Reserves of US dollars held by developing countries rose from $1 trillion to $6 trillion between 2001 and 2011, partly because these countries perceived risk in the dysfunctional global financial system. However, high levels of foreign reserves pose serious dangers. Robert Pringle, chairman and founder of Central Banking Publications, contends that surplus savings did not cause the 2008 financial crisis. He blames the excessive elasticity of credit, along with risk-taking bankers and lax monetary policies. Pringle advocates establishing a global monetary standard, anchored to the real economy, to address these issues. getAbstract recommends this thought-provoking – though at times meandering – treatise to economists, financial professionals, policy makers and anyone interested in how money works.
The Instability of the International Currency System Is Decades Old
The US dollar is central to the era of managed international currency, which began with the 1945 Bretton Woods agreement. The dollar has remained the world’s principal monetary unit ever since. “Most of the world outside Europe is on a de facto dollar standard.” But playing such a role involves certain conflicts of interest with the dollar’s day job as America’s domestic currency.
At a basic level, the monetary policy that a US administration believes is necessary to address its internal objectives may produce harmful side effects in other countries. For example, economists now widely think that former Federal Reserve Chairman Paul Volcker’s 1979 push to tackle inflation was a positive force in reshaping US economic fortunes for the 1980s. However, coming as it did after a period of plentiful international capital, it helped generate – through the transmission of the dollar’s central role – that decade’s debt crisis in the developing world. The harsh monetarist medicine “was, and indeed had to be, an exercise in monetary unilateralism.”
At the other extreme, the historically loose monetary stance...
Robert Pringle, the chairman and founder of Central Banking Publications, is a financial commentator, economics editor, entrepreneur, and economic policy consultant.