The idea of a global reserve currency (GRC) issued by a supranational entity was debated at the Bretton Woods Conference in 1944. In fact, the UK’s official proposal to the conference, as put forward by John Maynard Keynes, consisted, among other things, of international bank money called “bancor” to be issued by an entity to be called the International Clearing Union (ICU). However, the concept was not original to Keynes and may be attributed to Silvio Gesell, who, in the 1920s, proposed to issue a global monetary unit called “iva”.
Post-2008, the idea of GRC on the lines of bancor made a tentative re-entry in popular economic debates. It often appears that the health of the world economy, particularly for a lot of emerging nations, depends on the US Federal Reserve continuing to expand its balance sheet and fiscal deficit. The moment there is a discussion by Fed on unwinding its “easy money” policy, there is often a capital flight, of differing intensities, from emerging markets. Part of this phenomenon may be attributed to the US dollar being the de facto GRC. As Keynes pointed out from the UK’s experience in the pre-1930s, the sovereign which issues global reserve currency tends to have a deflationary overhang on its domestic economy. So while the US should and would try to take the best decisions for its economy, global regulators need to assess tools to minimize the adverse fallout on emerging economies. A GRC such as bancor may be an answer to this problem as it may provide an alternative to the US dollar.
Keynes’ original proposal included a formula for calculating the maximum bancor allowed for a country. It was to be driven by the country’s net trade position in the previous three years. Keynes also highlighted other factors to fine-tune the calculations. Apart from holding bancor as reserves, countries could have also lent or borrowed bancor from the ICU or from each other. Given that it was the 1940s, Keynes’ proposal was computationally demanding. However, modern technology is capable of capturing real-time data on trade and cross border financing. Subject to political consensus, more involved rules for determining the country-wise quota is technically feasible.
Post-2000, Paul Davidson modernized Keynes’ plan. His solution was a “closed, double-entry bookkeeping clearing institution to keep the payments ‘score’ among the various trading nations plus some mutually agreed upon rules to create and reflux liquidity while maintaining the purchasing power of international currency”. His proposed currency, called “International Money Clearing Unit” (IMCU), may be held only by central banks, which could also trade in IMCU among themselves. The private transactions may be cleared among central banks’ accounts held with the clearing union.
Davidson’s construct calls for a technology that will allow peers (in this case central banks) to transact among themselves, without a central authority. In addition, the central banks may be allowed to mine the GRC based on their macro parameters. The reserves of a central bank may be transparently tracked by its peers adding to the credence of the framework. This GRC may be named the “worldcoin”.
The worldcoin reserves of a country will depend on three types of transactions—trade, financing and “mining” of the reserve currency. The global central banks need to have access to a digital ledger on the lines suggested by Davidson. Based on transactional requirement, the central banks can update their reserves. Such changes, which will be rule-based, should be captured in the ledger promptly and simultaneously for other central banks to keep track. To enable lending /borrowing in the reserve currency, the digital ledger would also keep track of which entity owns how much to whom.
The technology to facilitate worldcoin with such features is available in the form of the database architecture called distributed ledger technology (DLT). Arguably, a GRC may be the best use case for blockchain—a specific type of DLT.
Blockchain’s uniqueness with respect to conventional databases lies in its ability to enable peer-to-peer transactions without the need for a centralized monitoring/administrative entity. In addition, it is capable of tracking the entire path of how a unit of account reached its current owner.
While the digital ledger function would support tracking the reserve-based trade and financing, blockchain will enable central banks to mine worldcoin. The algorithms to mine worldcoin may be driven by macro-economic inputs such as inflation, growth and fiscal deficit. However, the central banks need not require a cryptographic element of blockchain. In fact, a body such as the International Monetary Fund (IMF) may provide the coordination and technical support. Previous instances of synchronized effort to shift to a new monetary regime took earth-shattering events like a couple of world wars. So technological feasibility may be the least of the roadblocks.
A country’s neutral reserve currency may limit foreign currency risk-driven contagion in emerging nations, while allowing the US to unwind unconventional monetary policy and correct its fiscal deficit. Further, a worldcoin would ensure that speculative trade on foreign currency (FX) is reduced and FX is used for real economic purpose. This may disrupt the functioning of FX currency markets, particularly FX speculation trades.
Deep Narayan Mukherjee is a financial services professional and visiting faculty of finance at IIM, Calcutta. Comments are welcome at theirview@livemint.com