The Two Families of Global Reserve Proposals & Swap Lines

Before continuing with posts on this topic I want to note: I started these posts with a twitter comment by Nathan Tankus on replacing the dollar in international trade. That thread continues – that he foresees

“a world of swap lines as alliance politics… Swap lines may seem like technocratic high politics now but it’s very possible that in a few decades polities swapping their respective ‘currencies’ will feel second nature.”

A 2009 United Nations proposal (mentioned again later) for a global reserve system for trade states:

“One possible approach would require countries to agree to exchange their own currencies for the new currency…This proposal would be equivalent to a system of worldwide “swaps” among central banks.” (p. 115-116).

2009 UN Report of the Commission of Experts

For a number of reasons something like this happening is what I concluded as well before seeing these quotes. Exactly how and why is what I am working up to. As I mentioned at the outset, I think thinking about some of the deep reasons, and not just the political reasons, why this is so is important.

Relatedly, the same report, noting the difficulties in doing so, states:

“However, this is an idea whose time has come. This is a feasible proposal and it is imperative that the international community begins working on the creation of such a new global reserve system. A failure to do so will jeopardize prospects for a stable international monetary and financial system” (p. 110)

I include this second UN quote because there is an overall deep skepticism that any global systemic reform is politically achievable. Yet there may be more serious proposals being taken more seriously than some realize. Given the high degree of turmoil in global markets in 2008, unexpected government and central bank actions during covid, and renewed turmoil related to covid and the Ukraine invasion now, the reconsideration of current practices may be as pressing, and feasible, as the quote above suggests.

The main plans that I discuss in these posts constitute two “families,” each with some antecedents and many subsequent related newer proposals. I think of them as Goudriaan/Graham/Hart-Kaldor-Tinbergen-type plans and Keynes/bancor/SDR-type plans. The key difference is whether they have maintained some connection to commodities—often with the goal of trying to keep the financial architecture of world trade tied to the real economy in some way (importantly, not in a “goldbug” way, rather to a basket of systemically key commodities because thinking of the “real” real economy, sort of like Pozsar)—or something like a bancor, or later, extending the use of SDR in some way. (yes there was some connection with bancor; more on that and truly “abstract” unit-of-account later). Why maintaining a connection to a basket of global commodities might be uniquely of interest for global trade yet not at all for sovereign currencies is a point I’ll resume.

One of the earlier plans was that of Jan Goudriaan in his 1932 pamphlet “How to Stop Deflation.” At the same time, Benjamin Graham was developing his well known, somewhat similar plan (later helped by Harvard/Princeton economist Frank Graham [no relation]). The later Hart-Kaldor-Tinbergen plan (1964) is in some ways similar to the Graham plan.

The Keynes plan is of course the most famous of all, with notable (SDR based) updates by e.g., Paul Davidson (1988 and 1993) and the 2009 United Nations Commission which included Joseph Stiglitz and Charles Goodhart, and lists as “Rapporteur” Jan Kregel. Also notable is that the commission lists economists from key surplus nations: China, Japan, Germany, and Russia especially. This is a point I will come back to- there is more support for “forced purchasing” by surplus nations (or at least greater balance) from perennial trade deficit countries than is popularly assumed. Related: the 2009 BIS essay by China’s then Central Bank Governor Zhou Xiaochuan “Reform the international monetary system,” for Keynes-style, SDR-based reform.