Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries’ demand for reserve currencies. […] The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists. —Zhou Xiaochuan
What the technologies of steam power were to the epoch of British global dominance, and the twin-track developments of electricity and the automobile to the subsequent American Age, digital electronics—and, more specifically, the Internet—are to the “rise of China” and the refashioned world it epitomizes. It is only to be expected, therefore, that the intersection of the post-1979 Open-and-Reformed New China with the post-1990 World Wide Web-enabled Internet should be an object of particular international fascination, and practical concern.
From the dawn of the modern epoch, geopolitical hegemony has been associated ever more intensely with techno-economic leadership, which has in turn been reflected in the international reserve status of a select national currency. An ever more explicitly formalized world monetary order has converted compelling but obscure intuitions of relative national prestige into an unambiguous system of financial relationships, in which a position of supremacy is clearly established, with a definite and singular role.
The suspicions fostered by leadership are no less inevitable than leadership itself. For easily intelligible historical reasons, the French policy establishment has been an especially vociferous critic of international reserve status and its “exorbitant privilege” 1Coined by Valéry Giscard d’Estaing, during his service as French minister of finance in the 1960s. See: http://www.j-bradford-delong.net/movable_type/2005-3_archives/000397.html (accessed 29 April 2014). of seigniorage—the spontaneous ‘right’ to issue promissory paper in exchange for real goods and services, without any definite prospect of redemption. There can be little doubt that such criticism articulates concerns widely held beyond the Anglophone world, and its substance deserves serious examination.
Of the indispensable building blocks constructing the near future, China and the Internet have special prominence. There are innumerable places where China meets the Web, beginning with the sprawling, multidimensional, and explosively growing Chinese Internet itself. Bitcoin is a recent and still relatively slender thread in the tapestry of global change, but by tugging at it, some central features of the emerging world can be pulled into focus.
Among the characteristics that the Chinese yuan and bitcoin share is that neither is the US dollar. Specifically, both are limited yet practical alternatives to the dollar, at least at the level of microeconomic decision-making. When questions are raised about the durability of the dollar’s international role, it can be predicted with confidence that one or both of these challengers will be invoked. For the dollar to die of ice or fire is, today, for it to succumb to geopolitical substitution (by the Chinese yuan) or techno-financial obsolescence (by some decentralized, Internet-based crypto-currency).
The international status of the US dollar concentrates two multi-century trends. Firstly, it represents the ethno-geographical peculiarity of modernity, which—up to the late twentieth century at least—tended to slant global power not only toward the West or Occident, but more specifically toward the Atlantic Anglophone nations, ultimately gathered under American leadership. Since the decline of the Spanish dollar, which monetized the treasure of the New World as the first global currency, international finance has been principally denominated in the currency of an English-speaking nation. Non-coincidentally, it has thus been tightly associated with a set of particular cultural themes, including (Philo-Semitic) Protestant Christianity, the invisible hand, free trade, and liberal democracy. The institutionalization of world finance has been intimately connected with the promotion of a distinct—and for many a distinctly questionable—cultural orientation.
Secondly, the formalization of a global monetary order has been accompanied by an incremental politicization of money, which is to say, by the consolidation of monetary policy as a core function of government. With the establishment of central banking and the demetallization of currency, intrinsic scarcity is replaced by an institutional “promise to pay” that converts money from a tangible asset into a contractual liability. Public confidence in the value of money is turned into a governmental responsibility. It becomes political, and—in the context of a world reserve currency—geopolitical.
In combination, these trends are inevitably provocative, since they concentrate the world’s financial destiny in selected, identifiably non-representative hands. Behind the studied neutrality of the Bretton Woods institutions (the IMF and the World Bank) stands the US dollar as the symbol of American exception and the concrete peculiarity of the modern world order.
While it is natural—and even inevitable—for political command of the global reserve currency to be understood as the modern capstone of geopolitical hegemony, it is not a privilege separable from testing responsibilities, or from profound ambiguities. These have been clearly recognized since the 1960s, when Belgian-American economist Robert Triffin formulated the paradox or dilemma that bears his name: that if foreign governments are to accumulate reserves in one selected nation’s currency, that nation must necessarily be a net exporter of money—which can be achieved only by running a negative balance of trade. A nation issuing international reserve currency assumes responsibility for global monetary liquidity. This obliges it to consume more than it produces, in order for the difference to be made available as world money. While this requirement is merely seigniorage, seen from the other side, the constraint it imposes upon domestic economic policy options are so strict they amount almost to a destiny.
These constraints are turned into a destructive dilemma by the fact that the mandatory policy structure required to supply the world with liquidity tends to destroy confidence in the currency at the same time, therefore undermining its value. Chronic balance of payments deficits signal currency weakness, since they would normally be interpreted as a sign that a currency is over-valued (or in need of devaluation). For the issuer of a global reserve currency, however, conventional policy responses to this situation are blocked in both directions, since it can neither take measures to close the deficit, nor attempt to strengthen the currency through elevating interest rates. Because for the reserve currency issuer the trade deficit is a constant, rather than a variable, a devaluation merely incites competitive currency destruction worldwide. Strengthening measures, on the other hand, draw in money from abroad (denominated in the international currency) and thus further expand the demand for issuance, which can only be satisfied by a widening of the trade deficit.
In other words, the Triffin Dilemma recognizes that international demand for a reserve currency is inherently paradoxical. What is sought is the currency as it would be were it not supplied through chronic trade imbalances, yet these same imbalances are the only channel through which it can in fact be supplied.
“Chimerica” perfectly exemplifies the essentials of the situation. China’s two trillion US dollars of reserves correspond to a cumulative balance of payments surplus of precisely the same sum, since this is simply what the reserves are. When perceived appreciatively—which was far easier in the final decades of the twentieth century than in the early decades of the twenty-first century—Chimerica has been a complementary economic arrangement through which America achieved high levels of consumption coupled with restrained price inflation, while China realized export-oriented economic development and the break-out modernization that had eluded it for 150 years. To more jaundiced eyes, the same arrangement is a trap that has married American de-industrialization to Chinese environmental devastation, while fueling unsustainable fiscal incontinence in America and a Chinese investment bubble. Whichever picture has greater realism, it can probably be safely concluded that the dissymmetry imposed by an international reserve currency has far-reaching and ambiguous consequences.
Cynically, it might be argued that the tributary aspect of reserve currency status is perfectly matched to deep Chinese traditions in international relations, so that an ascent to yuan-based exorbitant privilege would make a natural geopolitical goal for the Middle Kingdom, as it restored its central position in the world. More realistic however—at least in the near term—is a recognition that loss of domestic economic policy control is an inevitable, and well-understood, consequence of global currency hegemony, and it is one the Chinese government is certain to find unacceptable. Whatever the costs (primarily environmental) associated with the role of “workshop to the world” they are immensely outweighed, from the Chinese perspective, by the advantages. It is on the tributary side of the international reserve currency ledger, where China has been for over four decades, that all crucial vectors of development are to be found—technological absorption, infrastructural deepening, industrialization, urbanization, employment, and even military capability.
If Chimerica is breaking down, it has far less to do with any kind of Chinese challenge—even a spontaneous and unintended one—than with a tragic structure inherent to currency hegemony. As hubris leads to nemesis, so does exorbitant monetary privilege lead to crisis, and even ruin. In both the Spanish and British precedents, financial supremacy became self-defeating, because exporting money (rather than things) differentially advantaged industrial competitors, locking in secular social decline. There is no compelling reason to believe that America has exempted itself from the same ominous pattern.
On 29 March 2009, in the wake of the financial crisis, Zhou Xiaochuan, governor of the People’s Bank of China, delivered an important speech entitled “Reform the International Monetary System.” He explicitly referred to the Triffin Dilemma as the key to understanding the world’s economic instability, while suggesting that a shift beyond US dollar hegemony would ultimately be required to remedy it. In this respect, his words conformed to a tradition dating back over half a century, to the Bretton Woods negotiations, when John Maynard Keynes recommended the introduction of a neutral global monetary medium—to be called the bancor—making the supply of global liquidity independent of national currencies.
Historically, international reserve currencies have not arisen by design. It might be argued, therefore, that the Keynesian bancor was an unrealistic technocratic fix, blind to the spontaneous momentum that had already made a non-negotiable fact of the dollarized world, even before the Bretton Woods proceedings began. This did not prevent the same basic idea re-emerging in different guises, the most prominent of which has been the IMF’s SDRs (Special Drawing Rights), regularly proposed as a neutral international currency in embryo. It was still to SDRs that Zhou turned when searching out a candidate for a neutral world currency.
Perhaps some technocratic solution to the problem of monetary hegemony will ultimately be found, but if so it would mark an unprecedented departure from world financial history. If, as has always been the case to date, economic tides beyond policy control are to determine such outcomes, it is understandable that attention should drift toward the Chinese yuan as an eventual substitute for the US dollar. Yet the lessons of history are available to policymakers, even when the most insistent lesson concerns limitations upon their own influence, and in this case the foremost of these is that the prospect of an international reserve status yuan presents China with a poisoned chalice. It is very unlikely to be accepted willingly.
Might some alternative spontaneous evolution in the nature of money take this critical geopolitical dilemma in a new direction? Such an evolution appears to be occurring, symbolized by bitcoin, history’s first example of a decentralized digital crypto-currency. For China, bitcoin—or something comparable to it—could be the only way to evade an assumption of global economic privilege whose essence is ruinous hubris.
Like James Frazer’s sacred king, who is crowned in order to be sacrificed, the inner meaning of monetary hegemony is economic and social destruction. China quite clearly understands this, and as the dollar era comes to a close, it is looking for a way out. That is how the China-bitcoin story really begins.