Should we be Worried About Currencies?

Trust is an essential feature of money. Nowadays, trust in a currency no longer relies on gold reserves at the central bank, but on the quality of today and tomorrow’s central bank balance sheet. It requires a credible monetary policy and, by extension, a sustainable fiscal policy.

In the international arena, not all currencies are equal. Despite the multipolarity of today’s world economy, the US dollar remains the main international currency. The euro comes second, but its role has somewhat receded since the mid-2000s. As for the yuan, its internationalization is still in the infancy. According to economic historians, the international monetary system could operate with more than one key currency: depending on the reforms that will be carried out in both regions, the euro and the yuan could complement rather than supplant the dollar. A multipolar system would likely be more stable, but the transition may involve tectonic movements. Wide exchange-rate fluctuation could in turn exacerbate existing tensions related to international trade and taxation, especially if the United States is no longer willing to maintain a benign neglect vis-à-vis the dollar value. At the same time, the extra-territoriality of US laws concerning transactions involving the dollar, but also the low effectiveness of exchange-rate variations to counteract foreign non-cooperative policies in a world dominated by the dollar, may accelerate the diversification of the international monetary system, with the risk of triggering a crash of the dollar.

In parallel, a debate has developed around the use of currencies outside the realm of central banks. This debate is fueled by rapid technological change, but also by a form of distrust in public institutions. Ironically, private currencies such as the bitcoin offer much less guarantee than official ones. A related debate is that of narrow banking: if banks were to be required to back 100% of their deposits with reserves at the central bank, why not allow the depositors to directly hold their accounts at the central bank, in the form of electronic money?

This session will focus on the relationship between trust and the evolution of local, national and international monetary systems.