On exchange rates and trade deficits: part two

How would a composite commodity currency work ? First of all we would have to have a new sort of Bretton Woods where all the leading countries could gather to lay the groundwork and basis for a superior substitute to the current system of floating rates. In the original Bretton Woods the US and Britain disagreed about the nature of the institutions they were creating, the World Bank and the International Monetary Fund.

The original position of Keynes was that these institutions would help countries in deficit on current acount to overcome their deficits and facilitate countries in surplus positions to use their surpluses to assist the   deficit countries rebalance their trade flows. Where necessary loans could be made denominated in the new global currency that no one country would dominate. The problem with the current system is that the supply of American dollars abroad which the American trade deficit contributes to comes at the cost of American dollar stability. Fix the stability by closing the trade deficit and global shortage of liquidity increases. Fewer US dollars abroad decreases trade and liquidity when the US dollar is the reserve global currency.Robert Triffin pointed this out in 1960. (See the discussion in Tony Thirlwall & Heather Gibson, Balance of Payments Theory and the United Kingdom Experience,London: Macmillan, 1993; p.46ff)
The IMF was   supposed to fix this problem by creating special drawing rights but over time the fix has failed essentially because it has been dominated by the US and the   obsession of IMF economists with monetarist doctrine and laissez-faire dogma.
A new global currency would have to work differently
The currency could be backed as special drawing rights are by a basket of the leading global currencies dominated by the US dollar but in addition to currencies, commodities in certificate form as well as stocks of key high tech companies would be part of the basket. Each unit of account would represent a balanced blend of these currencies, commodities and stocks. Countries rich in resources but poorer in terms of the strength of their national currency would benefit by having greater drawing powers in the case of need. To ensure sufficient global liquidity the new central bank like institution that would emerge from this kind of arrangement would have an international board committed to both low inflation and low unemployment as well minimally disruptive resolution of trade imbalances.

The kinds of conditionality that the IMF insists upon would not be followed. Instead a more balanced perspective would prevail.

Of course, this kind of reform will not happen without the agreement of the wealthiest countries. But the argument should be fleshed out and presented in policy circles for debate.A number of economists have explored the problem of new global financial architecture of which a commodity, currency high tech   based currency reserve would be a part. John Grieve Smith at Cambridge has done so. International trade specialists like Paul Krugman and Tony Thirlwall are also interested in these questions. (more on this to come)