[Viewpoint] An East Asian currency? Not yetIn July 1944, against the backdrop of the Second World War, representatives from 44 nations gathered in Bretton Woods, New Hampshire, to discuss a new fi nancial order for the post-war period. The U.S. dollar was crowned as the dominant global reserve currency in the Bretton Woods agreement. The renowned economist, John Maynard Keynes, leading the British delegation at the negotiations, opposed a world monetary system pegged to a single national currency. Instead, he proposed the creation of a World Central Bank that would issue a global currency unit, which he called Bancor, for payment systems and international exchange rates. If Keynes’ proposal had been accepted, the U.S., too, would have been vulnerable to a crisis of rapid devaluation, but the U.S. came thoroughly prepared to make the U.S. dollar into the international currency with a strong argument by Harry Dexter White from the U.S. Treasury Department. Under this plan, a global fund would be created and gold established as the standard for exchange rates.
Gold would be convertible to the U.S. dollar at a fixed rate, and other currencies would be fixed to the greenback. As a result, the dollar became the preeminent world reserve currency.
In 1971, the dollar’s hegemony came to an end — in theory — after President Richard Nixon declared that he was breaking the Bretton Woods agreement by closing the gold window, thereby ending the gold standard for the U.S. currency. The U.S. note was no longer as good as gold, but the dollar’s global status remained unchanged even with a floating exchange rate system.
The legacy of Bretton Woods lives on, however, and as long as the U.S. incurs current account deficits, it will sell assets to finance these deficits and end up enriching other nations’ coffers with dollars. The global imbalance caused by massive U.S. deficits poses serious risks to the entire global financial system by relying too heavily on a single currency.
Amid alarming signs about the current international monetary system, some Chinese think tanks and media are floating the idea of creating a common currency among China, Korea and Japan. It is not the first time the Chinese have raised this idea. In the spring of last year, China’s central bank governor, Zhou Xiaochuan, dropped a bombshell by proposing to replace the dollar as the world reserve currency with Special Drawing Rights, or SDR, an obscure international supplementary reserve asset issued by the International Monetary Fund as an alternative unit of account.
The comment sparked American leaders to vehemently defend their currency’s status. President Barack Obama said the dollar remained “extraordinarily strong” as the world reserve currency, and similar comments were made by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke. A year later, the Chinese have renewed calls for an alternative to the U.S. dollar, suggesting its campaign against the greenback is likely to continue.
I have to agree that China has a point. In the past, Japan has attempted to make the yen into a global reserve currency, and it is currently used for international settlements in a limited capacity. We, too, campaigned to internationalize our won. It is only natural for China to want to flex its muscles and test its clout with its currency, now that it has begun to challenge U.S. economic preeminence. A single currency among the three major East Asian economies is an attractive alternative, but it remains unrealistic.
First of all, the U.S. won’t allow it. Its immediate displays of skepticism whenever there was talk about the creation of an Asian Monetary Fund and Asian Currency Unit following the 1997-1998 Asian financial crisis is proof. Japan, too, is not in a position to support the move. The country is now saddled with a staggering fiscal deficit that exceeds its gross domestic product by 220 percent. If a common currency unit were to be pursued despite the ticking time bomb of Japan’s deficit, the entire currency zone would be placed in jeopardy if there were a credit crisis in the country.
Strained ties with China will also remain a stumbling block. We have learned through the Cheonan disaster how China can turn cold when geopolitical issues get in the way. As long as Beijing has a soft spot for North Korea, we cannot sustain reciprocal business relations and coordination of economic issues under a single currency framework. For instance, if North Korea also joined the block, China might unilaterally seek favorable terms for it when setting exchange rates between the new currency and North Korea’s old notes.
A common currency unit among the three countries will likely remain a distant dream for the time being, but we should not be too quick to throw the idea out the window as we strengthen our position going forward. At any rate, we must be quick and sensitive to various movements toward setting a new global economic order in the wake of the global financial crisis.
*Translation by the JoongAng Daily staff.
The writer is a professor of business administration at University of Seoul.
By Yun Chang-hyun