01.12.2003
International Monetary System: The End of Monocracy
№4 2003 October/December
Olga Butorina

Olga Butorina is a Doctor of Economics, professor, head of the European Integration Department, Advisor to the Director of the MGIMO University of the Russian Foreign Ministry, and a member of the Board of Advisors of Russia in Global Affairs.

How to turn the ruble into an international currency

Over the next ten to 15 years the dollar’s global hegemony will
be a thing of the past. However, it is not going to give way to a
single world currency, as proposed by Keynes and Mandell, or to a
plurality of monetary units in each country, as believed by Hayek,
and not even to the division of the globe into several currency
zones. The core of the new international system will be constituted
by 20-30 of the most important currencies, which will be integrated
into a real-time settlements system based on new information
technologies. This type of format change can radically improve the
position of the Russian ruble and alter guidelines for national
monetary policy.

If Russia ranks among those countries whose currencies will be
accepted into the global web of multi-currency payments, then local
companies will be able to pay for imports with the ruble. The
Russian ruble will also become the main currency in the
Commonwealth of Independent States. This will appreciably widen the
scope of its use, lowering the demand for foreign cash, and pushing
the dollar out of domestic circulation. As a consequence, internal
investment sources will become significantly more available, and
both quantitative and qualitative characteristics of the Russian
stock market will improve. The Bank of Russia will not be compelled
to sustain huge official foreign exchange reserves just to keep the
ruble steady. Overall, Russia will be able to enjoy many of the
benefits of a market-based economy which are now out of its reach
due to the ongoing processes of globalization – its currency and
financial systems are not yet prepared for much stronger
competition.

In order not to miss its opportunity, Russia has three immediate
things to accomplish. One is to extend the ruble’s sphere of
circulation by all means possible. Another is to make maximum use
of up-to-date payment expertise. Last but not least, Russia should
be prepared for idiosyncratic shocks in the international monetary
system, including significant and hardly predictable changes in the
global role of the U.S. dollar.

From gold to dollar

Throughout history, the world has experienced four international
monetary systems. The first one was forged in Paris in 1867 and
lasted for 47 years until World War I. The second one proved the
most short-lived: after seeing the light of day in Genoa in 1922,
it disintegrated as early as 1931 with the sudden shock of the
Great Depression. The Bretton Woods system survived for 27 years –
from 1944 till 1971, when the United States stopped exchanging its
dollars for gold. The current system was formally implemented by
IMF members’ Kingston agreement in January 1976.

Any change in the currency system has always meant the
replacement of some elements of the international monetary system
with new ones. The decline of the first system ushered in the
elimination of the gold coin standard. When the second system
started to break down, exchange rates stopped being fixed in
relation to gold. Under the Bretton Woods accords, only the dollar
was converted into gold, while all of the other currencies could be
exchanged for gold via the dollar. The present monetary system has
finally removed the last tie that bound currencies to gold, with
the world transferring to flexible rates once and for all.

Today the global foreign exchange markets are an unimaginably
far cry from what they were when the post-Bretton Woods system was
only being introduced. Yet the regulatory machinery has remained
much the same as it was in 1976. Let us recall that at this time
the Chinese people were paying their final respects to the Great
Helmsman, the Soviet Communist Party opened its 25th congress,
while two college friends were putting together the first personal
computer in a garage in California.

FINANCIAL markets: global climatic changes

In the last quarter of the 20th century, the financial markets
found themselves exposed to five new factors, namely: (1) the
general liberalization of capital flows, 2) new technologies, 3)
changed nature of exchange rates, 4) breakup of the socialist
system, and 5) introduction of the euro.

The scope of exchange rate regimes liberalization is illustrated
by the following fact: whereas in 1976, just 41 countries observed
the undertakings set out in Article VIII of the IMF Articles of
Agreement (which bans restrictions on current payments,
discriminatory exchange practices and barriers in the way of funds
repatriated by foreign investors), in 2002, this number rose to
152. Comparatively recently, even the most advanced Western
countries imposed multiple foreign exchange controls. England until
the middle of the 1970s, for example, prohibited its residents from
buying foreign cash in excess of a very nominal amount, while
France in 1983 imposed some very stiff rules on repatriating export
earnings, buying foreign currency to pay for imports, covering
foreign exchange futures and making investment abroad.

The removal of foreign exchange controls at the end of the 20th
century has had mixed results for many economies in transition.
According to the IMF, the liberalization was designed to enhance
their growth and integration into the world economy. In practice,
however, exchange deregulation often contradicted with the
macroeconomic context, and its pace did not correspond with the
speed at which market mechanisms and institutions were being
established. This has all set the stage for dollarization,
investment drain, and chaotic shifts of short-term capital.

New information technologies have dramatically increased the
mobility of international capital flows. Many countries in the
1970s-80s launched national real-time gross settlement (RTGS)
systems. During the 1990s, those were linked up. In Hong Kong, for
example, such systems are now used for payments in Hong Kong
dollars and the standard U.S. dollar; another such system went on
line in April 2003 for euro settlements. All these three systems
are operationally complementary to each other. Moreover,
traditional international clearing arrangements have been improved
and made more reliable, with increases in lending ceilings, the
range of participants, and the scope of operating functions. This
now makes it possible to transfer large sums of money from one part
of the world to another with simply the touch of a button.

The last two decades have ushered in another crucial shift, with
the exchange rates ceasing to depend on foreign trade. This was due
to international foreign exchange markets having swelled 100-fold.
While daily exchange transactions through the 1970s amounted to
U.S.$10-20 billion (or approximately the same as the daily GDP in
the developed economies), the comparable figure in 2001 was an
enormous U.S.$1.2 trillion. Buying and selling money for commodity
transactions is responsible for merely 2% of the total foreign
exchange business done today. Therefore, it is much more likely
that a currency’s market rate differs from its purchasing-power
parity (which reflects relative prices in the corresponding
countries). In Russia, for example, one dollar can buy twice as
many goods and services as it can in the United States. In other
words, the ruble’s market value equals 50% of its purchasing power
parity (PPP). This is typical of most Central and East European
nations. In some countries, the national currency is even more
understated and stands at around 20% of PPP, for example, in India
and China.

In 1971, the exchange rates broke free from the gold anchor;
they also freed themselves from the merchandise anchor at a later
time. Notwithstanding globalization and a well-developed world
market (even if the latter accounts for less than 20% of the
world’s GDP), at the present time there are no signs of price level
convergence among different countries. In other words, the corridor
that is open for fluctuations in exchange rates has markedly
widened. A sharp depreciation of a currency to 50%-25% of its
original value (experienced, for example, by the Russian ruble in
1998), no longer astonishes anyone.

As the socialist camp crumbled during the early days of the last
decade, former COMECON nations began their trek toward a
market-based economy. Most of them immediately made their
currencies convertible, and lifted principal restrictions on
current transactions. In 1992, Russia enacted a law entitled On
Foreign Exchange Regulation and Foreign Exchange Control which has
permitted conversion transactions and cross-border capital flows.
With an entirely new segment added to the world money market, the
international monetary scene has undergone profound change, even
though the regions comprising this transition account for only 2%
of the global foreign exchange turnover. Suffice it to recall that
all of the new currencies went through a spell of rampant inflation
and severe depreciation; the post-Soviet space became increasingly
dollarized. Much more robust than young local currencies, the U.S.
money elbowed the latter out of domestic circulation. This was soon
followed by a financial crisis which hit Russia in 1998.

Yet another new factor of the global financial system has been
created by the advent of a single European currency, launched on
January 1, 1999. During the first two years of its life, the euro
depreciated substantially, but rebounded to surpass the dollar in
value already in late 2002 and early 2003. This has strengthened
foreign investors’ trust in the euro and made it an attractive
instrument of diversifying their savings. National currencies of
the EU countries have never before enjoyed such a level of
internationalization as the euro these days. If its exchange rate
remains stable, the demand for the single currency will steadily
grow – something its predecessors, national currencies, could never
hope for in the past.

However, the euro has also made world financial markets only
more unstable. This is because market operators now have a real
alternative to the dollar (albeit not in every field), while the EU
is now implementing economic and monetary policies that are more
independent from the United States. According to the Basel Bank for
International Settlements, the exchange rate of the euro in
relation to the U.S. dollar in 2001 was three times as volatile as
the Deutschmark was in 1998. The amplitude and frequency of the
fluctuations shown by other main currency pairs has also increased.
The instability of the foreign exchange markets, of course, has not
been brought about simply by the introduction of the euro, but the
latter event has obviously triggered it.

These developments of the 1990s have contributed to the growing
instability of the international monetary system. The series of
regional crises opened with upheaval in the European Monetary
System in 1992-93. The currencies of even those countries whose
governments had maintained sound economic policies came under
attack for the first time. Economists started talking about a
“second-generation” crisis. Here, what really matters is not the
quality of national policies, but the ratio between the financial
resources which the governments, on the one hand, and the currency
speculators, on the other, are prepared to put at stake. The
dealers calculate which sum the government can spend on
intervention and, if their own resources turn out bigger, start an
attack.

In 1997-98, the world was struck by another torrent of financial
turmoil. It started with Southeast Asia and Russia, and sent
shockwaves to Latin America; finally, financial crises broke out in
Turkey in 2001 and in Argentina in 2002. No matter how much one
would like to view this string of events as fortuitous, they were
not. Furthermore, these events were not precipitated by
irresponsible economic policies or some fateful fluke; the
turbulence was triggered by dramatic changes in the global monetary
climate.

What options does the world community have for responding to the
challenge?

Exchange rate management: a classical answer

The primary methods employed for managing exchange rates have so
far been foreign exchange intervention, interest rates, current
account balancing, and currency pegs. Each of these techniques,
however, has undergone serious change over the past 15 years.

The amount of resources available for interventions is no more
sufficient, although they have not decreased. On the contrary, the
overall world foreign exchange reserves of all of the world’s
countries during 1990-2002 swelled to 1,730 billion SDRs from 640
billion, or almost trebled. Now they are insufficient compared with
the market size. Should it be required to support the euro or the
dollar, the available resources (EUR 300 billion held by Eurosystem
and U.S.$60 billion owned by U.S. Federal Reserve System) will only
be enough for cosmetic measures. In the fall of 2000, the European
Central Bank intervened in the foreign exchange markets on four
occasions to support the euro. But the result was pitifully small:
the euro would not actually grow till 2002. The amount spent on
interventions is indirectly indicated by the fact that in November
2000, the ECB’s foreign exchange holdings (net of gold, SDRs and
reserves with the IMF) fell by EUR 13 billion.

The world’s largest gold and foreign exchange reserves are to be
found in the Southeast Asian nations. In mid-2003, the official
holdings of Japan grew to U.S.$540 billion, while China had up to
U.S.$350 billion; Taiwan, South Korea and Xianggang (Hong Kong)
each had U.S.$100-odd billion. It turns out, therefore, that while
some countries issue the world’s major currencies, it is others
that keep the lion’s share of such monies in reserve. An asymmetry
is in evidence. Should the dollar or euro lose its market value,
the Asian nations will hardly sacrifice substantial sums to bolster
a foreign currency, even though it may be important to them.

The interest rate’s impact on the exchange rate is likewise
fairly limited. Any connection between the two is only really
visible in the case of well-recognized international currencies,
which are the dollar and the euro. (In Japan, interest rates over
recent years have been close to zero percent due to the recession.
In Britain, interest rates are suppressed by the dependence of most
families on mortgage payments. In Switzerland, the rate is
traditionally low thanks to banking secrecy: owners of financial
fortunes of dubious origin easily agree to zero or even negative
earnings, thus providing Swiss companies with cheap loans). And
even this is not often the case. Market interest rates in the euro
zone have exceeded the American ones since the summer of 2001, but
it is only 18 months later that the euro has nudged upwards.
Increasing the refinancing rate for non-reserve currencies does
rather little to attract foreign capital – not only due to the lack
of trust, but also due to the frailty of local stock markets.
External operators fear that after investing money in a rare
currency or in securities denominated in it, they will be unable –
when the time comes – to sell these assets at their former price.
Underdeveloped markets are usually exposed to abrupt swings.

The current account balance is believed to be crucial for an
exchange rate. Loan facilities to recover such balances are widely
used by the IMF to help its members steady their exchange rates.
However, even a non-negative current account balance in a country
whose currency is not used abroad does not guarantee a stable
exchange rate. In 1998, Russia had a favorable balance of U.S.$700
million, but this did not save the ruble from devaluation. In a
country with a dominant currency a substantial current account
deficit can well be offset by an inflow of long-term capital, as
has already been the case in the United States for years.

Before the crises that unfolded in Southeast Asia and Russia,
the IMF, acting on U.S. prompting, had strongly recommended
developing and transitional economies to peg their currencies to
the world’s stronger currencies, most notably, the U.S. dollar. The
rationale was that this would quickly build or restore investor
confidence in local money by suppressing inflation and attracting
capitals from abroad. The events of 1997-98 demonstrated how grave
the medium- and long-term consequences of such a policy could be.
These governments’ commitments to sustain fixed rates and ensure
central banks’ transparency (including their official reserves)
enabled speculators to find accurate bearings amidst the financial
terrain. As a result, they were able to make correct judgments
concerning the timing and nature of their offensive.

New problems call for new cures

Where time-tested formulas have become notably less effective
and clearly outdated, new solutions are needed to meet the new
challenges. A vigorous quest for such remedies has been on for some
time now, and has been in especially high gear since the end of
1997. It is possible to divide the new or largely modernized
monetary stabilization instruments implemented lately into the
following three categories: 1) regional cooperation; 2)
international regulation; and 3) new technologies.

Currency stabilization limited to a separate region is, in
principle, a bug-free process. Western Europe proceeded along that
route after World War II with the European Payment Union
established in 1950. Then the “monetary snake” – a collective
exchange rate mechanism – made its appearance in 1972, under the
aegis of the European Economic Community. The European Monetary
System followed in 1979, and the Economic and Monetary Union in
1999. The Europeans’ will has been dictated by business needs: for
most countries in the region, commerce with their neighbors made up
more than half of their entire foreign trade, while the haphazard
movements of floating exchange rates following the breakup of the
Bretton Woods system disrupted traditional commodity flows.

The European experience has long become a model to emulate. It
was drawn on in Central America (with Guatemala, Costa Rica,
Nicaragua, and El Salvador in 1964 entering into their Agreement on
the Central American Monetary Union) and was also borrowed in
Africa (where 16 countries of the Economic Community of Western
Africa (ECOWAS) set up the Western African Clearing House). In
November 1997, 14 Southeast Asian nations organized the Manila
Framework Group to devise crisis management arrangements. Following
that, Indonesia, Malaysia, the Philippines, Singapore and Thailand
entered into ASEAN Swap Arrangements (similar to the system
existing in the EC in the 1980-90s), which enable a country which
has been attacked to obtain foreign currency for interventions on
collateral of its government bonds. In May 2000, all ASEAN members,
as well as China, Japan and South Korea, signed agreements in
Thailand to broaden the operating area for such arrangements. The
documents have come to be known as the Chiang Mai Initiative. By
the spring of 2003, there were as many as ten bilateral credit
lines already open, totaling U.S.$29 billion, while another three
were in the pipeline.

The amount of resources under the initiative is not really that
big. However, it has given an important signal to the markets, as
the central banks involved have gained extra possibilities to
counter speculative attacks without enlarging their reserves. In
the opinion of Asian economists, it is critical that the funds are
immediately available, as compared with IMF financial assistance
which is always very late. Furthermore, IMF facilities have taut
strings attached. Governments are in no hurry to apply for such
assistance for fear of moral pressure, the concomitant meddling in
their internal policies, and an increased capital outflow.

Of all other of the world’s regions where currency cooperation
plans are being entertained, only the CIS has any real chance to
succeed. Even though there will certainly be no single currency
there within the next 20 to 30 years, the CIS nations can integrate
their financial markets. In fact, they have already made some
progress. The CIS Joint Payment System, a banking association, and
the International Association of Foreign Exchanges, were
established in 2000. In 2001, the CIS Inter-Parliamentary Assembly
passed the model laws entitled On the Securities Market and On
Foreign Exchange Regulation and Foreign Exchange Control, while the
Eurasian Economic Community (EurAsEc) drafted an Agreement on
Principles for Organizing and Operating Foreign Exchange Markets.
In 2002, nine CIS countries came to terms on the establishment of a
special council which brings together their top stock market
regulators. Finally, a Convention on Integration of Stock Markets
in the CIS Countries was drawn up.

The above developments are not a direct remedy for stabilizing
exchange rates. Nevertheless, they have contributed to the depth
and liquidity of national financial markets, which is essential for
making domestic currencies steadier. Over the long term, the launch
of a common payment unit (but not yet a single currency), joint
steps to get the dollar out of the economy, together with measures
similar to the Asian initiative, could markedly fortify the
positions of CIS countries’ currencies.

Among international tools for currency and financial
stabilization, the Tobin Tax is the best-known. In 1972, James
Tobin, a U.S. economist who nine years later, in 1981, would be
awarded the Nobel Prize, proposed that speculative capital
movements around the world should be taxed by a special levy equal
to 0.1% of their value to finance the needs of the developing
nations. After the financial calamities of 1997-98, debates on the
tax have finally become practical. The toll has been officially
urged by the Government of Finland, the Canadian legislature, the
Brazilian President, and various parliamentary caucuses in the
United States, Britain, France, Belgium, and Italy. In 2001, forty
members of the European Parliament and national legislatures in EU
countries went on record in favor of the Tobin Tax being imposed in
the European Union at two levels – normal and emergency situations.
In the latter case, the tax could be raised to as much as 50%
should a specific currency suddenly plummet in value. The EU
Council, however, turned down that plan, arguing that the
imposition would force businesses into offshore tax havens and, as
a result, would destabilize markets rather than secure them.
Measures patterned on the Tobin Tax, however, have started to be
invoked elsewhere: business transactions are subject to a tax of
0.2% in Singapore, 0.4% in Hong Kong, 0.0034% in the United States,
and 0.3%-0.6% in France. The chances that the Tobin Tax will be
enforced around the world overnight – and this is the only way for
it to be introduced in order to make its point – are not very
high.

Last but not least, new information technologies provide for yet
another foreign exchange stabilization instrument. They are mostly
employed, however, by private business rather than governments. As
already noted above, many countries during the 1990s created their
own high-speed settlement systems – these were originally national
systems which went on to become cross-border arrangements. The EU
now has two major systems in play. One, named TARGET, handles
bilateral settlements between banks in different countries through
their central banks and a special interlinking system. The other –
the Euro Banking Association – deals with multilateral clearing
between participating commercial banks, and European Central Bank
acts as the clearing house. These systems have not only slashed the
time it previously took for payments to reach their destinations
(down to a few minutes), but they have also eliminated forex risks,
since they operate in a single currency.

As to foreign exchange risk insurance, this is another sphere
where changes are needed and have already commenced. Such
traditional tools as forwards and options can no longer meet the
growing requirements of business for the market
infrastructure.  In September 2002, the Continuous Linked
Settlement Bank (CLSB) started to operate in the United States.
Organized by the world’s major banks, in cooperation with seven
central banks, it makes it possible to minimize risks which arise
during the execution of multi-currency payments (this is due to the
possibility of one party never receiving the currency it bought
after it has sold its own). The system involves U.S., European, and
Southeast Asian financial institutions, and its total number of
participants grew to 70 in July 2003, from 42 in November 2002.
Over the same time, the new bank’s share in the total global
exchange business burgeoned to 50% from 16%, and it now closes
daily deals worth a total of more than U.S.$600 billion. Trading is
done in seven currencies, namely: the U.S. dollar, the euro, the
Japanese yen, the pound sterling, the Swiss franc, and the Canadian
and Australian dollars. They are to be joined by six more
currencies – the Swedish krona, the Danish and Norwegian kroner, as
well as the Singaporean, Hong Kong, and New Zealand dollars.

Pegging the euro and the dollar (and perhaps also the yen) is
another measure for international currency stabilization, which has
been widely discussed lately. In 1985 and 1987, the Big Seven
entered first into the Plaza Agreement and then into the Louvre
Accord to stop the appreciation of the dollar. Where exchange rates
deviated from the established parity by at least 2.5%, voluntary
unilateral interventions would start immediately. Obligatory
multilateral interventions would commence should the rates deviate
by 5%.

Before the euro’s unveiling in late 1998, the idea of keeping
two or three primary currencies linked together came to the
forefront of debate once again. The leaders of the United States,
the EU, and occasionally Japan, held lengthy discussions on the
possibility of a corridor necessary for the plan, but in the end
rejected the scheme. This was mostly due to the fact that the
market economy models in the United States, the EU and especially
Japan are too different from each other. Their economic cycles are
not identical and are not going to coincide anytime in the future,
thus making synchronized inflation and interest rates wishful
thinking. Furthermore, setting ceilings on fluctuations would
definitely give a signal for wildcatters to attack one of the
currencies, while the reserves held by the central banks of the
United States and the EU are not enough to counter such activity.
The peg issue was yet again broached at a recent meeting of the Big
Eight at Evian, but the possibility that this kind of coupling will
occur is rather unlikely. The discussions will yield the most
tangible results if they produce a confidential understanding for
coordinating the guidelines for monetary policies, for example, in
such aspects as official reserve management.

It would seem that the IMF and other international organizations
should have a key role to play in grappling with the specific
currency problems of the developing and transitional economies. Yet
they have essentially sat on their hands in this respect. That the
developing and transitional economies have special foreign exchange
mechanisms, which are different from those of the industrialized
countries, has still to be officially acknowledged. The former are
still being offered medicine that might serve to help the dollar,
the euro, the yen and other international currencies. But the
therapists overlook the obvious – that inflation can still progress
where the money supply is kept in check (because there still are
inflows of foreign currency). As a result of dollarization, whole
segments of the money market are out of reach of the central bank,
imports are not paid for with the national currency, and the
foreign exchange markets are weakened and unable to sustain
additional hits.

The regional economic breakdowns in the late 1990s or, more
precisely, the IMF’s inability to predict and cope with them,
exposed the international body to fire from the aggrieved countries
and leaders of industrialized nations, the business community, and
the world business elite in general. As it turns out, the IMF,
which boasts top-notch professionals and which had conducted
hardnosed “educational work” with the developing countries, found
itself clueless at a time when strong remedial action was
required.

At the end of 2001, the IMF released a report on complete and
pending initiatives to forestall crises. The measures it cataloged
were mostly applicable to the financial markets, with only a single
subsection (that on gold and currency reserves) devoted directly to
foreign exchange regulation. The Financial Stability Form, which
was established by the Big Seven in 1999, also concentrates on
nothing other than financial and prudential supervision, action
fine-tuning, and data exchange in the field. (The Forum gathers for
bi-yearly meetings at the level of ministers of finance, central
bank representatives, and banking supervisors from the Big Seven,
The Netherlands, Singapore, Australia, and Hong Kong). Of course,
exchange rates depend on economic policies, the overall financial
situation, and the behavior of foregn investors. But the issue does
not boil down to this alone. Through the 1990s, the nature of
currency crises has changed. They now have their own internal
causes which are not always due to poor fiscal discipline or
irresponsible government policies.

En route to a fifth monetary system

The consecutive replacement of four international monetary
systems has included two parallel processes – the displacement of
gold from circulation and the passing of leadership from one
country to another. What we deal with in the former case is the
evolution of money proper, and what happens in the latter case is
the use of a particular national currency as the global one.

It was demonstrated above that the present monetary system is
becoming increasingly less effective. Its structural elements can
no longer bear the mounting stress. Only a small part of those gaps
resulting from decreased effectiveness of traditional instruments
are then filled. What can trigger the system’s downfall? In the
past, such collapses were provoked by wars or grave economic
failures. However, the experiences of Yugoslavia and Iraq have
demonstrated that the local nature of military conflicts in the
21st century – dependent on pinpoint strikes and hi-tech,
non-lethal weaponry – has only temporary and slight influence on
exchange rates. Fortunately, a rock-bottom depression in the world
or in the United States is unlikely.

The present monetary system will be brought down not by any
cataclysms, but by high technologies. They will eventually claim
their institutional rights. Before the 19th century, when silver
and gold were used as the global currency, neither the buyer nor
the seller cared about whose coat-of-arms appeared on the coins. As
the gold standard beat a retreat, some currencies assumed the
function of global money, while others left the international scene
altogether. Selective criteria were reduced to whether they were
able to properly execute the functions of money on external
markets. By the end of the 20th century, most national currency
units had become convertible, but they still failed to serve global
trade. Russia is not buying Chinese goods for rubles, nor is China
selling them for yuan, even if neither side imposes controls on
current-account capital movement. Bilateral barter is extremely
inconvenient, while multilateral barter is only possible where a
common payment unit is at play.

Therefore, the dollar, the euro, and several other generally
recognized currencies work as universal currencies precisely
because it is technically unfeasible to regulate the sprawling web
of international payments in the multicurrency mode. This is true
not only of trade and investments, but also of foreign exchange
markets, where nine transactions out of ten are to buy or sell
dollars. Since most currencies are not directly exchangeable, the
United States dollar performs the role of money on those markets
where other currencies are traded.

As soon as the mechanisms for multicurrency, multilateral
payments are in place, demand for the vehicle currencies,
especially the dollar, will diminish, whereas the international
significance of other currencies will begin to rise. The technical
solution sought will, most likely, be found within the next ten
years and, as demonstrated by the example of the CLSB, may be
already in sight. It is not necessary to balance payments in 150
currencies: a breakthrough will be achieved if this is done for the
currencies of those 20-30 countries which account for more than
four-fifths of the world’s trade and cash flows. Third countries
such as Georgia will be able to shift their foreign trade from
dollars to the currencies of their principal partners (e.g. the
euro, the Russian ruble, and the Turkish lira).

This arrangement will tangibly slash transaction costs. The new
paradigm will also mean that world money will complete a spiral in
its development, returning – now in a new role – to the same point
of departure from where it once set out to abolish the gold coin
standard. No single international currency will be required. Amid
internationalization, existing centripetal forces – regional
monetary organizations – will be combined with currency
polyphony.

Overall, the 5th monetary system can possess the following
features: a ramified network of multicurrency payments for two or
three dozen of the more important currency units, plus several
regional areas of advanced monetary cooperation. The first, number
one phase of this plan stands a good chance of materializing before
the decade is out. It may also occur earlier than that, at least in
individual segments of the financial market. So it seems that we
only have to wait a short while longer for the introduction of the
next big monetary system.