1. Catherine R. Schenk, University of Glasgow, Scotland
Managing multiple international currencies in the international monetary system: reflections from the experience from
Catherine R. Schenk, University of Glasgow, Scotland
Uses of the Past in International Economic Relations

2. Are multiple currencies a source of risk?
Triffin Paradox: national currency as an international currency, requires deficit and undermines exchange rate stability: persists beyond pegged exchange rate regime
Sensitivity to US economic policy: asymmetry, spillover effects
Tipping point risk – massive switch collapses the international monetary system
Both sterling and dollar weak in 1960s: fear of tipping point for both
Main policy response is SDR in 1960s, call to enhance SDR in 2010
International Liquidity “a fashionable conversation piece of the economists’ union”: JK Galbraith to JFK (1963)

3. Functions of International Currencies
Reserves: $ stable at c.63-64%
FX/Money Market/Debt Markets: more diversified ($=44% FX turnover, 43% Cross-border payments)
Invoice, Unit of Account: $ for commodities, Euro intra-European trade, increasing share of RMB for Chinese trade
Portfolio diversification (ECB sold €500m for RMB June 2017 <1%)
RMB still only 1% identified reserves, 2% FX turnover
Variety in reserves preference (related to trade, debt, anchor)

4. Multiple currency system is the norm?
Sterling in Gold Standard: (40 years)
Sterling – Dollar – Sterling (20 years)
Sterling decline: Dollar Rise (25 years)
Dollar (failure of Yen internationalisation, DM restricted)
Dollar, Euro 1999 –
Future: Dollar losing share, or other currencies jockeying for position while dollar holds its place? RMB? Euro? SDR?

7. Remember valuation effects: denominated in USD

8. Managing the Decline of Sterling
Triffin Dilemma (1960) and fear of run on US drives search for cooperation
Central bank cooperation propped up the system
General Agreements to Borrow (1961: IMF, G10)
Gold pool ( )
Swaps (lines of credit)
Group Arrangements (lines of credit)
Urgency and Cooperation intensified by weakness of US Dollar

10. Pressures for Transition
Declining share of trade and debt in sterling
Perceived frailty of sterling exchange rate
UK policy focus turning to EEC
BUT
Dollar’s value also becoming frail (particularly after sterling devaluation in Nov. 1967)
Danger of tipping point from diversification of reserves

11. Source: C.R. Schenk and J. Singleton, ‘The shift from sterling to the dollar 1965-76: evidence
from Australia and New Zealand’, Economic History Review, 68(4), 2015

12. Sterling Group Arrangements 1961-1977 Key example of Central Bank cooperation: G10
Sterling was viewed as key line of defense for the dollar
$904m in 1961
$250m in 1963
$1 b in September 1964, $3 billion in November 1964 (equiv. to $37.7 billion in 1997; IMF/BIS/World Bank/swaps Mexico rescue in 1997 $40b)
$1b 1966;
$1b 1967 (sterling devalued, end of gold pool)
$2b 1968 (equiv $38b today)
$2b 1977 (+sale of $/Yen/SwFr bonds)
Terms tightened from 1968: link to IMF Stand-by in 1977

13. Sterling Agreements 1968: negotiated bilaterally with 34 countries
Territory
MSP (%)
East Caribbean Currency Authority
100
Zambia 65
Gambia
Nigeria 60
Hong Kong* 99
Jamaica 57
Barbados 97
Ireland 55
Mauritius 95
Uganda 51
British Honduras 90
Cyprus 50
Bahamas 80
Dubai
Bermuda
Iceland 45
Ceylon
Australia*
40 (47)
Ghana
Malaysia*
40 (45)
Guyana
Pakistan 40
Malawi
Singapore*
Trinidad
Jordan 25
Malta 75
Tanzania
Bahrain 70
Kuwait*
25 (54)
New Zealand*
Libya
18 (50)
Sierra Leone
India 13

14. Share of Sterling in Reserves (Percent)
Sterling Agreement Countries
All Countries
1968
57.9 20
1969
56.1
17.5
1970
53.7
5.2
1971
61.6
4.5
1972
54.5
4.7
There were two rounds of compensation under the guarantee
October 1972 (costing £58 million)
October 1973 (costing £100 million)

15. Not a Tipping Point
Source: Schenk, The Decline of Sterling: managing the retreat of an international currency (2010)

16. SDR – Triumph of Compromise over Clarity
Prolonged and acrimonious debate over a range of schemes from (Per Jacobsson)
Too much liquidity or too little? Europe vs USA
Replace the dollar or supplement it?
Link to gold or not?
Form of credit or reserve asset? (repayable? Unconditional?)
1967: need something to present at Rio Summit September 1967
last minute fudge August 1967
sterling devalued, gold pool collapses
March 1968 Stockholm meeting to finalise amendment to Articles of Agreement and details of SDR: Debre of France abstains
First tentative issue

17. End of the Bretton Woods System
System began to collapse after Sterling devaluation in 1967
Run on the dollar and collapse of Gold Pool in March 1968
September 1968 Sterling holders promise to retain share of sterling reserves
US inflation pushes Europe to convert dollars into gold in 1971
Nixon closed the Gold Window in August 1971
Smithsonian Agreement not credible

18. 1970s: Transitional phase
Cooperation and Coordination:
Swaps and Group Arrangements continue (CB cooperation)
Efforts to reform the international monetary system come to little (SDR, Substitution Account, imbalances trigger, NIEO)
Low point for IMF (greater importance for G10 and then extension to C20): diffusion
Launch of G-summitry 1975
Reform of SDR: eliminate gold link, more competitive interest rate, basket of currencies smaller

19. 1980s-1990s: Continued Effort to Manage Currencies
1978 US dollar crisis: Coordinated dollar defense, Carter Bonds (weak effects)
Volcker (1979): supported by G10 central banks at BIS
G-summits: Plaza (1985) and Louvre (1987)
Limited effect of Exchange Market Intervention
Longer term damage to Japan
Major failure of Coordination
After Volcker, CB independence and rules based policy focused on credibility for low inflation
End of FX intervention by US in 1995
EME crises in 1990s spread floating rates and inflation targeting but also return of reserves accumulation

20. 2000s – the era of the RMB?
Resurgence in $ use after 2008 (RMB re-pegged) despite weaknesses in US economy
2010: PBoC call for mobilisation of SDR, reduce reliance on USD
Internationalisation of RMB as part of China’s outward-looking economic strategy (AIIB, OBOR, Cross-Border Interbank Payment System, join SDR)
Internationalisation faltering?
trade settlement ranking 5th (2015) to 7th (May 2017): 76% is Hong Kong
Symmetric exchange rate risk reduced demand for RMB assets (Aug 2015)
Difficulties generating bond market

21. Conclusions/Speculations
We’ve lived with multiple international currencies for a long time
Dollar is most prominent – but dominance varies according to purpose
SDR mobilisation as a way to avoid tipping point?
SDR not a currency now, no market (limited new bond issues 2016)
Easily replicated for diversifying risk, less liquid: needs other advantage
Future: more diversified system?
Unlikely: Euro and RMB have institutional flaws, US appetite for debt not likely to decline
Likely: US retreats from globalisation, OBOR increases Chinese economic sphere of influence, Euro moves to fiscal convergence
?Impact of higher inflation, shrinking Central Bank balance sheets in 2020s?