Paulo Nogueira Batista Júnior
Is it possible and desirable to create a new international currency as an alternative to the United States dollar? The topic is controversial. Many believe that it is not possible, others that it is not desirable.
I am part of the minority that believes that it is not only possible, but desirable and perhaps indispensable. I have written a few times about the creation of a new reserve currency, including just over two years ago, in August 2023, under the title “A BRICS currency?”: www.cartacapital.com.br/economia/uma-moeda-brics/.
Since then, I have developed the proposal in a more complete and comprehensive way, in a paper that I am now concluding, with the support of ECLAC and IPEA. In the present article, I will summarize some of the main aspects of the idea.
What I intend to do with this is present an innovative alternative that should be subjected to criticism, as it certainly needs improvements and revision.
In the world monetary history of recent centuries, the role of international currency has been played mainly by national currencies. One (or a few) national currencies, issued and managed by national central banks, served and serve as international currency.
Since the national objectives of the issuing country or countries do not usually coincide with those of the other countries, it is only by chance that the international currency will adequately serve the interests of these other nations.
We need, in fact, something that has no practical precedent: an international currency that does not perform national functions, as I will try to explain. But first, I quickly show that there are no available or efficient alternatives in the world today.
Discarding alternatives
The alternatives we have are either inconvenient or unlikely. One possible scenario, for example, would be to continue living with the system dominated by the dollar (and secondarily by the euro).
But this does not suit the emerging countries of the Global South. The dollar system is inefficient, unreliable and even dangerous. It has become an instrument of blackmail and sanctions.
In addition, the precariousness of the monetary, fiscal and financial foundations of the US economy, the issuer of the hegemonic currency, is becoming increasingly clear.
Could the dollar be replaced, at least in part, by other currencies of the Global North? This other scenario is also not feasible, not in a large scale.
The euro suffers from the same problems as the dollar, since it has also been distorted as an instrument of sanctions. And Europe’s economic situation is even more problematic than that of the US.
The Japanese yen has similar problems. The yen never played a major international role; in addition, the Japanese economy is not doing well and does not inspire confidence.
The other currencies of the Global North are either too small (Swiss franc, Canadian dollar or Australian dollar, for example) or also suffer from the weaknesses of the economies of the countries that issue them (the United Kingdom, for example).
Gold, in turn, given the intense volatility of its price, is not able to replace the dollar, except partially, as a reserve asset for central banks and other economic agents (something that is already happening and has resulted in an explosion in the price of gold).
The only scenario that may present some viability would be the large-scale internationalization of the Chinese currency. The renminbi has become more important on the world stage, reflecting the growing weight of the Chinese economy.
But there is a long way to go before it can replace the dollar in a significant way. And the Chinese are reluctant to try.
Why? The subject is complex. I try to summarize.
For the internationalization of the Chinese currency to be viable, there would be at least two preconditions: free convertibility and the willingness to allow a large exchange rate appreciation.
The Chinese government is hesitant on both of these points – and rightly so.
In the Chinese case, free convertibility would essentially mean removing capital controls, a central element of China’s economic policy in recent decades, which has greatly contributed to its stability. The external appreciation of the renminbi, in turn, would threaten the competitiveness of exports, one of the main sources of dynamism in the Chinese economy.
As they say in football, why mess with a team that is winning?
Even if the Chinese wanted or could follow the path of broad internationalization of their currency, one question remains. From the point of view of the other countries of the Global South, wouldn’t we be exchanging six for half a dozen?
Another national currency, the renminbi, would occupy the space left by the dollar. The People’s Bank of China, another national central bank, would replace the U.S. Federal Reserve.
The renminbi would replace the dollar, in part or in full, and China would issue the world’s reserve asset. The rest of the world would continue to experience, albeit perhaps in a milder way, the problems we already face today with the U.S. dollar and central bank.
In other words, there is room to create a new reserve currency. Any proposal (there is more than one possible path) will face geopolitical problems (fundamentally US resistance) and technical problems (it is not easy to build the institutional and operational structure capable of generating confidence in the new currency).
But facing the challenge seems necessary, not least because it cannot be ruled out that another major financial crisis in Western capital markets will occur in the coming years or even months, such as the bursting of the stock bubble associated with artificial intelligence and technology companies.
If this happens, the US economy and the dollar, already weakened, will face an acceleration of their decline. Everyone will be scrambling for a solution. It is better, therefore, to discuss alternatives without delay.
A possible path
What would be the best path to a new currency? One way, in theory, would be to back the new currency with gold, as has been suggested by Russian economists.
However, these economists have not, as far as I know, solved the problems that this alternative entails – notably the following: how to give stability to a new currency while supporting it with an eminently unstable asset? There may be a solution for this, but if there is, it has not come to my knowledge.
It would be better, it seems to me, to give confidence and back the new currency in another way. Let’s see how.
I present below a brief discussion of the essential aspects.
Who would create the new currency? There is only one possibility in the current international circumstances – a group of countries in the Global South, something like 15 to 20 countries, which would include most of the BRICS and other emerging middle-income nations.
Could this group of countries delegate the issuance of the new currency to one of the existing institutions? No, none is able to take on this mission efficiently and reliably.
A new international financial institution would therefore have to be created – an issuing bank, whose sole and exclusive function would be to issue and put into circulation the new currency.
This issuing bank would not replace the national central banks and its currency would circulate in parallel with the national currencies of the countries of the sponsoring group and in parallel with the other national and regional currencies existing in the world.
It would be restricted to international transactions, with no domestic role. Contrary to what is often said, it would not, therefore, be a euro-type currency, that is, a single currency, issued by a single central bank, which took the place of the pre-existing European currencies (Deutsche Mark, French franc, Italian lira, etc.).
How do you ensure the success of a currency? What would make the new currency widely used?
The essential thing is to ensure confidence, which depends on the way in which the new monetary arrangement is constructed from an institutional point of view.
The path that seems most viable to me would include, among other elements, the following legal guarantees: 1) stability of the new currency in terms of value; 2) its non-use as an instrument of sanction or pressure on countries; 3) operational autonomy of the issuing bank; 4) maximum limit for its issuance; and 5) backing of the currency by a basket of government bonds of the sponsoring countries.
I address the five points in a very tight summary. The first and fifth require a little more space.
First point: the currency would be based on a weighted basket of the currencies of the participating countries and would therefore fluctuate on the basis of changes in these currencies.
Since all currencies in the basket would be floating or flexible, the new currency would also be a floating currency.
The weights in the basket would be given by the share of each country’s PPP GDP in the total GDP of the sponsor group. China accounts for at least 40/45% of the total, depending on the exact composition of the group.
The basket would have a certain stability provided endogenously by the presence in it of currencies of both exporters and importers of commodities. This stability could be exogenously reinforced by establishing that the weighted average would be geometrically and symmetrically trimmed.
Currencies with large fluctuations, beyond pre-established limits, would be temporarily excluded from the basket.
Secondly, an explicit commitment not to resort to sanctions would contrast with the insecurity resulting from the abusive use of the dollar and the euro as a basis for punishment and blackmail. This legal guarantee would be reinforced by the bank’s operational autonomy.
Operational autonomy, the third point, would be ensured by granting the bank’s presidents and vice-presidents relatively long terms (five years, for example). This will send the message that the bank would not be easily subject to political interference and diplomatic maneuvering by its founders.
This kind of autonomy is guaranteed in all or almost all international financial organizations. It does not fully protect the bank from interference, but it has its value.
The bank’s management would have to be overseen by and accountable to designated representatives of the sponsoring countries, on the Board of Governors and on the Board of Directors. But this oversight and accountability would occur through the normal institutional channels, not by individual pressures on the president and vice presidents.
Fourth, a cap on the amount of currency circulated by the bank would provide some protection against excess issuance. The new currency would thus have a brake that Western and other currencies do not have.
But this ceiling would be a secondary instrument, as the most relevant one is the form of backing of the new currency.
Fifth point, therefore: to define as backstop of the system a basket of national bonds of the founding countries and those that will join later.
The issuing bank would issue the new reserve currency (NRC) and new reserve bonds (NRB), whose interest rates would be attractive as they would reflect the interest rates on the bonds of the participating nations, all of which are higher than the rates on the bonds in dollars and euros.
The NRC would be fully convertible into NRB and these, in turn, in the basket of bonds of the participating countries. The high weight of the Chinese currency, issued by a country with a solid economy, would favor confidence in the backing and in the NRC.
The reaction of the West
The proposal has its vulnerabilities, discussed in detail in the paper that is being finalized. I will not go into all these weak spots now so as not to make this article too long.
I will only highlight the one that seems to me to be the most serious – the risk that the initiative will provoke negative reactions from the West, which would resort to threats and sanctions against the countries involved in the creation of an alternative to the dollar and the euro.
This risk is real. The West, in frank decadence, is even more arbitrary and violent than in other times.
What we have to ask ourselves, however, is this: Are we going to live indefinitely with the monetary and financial system that the West has created since World War II, an increasingly dysfunctional system that has been used and abused as a geopolitical tool? Or will we gather economic, political and intellectual efforts to get out of this trap?
The next few years will tell whether emerging countries are up to this challenge.
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The original Portuguese version of this article was published in Carta Capital magazine.
The author is an economist and writer. He was vice president of the New Development Bank, established by the BRICS in Shanghai, from 2015 to 2017, and executive director at the IMF for Brazil and 10 other countries in Washington, from 2007 to 2015.
E-mail: paulonbjr@hotmail.com
YouTube Channel: youtube.nogueirabatista.com.br
Portal: www.nogueirabatista.com.br
