2. For and against reform

What are the forces favouring reform – and those obstructing it?

Natural development: There is a natural tendency for a dominant currency to emerge as the de facto global currency. The US dollar has served that purpose and inertia keeps it in the leading place. But It is in the interests of the US as well as other countries to start planning for a replacement now. The US would get a better deal from the international community if it negotiated in good faith now rather than wait, as the UK did when the pound sterling was in decline, until it was in a weak negotiating position.

Pressure from rising powers: I was at a conference in Vienna on Feb 27 this year when Mr Li Ruogu, a senior Chinese official and former deputy governor of the PBOC called for a reform of the international monetary system: “there are inherent flaws n the international monetary system which depends on a single currency”, he said. Not only does it face the “Triffin Dilemma” but it is impossible to avoid the moral risk arising from attempts by the core country to take advantage of its special position “to manipulate international finance”. A reformed system would “impose greater legal restraints on and conduct tighter supervision over the domestic macro-economic and monetary policies of major issuing countries” (i.e. the US) .When challenged about China’s willingness to submit to such rules, he said he thought a future Chinese government would if the US were to do likewise. Other emerging market economies are also complaining about the destabilising effect of the policies of the Fed on their economies.

Loss of trust: Give people a say: there is widespread anger among people all over the world at the inequities, scandals, blatant profiteering of too many financial institutions. The number, scope and cost of the scandals, shameful misbehaviour of too many banks have persuade many that they have behaved like criminal organisations. Without State support, many would go out of business. As it is, people fear that regulators are pulling their punches. they know that customers pay the cost of fines, not the people who committed the crimes. This is not to “demonise” finance but to recognise the enormity of what has happened.

Inert money: The fall in confidence n the monetary system means money itself is not fulfilling its functions to coordinate economic activity and guide new investment. This lack of confidence in the current policy regime explains the low level of investment and why so much is going into speculative assets.

Fear of what could happen in the next recession, when we have not healed the woudns from the last one

Already another boom-bust cycle is well under way.

The cost of propping up the present system is becoming unsupportable.

Opposition to radical reform would come from the United States government, which (in my view wrongly) thinks it benefits from the current system, large euro area countries like Germany, the banks and most (but not all ) of the finance industry. Countries such as the UK, Canada and Australia will follow the lead of the US. The obstacles look to be formidable. And yet – what if unemployment were to reach and stay at new peaks in the next recession? What if economic fragmentation plunged world trade and finance back into another Great Depression? That is why

we need to think urgently about the system and try to develop a consensus among economists and experienced financial statesmen such as Paul Volcker. My proposals are intended to contribute to such a debate and help get it started.