A Few Thoughts on the Current International Monetary System
Remarks byLiu Mingkang1
September 1, 2014
The Bretton Woods System was born 70 years ago and broke down 44 years ago. 26 years of age is tooyoung. However, the world has changed since then, enjoying economic and trade growth as well as
financial market stability. The post-Bretton Woods era has enjoyed the benefits of a floating exchange
rate system, but has also suffered chaos and panics. The world has seen the Mexican financial crisis,
Asian financial crisis, the collapse of the dotcom bubble, and the recent 2008 financial crisis. We havealso seen technological developments beyond what was originally dreamed possible, in areas such as
mobile internet, automation, cloud computing, big data, and so on. Geopolitical power shifts,
competition for world economic powers and natural disasters are changing the world every day. The
current international monetary system, in general, bears a lot of unsatisfactory characteristics. Domestic
currencies of major economies perform the roles of international money (medium of globaltransactions, store of international wealth, international unit of accounting), with each national
authority (central bank) having responsibility over their domestic currencies, engaging in monetary
management to achieve monetary policy objectives that are in the national interest. Little or no regard
is paid to monetary and financial issues that are in the global interest. Indeed, no super-national
currency in a meaningful form is dedicated to serving the global interest. For many years, we have had
globalized financial markets everywhere, with generally open capital accounts and a free flow of capitalacross jurisdictions and currencies to achieve diversification of investment opportunities and funding
sources. However, we have also seen that capital flows are volatile and voracious, particularly for small
and medium-sized open economies (newly emerging enough to attract international capital and smallenough to be tossed around). In 44 years, due to an absence of international standards, rules orregulations to guide or govern international monetary activities, incidences of monetary and financial
instability occurred rather too frequently.
American economic dominance has led to monetary dominance of the US dollar in performing thefunctions of money on the international dimension, and dollar dominance generated privilege for the US
in running large and sustained current account deficits and budget deficits. Due to the absence of abetter choice, emerging markets continue to finance US deficits as protection of monetary and financial
stability, and as safe haven assets even in times of global financial crisis.

1Special paper by Liu Mingkang - BCT Distinguished Research Fellow of the Institute of Global Economics andFinance, The Chinese University of Hong Kong; Member, 17th CPC, Central Committee; Chairman, China Banking
Regulatory Commission (2003—2011) and Deputy Governor, People's Bank of China (2000 - 2002).

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Though improving, US economic numbers are neither truly better nor more stable, in addition tomonetization of budget deficits – normally a recipe for monetary and financial disaster in jurisdictions
with no such privilege. Six years after the 2008 global financial crisis, the remaining financial market
bubble that has not burst is likely the market for US treasury bonds and other G7 treasury bonds. What
we are facing in the markets is an unstable equilibrium in the international monetary system with hugerisks for the global economy. To these system weaknesses, we must do something quickly, even if they
are still not very fundamental.
In this case, what we must do is to make most of current opportunities.
1.

National monetary policies should be better coordinated.

Six years after the 2008 financial crisis, the US’s Quantitative Easing (QE) policy is reversing. The marketexpects the US Federal Reserve to raise interest rates sometime in 2015. All else being the same, thereversed operation of QE and a US interest rate hike, if rushed or overshot, will highly likely act as atrigger, causing huge capital outflows across borders. The emerging economies that suffered from ahuge dollar trap (accumulations of US dollar reserves) may once again suffer from sudden outflows ofcapital. As a result, several red flags have begun to appear. Eurozone bonds have fallen to 200 year lowsand emerging markets are now particularly sensitive, with many red flags of uncertainty just as theFederal Reserve is about to complete its taper of QE. We all know that fiscal and monetary stimulus withlax regulations will stimulate false growth and asset bubbles, and we also know that once these themes
slow or reverse, the consequences could be quite significant. In a world so deeply inter-connected, we
have every strong reason for better coordination of national rules, policies and processes to bedeveloped to help ensure stability.
2.

Information sharing and disclosure should be improved.

The SDDS (Special Data Dissemination Standards) and GDDS (General Data Dissemination Standards) aregood efforts by the International Monetary Fund (IMF) at institutionalizing data sharing. We are toldthat in an era of big data, about 90% of the world’s data has been created in the last two years alone,
and that 90% of this data is not well structured nor analyzed. There is still room for the IMF to do more
to encourage data mining and sharing, as well as provide member countries with more meaningful
information to facilitate monetary policy decision making. The most striking issues over the past 44
years have been that a) central bankers and heads of finance ministries in many countries have not had
adequate mandates to share their data with others, and b) even if such a mandate exists, they are often
not willing to share, particularly during times of economic distress. These highlight the fact that the IMF
has to strengthen its powers of sanction and incentives for compliance to certain norms and standards,
to monitor, assess and review so as to ensure that necessary, quality data is surrendered by member
countries to help identify significant exchange rate instability and misalignments.
3.

Capital movements should be carefully monitored and better managed.
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Under the current international monetary system, the yield-driven behavior exhibited by investors is
exacerbating cross-border inflows and outflows of capital, which will destabilize national andinternational financial markets. Hence, countries should sequentially liberalize their capital accounts inline with their efforts to strengthen their governance. The IMF should encourage relevant countries toadopt suitable policies, such as Tobin tax-like approaches, to sterilize the volatility of capital flows andensure sustainability.
4.

Cooperation and coordination should be at all levels.

International cooperation and coordination should be made a strong focus in the coming years. First, theIMF and FSB should work more closely to deal with stability issues. They should not only share data andanalytical frameworks, but also human resources. Globally speaking, all nations should realize quickly
that cooperation and coordination should be promoted and strengthened bilaterally and/ormultilaterally, and this should be done thoroughly, substantively and in good time.
Why I stress this point is that this is a political process and we are sad to see quite often national interest
considerations of the major stakeholders override the global interest. We do need a bold initiative thatregains extraordinary political vision, wisdom and courage.
5.

The role of a multi-currency system should be recognized in international trade andinternational payments.

Discussion and efforts should be provided to encourage the creation of an international reserve
currency to become a widely accepted international payment and reserve instrument. And the desirable
goal is to disconnect the currency from individual nations and is able to remain neutral and stable in thelong term, thus removing the inherent deficiencies caused by using credit-based national currencies.
Before that, the role of a multi-currency system should be recognized and subject to market needs, andthe multi-currency system should be used more in international trade, investment and payments.
Because natural competition plays vital role in driving us forward, a shift in economic power isunavoidable and respective currencies should play corresponding roles, as was the case in the 1940s. At
the very least, such a move will, in part, supplement the current US dollar dominated system.
In conclusion, in a risky and dynamic world, returning to the Bretton Woods System, or idly sticking to
the current system, would be unwise. Higher quality information, implementing standards andcommitting to sharing, better disclosure, fully-fledged cooperation and coordination in deeds, and arefined financial governance system are the realistic solutions for all of us today.
If we commit to working together now, through the strength of our combined efforts we may be able tocreate a more robust and flexible system that is capable of adapting to future changes. Conversely, thecombined suspicions and panics of market actors may also result in amplified shocks and even greater
challenges – an outcome that we must be ever vigilant for.
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