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As a consequence, the world monetary system has become weakened and vulnerable, and even minor tremors often send currency values gyrating wildly. Lately the Administration seems to be coming around to the view that the system will need more than just day-to-day tinkering to keep it together. One possibility might be dragooning the ecu into service as a monetary reserve.
That would be another setback for the U.S., which has fought determinedly to retain the dollar as the world's leading reserve currency. If the dollar loses its dominant position, the U.S. no longer will enjoy the almost unique privilege of being able to run up huge deficits in international trade and paying them off simply by printing more money. The change would have the benefit of forcing the U.S. to accept some of the same economic and financial disciplines that the rest of the world's nations must endure. In brief, the U.S. would be obliged to contain its trade deficits, slow its creation of money and curb inflation. All that would tend to lift the dollar and depress gold.
One sign of just how willing the Administration may be to accept a diminished role for the dollar will come during IMF talks next month in Washington. The objective is to find a way of soaking up a portion of the $175 billion in U.S. currency now on deposit in foreign central banks. The favored idea, first proposed last year by H. Johannes Witteveen, former head of the IMF, is to have foreign governments give the IMF some of their dollar deposits, in return for which the fund would issue them its Special Drawing Rights. The SDKS are nothing more than units of account that cannot be spent but are accepted by central banks as reserve assets.
This "substitution account" idea is at best a first step, though certainly a necessary one. Taking it will help sop up at least some of the dollars that are now held abroad. The only lasting solution to the dollar dilemma is to give genuine value to the U.S. currency by reducing inflation and the energy-heavy trade deficit. Until the greenback is once again made as good as gold, many millions of people will persist in believing that the barbarous relic is still a better bet. ∎