The new Trump administration’s supposed discontent with the international monetary system – judging by the views of the President’s new Chief Economic Adviser (Miran 2024) – has left experts scratching their heads. We’d grown accustomed to the dollar’s ‘exorbitant privilege’, as Valéry Giscard d’Estaing famously called it in 1965: the US Treasury provides the rest of the world with a safe, liquid asset, thereby greasing the wheels of global finance, and in return, on top of the profits from seigniorage, the US gets to borrow in its own currency, with no exchange rate risk and at a relatively low rate given the huge size of its public debt – more than $35 trillion at end-2024, or over a third of world GDP.
Miran says this international monetary system is “unfair” as it supposedly prevents the US from eliminating its current account deficit. With the US economy now growing more slowly than the rest of the world, global demand for liquid, dollar-denominated assets is increasing faster than US GDP. This strong demand keeps the dollar too high to adjust the current account, or interest rates too low to discourage private and public US agents from taking on more debt.
The phenomenon is well known. As far back as the 1950s, the Belgian economist Robert Triffin warned of its dangers, pointing out that without any constraints, the US would inevitably issue too much debt. In the 1950s, the risk was that this would trigger a gold convertibility crisis, which is precisely what happened in 1971. In a floating exchange rate system, demand can only support the dollar up to a certain level of indebtedness, after which confidence collapses (Fahri and Maggiori 2018).
Economists usually assess the ‘fairness’ of a system by looking at how it affects household wellbeing, both in average terms and in terms of the dispersion around the average (inequality). Conventional analysis of the ‘exorbitant privilege’ would thus find that a dollar-based international monetary system (IMS) delivers long-term net benefits to the US. By keeping the dollar overvalued relative to the size of America’s debt, it supports household purchasing power.
The case against an international monetary system dominated by the dollar
In the 2000s and 2010s, critics argued that a dollar-based IMS was unsuited to an increasingly multipolar global economy. In 2009, Governor Zhou of the People’s Bank of China pointed out that it was impossible for the issuer of an international reserve currency to pursue its own domestic goals while at the same time safeguarding global financial stability. The solution he proposed was to allow Special Drawing Rights (SDRs), created in 1969, to play a central role in the IMS. The provision of global liquidity would then be divorced from the rate of growth in one country’s debt.
Another solution would be to increase the role of other international currencies alongside the dollar, as this would boost global liquidity volumes without having to rely on a single country. Giving investors a choice of currencies in which to hold liquidity and settle transactions would also force issuers to be more disciplined, and hence mitigate the Triffin dilemma (Farhi et al. 2011). Japan, the euro area, and China have, in turn or in parallel, attempted to boost the international role of their respective currencies, but inertia linked to economies of scale and network effects has maintained the dollar’s hegemony so far.
Developing the euro or renminbi as an international currency would mean issuing a large quantity of homogeneous, liquid and secure assets – the equivalent of US Treasuries – and selling them throughout the financial world. China in particular would need to secure its contract law and liberalise inward, and especially outward, capital flows. This seems a rather distant prospect, although Eichengreen et al. (2024) have shown how China could internationalise its currency to some extent through a combination of outward foreign direct investment in RMB, trade invoicing in RMB, offshore RMB markets, and central bank swap lines.
The euro is in a better position as the region already has secure contracts and free capital flows. Up to now, the euro’s international development has been hampered by its fragmented financial system and the lack of sufficient volumes of a ‘safe asset’ that could rival US Treasuries. But things could change on both fronts if the Savings and Investment Union project goes through, especially with prospects of new European debt issue to finance part of the rearmament. In parallel, the existing stocks of debt in euro issued separately by the EU (€689 billion), the European Financial Stability Facility (€211 billion), the European Financial Stability Mechanism (€78 billion), and the European Investment Bank (€298 billion) could be combined to create one large pool of safe assets.
A multipolar IMS is sometimes deemed risky, as markets could switch from one currency to another at any time. However, this potential instability in portfolio allocation needs to be weighed against two stabilising factors: a multipolar system would (1) attenuate the Triffin dilemma (thanks to the diversification of liquidity sources); and (2) provide the US with a deficit-adjustment tool (as the dollar would no longer be the only available reserve currency, it could better play its role as an adjustment variable for the US balance of payments) (Bénassy-Quéré and Forouheshfar 2015). The main risk in fact would be related to the transition from one regime to another.
Charles Kindleberger (1973) introduced the concept of ‘hegemonic stability’, where a dominant power has an interest in maintaining the status quo and will therefore do everything it can to avoid a crisis. In practice, the US Federal Reserve acts as lender of last resort to the entire world, thanks to standing swap and repo lines with other central banks. If a country experiences a dollar shortage, the Fed will provide it with dollars for a limited period, in exchange for foreign currencies or the pledging of federal government debt securities as collateral. This solidarity between central banks is essential, and worked well during the 2008 financial crisis. However, ‘hegemonic stability’ failed to prevent the crisis itself which, as has been well-documented, was rooted in excessive leverage in the US.
A Mar-a-Lago Accord?
In his much-commented essay published in November 2024, Stephen Miran proposes solving the IMS problem not through structural changes (SDRs, multipolarisation), but with an international Plaza-style agreement. At a famous meeting at the Plaza Hotel in New York in 1985, the US, Japan, the UK, West Germany, and France agreed to intervene in currency markets to halt the appreciation of the dollar, which had doubled in value in five years.
In addition to the doubts raised about the Plaza Accord’s actual impact on the dollar (the dollar had started to depreciate even before the Accord on 22 September 1985), the agreement left some US trading partners with painful memories. Japan had to repatriate huge amounts of savings that had been invested in the US. The influx of capital led to a financial and property bubble, which then burst in the early 1990s, plunging Japan into long decades of deflation.
Assuming the US actually manages to persuade its partners to repeat the experience, what might we expect? The literature on foreign exchange interventions is hardly encouraging. The effects on currency levels in advanced economies are almost never long lasting, especially when the intervention is inconsistent with monetary policy.
Since 1985, financial markets have hugely developed. Without a change in macroeconomic policies, and hence in expected yield spreads, a cheaper dollar would encourage private investors to increase their holdings, rapidly pushing the currency back up to where it was before the exchange rate agreement. But central banks are now independent and have a clear mandate to fight inflation. They will therefore remain focused on inflationary risks in their own country or region, so the idea that there could be lasting reversal of exchange rates following an international currency agreement is highly... speculative.
Editors’ note: A longer version of this column was published on the Banque de France website on 19 March 2025.
References
Bénassy-Quéré, A and Y Forouheshfar (2015), “The impact of yuan internationalization on the stability of the international monetary system”, Journal of International Money and Finance 57: 115-135.
Eichengreen, B, C Macaire, A Mehl, E Monnet and A Naef (2024), “Is Capital Account Convertibility Required for the Renminbi to Acquire Reserve Currency Status?”, International Finance 27(2): 102-128.
Farhi, E, P-O Gourinchas and H H. Rey (2011), “Quelle réforme pour le système monétaire international?”, Conseil d’Analyse Économique Rapport n°99.
Farhi, E and M Maggiori (2018), “A Model of the International Monetary System”, The Quarterly Journal of Economics 133 (1): 295–355.
Kindleberger, C (1973), The World in Depression 1929-1939, University of California Press.
Miran, S (2024), “A User’s Guide to Restructuring the Global Trading System”, Hudson Bay Capital, November.
Zhou, X (2009), “Reform the international monetary system”, People’s Bank of China, 23 March.
