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Geithner considered world currency to appease Chinese, dollar doubted
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China's central bank Governor Zhou Xiaochuan
In an article published today on the UK's Telegraph website, U.S. Treasury Secretary Geithner said that he's "quite open" to Chinese proposals to develop a world currency, operated by the International Monetary Fund. Shortly after making those remarks, the dollar dipped in value, but has since recovered when Geithner said that the dollar would keep its status as the top reserve currency for a long time.
Geithner's remarks were in response to those made by China's central bank governor Zhou Xiaochuan. Mr. Zhou said that a new world currency could be based on IMF's existing Special Drawing Rights (SDR) that have existed since 1969.
What's an SDR?
The Special Drawing Rights were created to support the Bretton Woods Agreements of 1944, where the allied nations of the world would respect a fixed currency standard. They were a response to a shortage of two of the world's reserve currencies at the time: gold and the U.S. dollar. For years after that, the dollar was valued at $35 per ounce of gold. However, dollar expansion in the 1960s and long-running U.S. balance-of-payment issues culminated in President Nixon's removal of the dollar from a fixed standard in 1971. Since then, the dollar has floated against other world currencies and commodities.
An SDR was originally defined as 0.888671 grams of fine gold, which at the time was equivalent to one U.S. dollar. Gold closed yesterday at $933.15 an ounce, over 26 times that value!
In effect, Governor Zhou is recommending that the dollar return to some resemblance of a gold standard.
To the Treasury Secretary's credit, Geithner instinctively knows that long-term the dollar cannot remain the world's currency, when its government and the Federal Reserve Bank inflate it in response to political whims. The Chinese and the rest of the world know it too.
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