Chapter 6. A Genuine Global Economic Problem: Replacing the Consumer of Last Resort

As John Maynard Keynes prepared for the 1944 conference at Bretton Woods, which would establish the structure of the international financial system after World War II, he had one overriding goal. He wanted to relieve Britain of the burden of having the pound sterling serve as the world's primary reserve currency by getting the U.S. dollar to assume that role in a reformed international currency system. In this effort, as in so much else, Keynes succeeded. The system, built around the newly established International Monetary Fund (IMF), has maintained the dollar as the world's currency for international transactions for more than 60 years.

Currently, the system looks like it is starting to fray, and the problems for Britain that Keynes identified prior to Bretton Woods have returned to haunt both the United States and the rest of the world economy. And just as the failures of the sterling system played, in Keynes's thinking, a significant role in the global depression of the 1930s, similar shortcomings of the current system threaten to undermine the economic performance of the United States and the rest of the world today. This is one area, today as in the past, where global economic forces are in fact a major challenge.

The Link between Reserve Currencies and Global Financial Stability

Trade between countries with different currencies has historically taken place at fixed exchange rates. For more than ...

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