US inflation ahead?
In an attempt to revive the American economy, Washington has been pumping vast amounts of dollars into the economy through extra federal spending and an extraordinarily generous monetary policy. This has aroused fears internationally that this policy might lead eventually to high inflation, in effect shrinking the value of dollar reserves. Foreigners withdrew capital from the US in record amounts in January.
There’s been talk that China itself might attempt to limit any losses on its stack of dollars by diversifying its reserves into euros and yen, or maybe even other currencies and commodities. But such a move could devalue the dollar on foreign exchange markets, result in Chinese losses on its dollar reserves, and threaten a global financial panic.
Zhou apparently recognizes chances of creating a really new international currency are probably zero. But by highlighting SDRs, Zhou, who has a doctorate in economic systems engineering from Tsinghua University, is recalling another period when the dollar was in trouble.
Trouble in 1969
At that time, the US dollar was tied to gold. France in particular had been complaining for years about the “unfair” privileges given the dollar by its role as the prime reserve currency. SDRs addressed this concern as their value is based on a pool of major currencies rather than just one.
In a 1969 Monitor article about the creation of SDRs, I called it a “historic event.” Later developments, though, diminished any role for what was frequently called “paper gold.” The Bretton Woods international monetary system fell apart in 1973 when the US devalued the dollar against gold and subsequently let the dollar’s price be set on foreign exchange markets.
Today there are only 21.4 billion SDRs, held largely by central banks. A US dollar buys about 0.66 SDRs today.