Questions Related to International Trade & Currencies

The currency of international trade has been on a lot of peoples’ minds in the last few years. The hierarchy of currencies literature, the related questions of reforming the international monetary and financial system (IMFS), the effects of US monetary policy on the rest of the world (ROW). Add to that the war in Ukraine and Chinese trade-related discussion on the role of the ruble, dollar, yuan, oil and natural gas, wheat etc.
These issues can easily lead to rethinking about the bancor or the role of SDR as a possible solution to some of these issues. As Nathan Tankus observed on twitter in 2020:

“Something I’ve been thinking a lot about lately is people have kept on looking for some “replacement” for the dollar. First the Euro, then the Yen, sometimes some gold-backed (or oil backed?) middle eastern currency. Sometimes Bancor/SDRs, nowadays the Yuan (a decade ago BRICs).”

If US monetary policy is hurting other countries (and/or the US as well), might a bancor alleviate that issue? And possibly some or all of the others above?
With all the talk about global commodities a few months ago, as well as US sanctions against Russia and effects on the dollar, on international commodity markets, and recent emphasis on US monetary policy hurting ROW, I wanted to explore some of these issues. In doing so, however, I came to dead ends, although I think for interesting reasons which I will discuss.

One thing that motivated my thinking was trying to get back to the very basics. We live in a world of chartal currencies. That a country’s people tax themselves/create tax-credits makes sense for organizing public goods internally. But why would one country want another country’s tax-credits? The obvious answer is they, or actually someone or a company in that country, want something from a seller in another country. So they are happy to acquire its currency to purchase what they want, and the seller is happy to sell in its own currency. If there is instead a commonly accepted third currency, that can work as well, and indeed for network reasons and something like a zipf-like power law a dominant country’s currency will end up filling a global role as a common international currency. So with some mix of active forex markets and a commonly accepted currency from one of the larger countries, international trade occurs in a world of only chartal currencies.
In thinking from first principles in this way, I couldn’t help but be struck by recent emphasis on commodities in world trade, however, as commodities played a key role in the earliest development of “money” (credit being the third ingredient in the tax-credit/commodities/credit trinity that is the origins of “money”), and, more importantly, commodities were specifically related to “international” or between-group exchange. Might this be of any interest to current international exchange (trade)?

With those thoughts in mind I want to think about some of the proposals for a supranational currency. And why despite seeming promising at first blush they may well all be unworkable. Along the way are some issues related to the hierarchy of currencies, the IMFS (international financial and monetary system), and thoughts on why we might be stuck with the current system but how we might limit its flaws.

(continued: Types & Motivations for Supranational Currencies)

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