economists had expected to become a central feature of the world's monetary system, instead became a bit player. Today, even after a major new issuance in 2009, SDRs constitute less than 4 percent of global reserves and are used almost exclusively in transactions between sovereign governments and the IMF itself.
But as Zhou's speech suggests, the idea of the SDR assuming a more prominent role persists. Liquidity may not be the problem that policymakers feared in the 1960s, but a dollar-dominated system has other perceived disadvantages. Plenty of observers believe that the dollar's position gives the United States an unfair economic advantage. French Finance Minister Valéry Giscard d'Estaing famously declared that the United States enjoyed an "exorbitant privilege" by issuing the world's de facto reserve currency. In economics parlance, that advantage is usually labeled "seigniorage." The significance of this advantage is hotly debated by economists, and some even argue that the United States suffers from the dollar's preeminence (primarily because it makes exports less competitive).