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The US has weaponized its financial power in the hope that Russia will withdraw from Ukraine rather than choose to suffer economic pain. One result of the sanctions is that Russia cannot access around half its $640 billion foreign exchange reserves, which it had assiduously built up over the past decade as a defence against either economic shocks or geo- political upheavals. The freezing of Russian foreign exchange reserves—and those of Afghanistan earlier this year—has led to a lot of discussion about whether some countries will (or should) try to diversify their foreign exchange reserves away from the US dollar.

It is not so easy. The Belgian economist Robert Triffin had pointed out way back in 1959 that the issuer of the global reserve currency would need to run a structural current account deficit if global trade is not to be starved of liquidity. The US has been providing dollars to the rest of the world through its trade gap, by sending dollars rather than goods to countries with which it has a trade deficit. It has also often been the global buyer of last resort whenever there has been an economic shock, as the splendid Indian export boom of the past few quarters shows.

The advantage that the US gets through this arrangement is that it does not face the usual balance of payments constraints that other countries face. It only needs to print its own currency to pay the rest of the world. All other countries need to actually earn dollars to meet their international obligations. However, there is no country right now which is ready to run a structural current account deficit or be the buyer of last resort to an extent that its currency can replace the US as the global reserve currency. Think of China, for example.

Is it now time to revisit an old suggestion by John Maynard Keynes? In the aftermath of World War II, he had come up with the idea of a global central bank that would issue a global currency: an International Clearing Union and bancor, to use Keynes’ own terminology. Countries would use the system to make payments to each other. His idea was not accepted by the US at the Bretton Woods conference that created a new international economic system. Countries pay each other in national currencies, especially the US dollar; some bilateral trade arrangements, such as the old rupee-rouble trade that is now perhaps being revived for energy imports, are also possible.

Keynes came up with a plan for his time. Each country would get an initial allotment of bancors depending on its share in world trade. Then each country would get bancor credited into its account based on its net exports. The global central bank would be the arbiter of global liquidity, at least for international trade. Keynes also wanted to avoid structural trade imbalances, so his plan included a levy on countries that ran large trade deficits as well as on those that ran large trade surpluses. Keynes did not want only deficit countries to bear the burden of adjustment.

The idea of a global central bank issuing a global currency was proposed by Keynes in 1944 when the Bretton Woods system was being built on the foundations of fixed exchange rates and capital controls. In effect, Keynes saw the bancor as an international medium of exchange rather than a store of value. Most countries today have at least weak forms of flexible exchange rates and open capital accounts. Is it time to think of bancor 2.0?

Economist and former Greek finance minister Yanis Varoufakis had written in 2016 about how the bancor idea can be adapted to our times. “It would feature a common digital currency—say, Kosmos—to be issued and regulated by the International Monetary Fund. The Fund would administer Kosmos on the basis of a transparent digital distributed ledger and an algorithm that would adjust total supply in a pre-agreed manner to the volume of world trade, allowing for an automatic countercyclical component that boosts global supply at times of a general slowdown," he wrote.

Varoufakis made his proposal in the context of the economic crisis in the Eurozone in the early years of the previous decade, when Greece had to deal with its current account deficit through a painful bout of deflationary policies. His concern was still close to Keynes’: how to deal with international trade imbalances fairly. However, countries do not hold a global reserve currency only to fund their international transactions, but also as a precaution in case of a sudden shock. The supply of a global digital reserve currency cannot be divorced from the demand for it, and hence will not be just a function of trade flows, as was the case in Keynes’ original formulation.

Neither a global central bank nor a digital global currency can be pulled out of thin air, for two big reasons. First, there are network effects that ensure that countries use the US dollar for their international transactions because other countries also use it. Second, any concerted move to replace the US dollar as the global reserve currency will run into geopolitical headwinds. However, if one thinks of a global reserve currency as a public good, then it is perhaps time to adapt Keynes’ old idea for the age of digital currencies.

Niranjan Rajadhyaksha is CEO and senior fellow at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.

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