The Rise and Fall of the Dollar. Part VII: Back to the Future

The current clash between the Old and New Worlds for the right to reshape the global monetary order may yield no winners. The international division of labor has placed nearly all countries in an almost insurmountable mutual dependence on the world market. Figuratively speaking, we are all now – "passengers" on one giant "Titanic" called the "global world." And as soon as a serious breach appears anywhere in its hull, the entire "ship" could go down.

If we assume that the world economy is a closed system, then trade deficits in some countries will permanently cause trade surpluses in others, and vice versa. Therefore, it is necessary to avoid both causes that disrupt the system's equilibrium. Both debtors and creditors must bear proportional responsibility for creating imbalances. A lack of discipline provokes permissiveness and ultimately leads to destructive consequences of international cooperation, up to the desire for mutual destruction of irreconcilable parties.

Money is the key linking element of international relations. However, money is merely a tool. On its own, it cannot satisfy human needs. When money ceases to perform its role as a mediator in social exchange, it turns into an instrument of unrestrained antagonism. This is exactly what happened to the US dollar after it lost its "golden brake." Gold may indeed be a "barbaric relic" (J.M. Keynes), but the money supply backed by it delayed the moment when virtual financial flows gained complete control over the processes of producing and exchanging real values.

Money can both unite and divide. It begins to divide when it loses its exchange and consumer value and turns into a means of accumulation.

Money should exit circulation as soon as it has fulfilled its mediating role in the process of producing, exchanging, and consuming goods and services. If the system does not provide for this, then trillions of it settle in offshore accounts, or cubic meters are buried in deserts, or tons are crammed into bank vaults. Then – it is no longer money. It is – a diagnosis.

Only a new monetary system can stop the dollar pandemic on the planet. Its foundation must consist of coordinated actions by countries to establish control over money production and its movement. International monetary circulation should ideally be separated from national circulation. All countries participating in international exchange should have the right to produce international money. Money servicing international trade must be backed by mutual supplies of real goods and services. The situation where one country supplies virtual "paper scraps" to the world market in exchange for real products is unacceptable. All participants in international trade must exchange real goods and services.

Production surpluses (net exports) should be curbed in the same way as excessive unproductive consumption (net imports). Then each country will strive for production self-sufficiency. This will stimulate the development of national science, technology, industry, and agriculture through its own efforts. Highly qualified specialists (including not only scientists and programmers, but also managers) will be able to find worthy work in their own states instead of enriching competitors with their knowledge. And then, perhaps, the problem of global imbalances will resolve itself, clearing the way for sustainable development.

Never in human history has there been a situation where the currency of a single country played a determining role in the fates of all other countries in the world and each individual resident of the planet. The dollar has turned from a universal equivalent of value into an object of worship, the main attribute of status, prestige, and permissiveness.

No state in the world can cope with its own "dollar mania" as long as its national currency is tightly linked to the US monetary unit. This linkage forms when a country assumes obligations under Article VIII of the IMF Agreement on the convertibility of national currencies for current international transactions.

The problem with currency convertibility is that it allows the redistribution of newly created value from countries with underdeveloped financial systems and technologies to highly developed states, primarily the US. As noted by the American popular science magazine Scientific American, “the average American consumes as many resources as 35 people from India and as many goods and services as 53 residents of China. … Having just 5% of the world's population, the US uses 19% of the world's mined copper, 27% of aluminum, 23% of coal, a quarter of the world's oil reserves, and one third of the world's produced paper".

To overcome this asymmetry, it is necessary to coordinate at the international level the principles for leveling regional socio-economic development disparities. An obvious mechanism for implementing these principles could be the creation of a new monetary system in which domestic national monetary circulation is separated from external international circulation. This is extremely difficult to achieve, but absolutely necessary for preserving global peace.

Author: Doctor of Economic Sciences, Professor of the Department of World Economy and World Finance at the Financial University under the Government of the Russian Federation Alexey Vladimirovich Kuznetsov.