The dollar and the Transition to Sustainable Development: From Key Currency to Multilateralism

Drastic changes in US politics relative to international agreements and to bilateral relationships with China raise a political question about the key currency status of the dollar and a theoretical question in international monetary economics: Can a key currency system be maintained if the issuing country deliberately engages in conflicting protectionist policy? This policy brief investigates how the positions of major currencies have been changing in the international monetary system for several years. The key currency relies on the acceptance of the issuing country as a benevolent hegemon that delivers an economic policy conducive to international financial stability. Until recently, it appeared that, despite the relative shrinking of the US weight in the world economy, the dollar had maintained its dominance both in international payments and in official reserves. However, uncertainty in US policy is disrupting risk perception in heavily dollar-indebted emerging and developing countries. Besides, denying the services of international transactions for non-US-resident firms with countries under US embargo is a serious encroachment on the key currency system. In the long run, the forces that can transform the international monetary system (IMS) stem from the transformation of the growth regime under environmental constraints. Since its genesis in the industrial revolution, the key currency has been the currency of the country dominating the primary energy resource, e.g. the commodity most traded worldwide. The pound sterling was linked with UK dominance in coal, the dollar with US dominance in oil. The irremediable shift to renewables, required to moderate climate change, will shift the growth regime to dispersed sources of renewable energy. The developing countries have inadequate financial resources to undertake the needy investments. Second, the positions of countries in terms of energy dependence will be reshuffled. A multilateral financial system, mixing public and private financial institutions, will require the cooperation of major countries to channel saving from all parts of the world to finance those investments. Here we argue that a multilateral monetary system would be more adapted to these challenges than the present one. It would fulfill the basic functions of international money in providing an ultimate reserve asset that will be the debt of no country, an SDR-based IMS. The last section of the paper explains the transition from dollar to SDR reserve.