This is a very old scheme and one that gets trot out every now and then. Keynes suggested the development of a global fiat currency. The idea being that keynes felt a debt backed fiat currency was good, because it allowed manipulation of the markets by the central bank to even out cyclical economic developments. I think we've all seen how well that idea works in the last few decades, but nonetheless. Instead of instituting the Bancor, the USD became the world reserve fiat currency through the bretton woods agreement (more on the details of the original plan for bretton woods can be found on wikipedia). This eventually fell apart, and all ties to the gold standard, as well as the pegging of several international fiat currencies to the dollar, were lost under nixon's administration, partly due to out of control spending in vietnam and domestically under LBJ (sound familiar?) and international discontent with US foreign policy in the early 1970s. Part of the problem with having the USD as a reserve currency, which is IMHO causing many of the current economic woes, is the issue with trade deficits. The issue is known as the Triffin dilemma:

Triffin dilemma

This is where short-term domestic and long-term international economic objectives can conflict when a currency is also a reserve currency. [1]

The Triffin dilemma or paradox: the conflict between the benefits and costs of a country with a reserve currency running a large current account deficit. The reserve-currency country enjoys the consumption benefit of running a trade deficit, while the rest of the world benefits from the additional liquidity, which helps facilitate trade, The cost comes from the declining value and credibility of any currency which runs a persistent trade deficit - eventually leading to a reluctance of creditors to hold the reserve currency. [2]

(from lexicon.ft.com)

In other words, it is, in the short term, both beneficial to the US to borrow money, and beneficial to our creditors, because it injects liquidity into their markets (effectively printing them money). Long term, however, the currency is devalued and everyone will end up sitting on useless assets backed by unmanageable debt. This is the state we are now in, I don't know if total collapse is coming, but I would be extremely surprised if the status quo of the USD being the world reserve currency can be maintained much longer. Currently, however, there is no replacement. The bancor would be a hard sell, given the incompetence of the UN and the IMF, and each member state's sovereignty issues, the euro is only marginally healthier than the dollar at the moment, the chinese refuse to even float the renminbi so it's unrealistic to expect central banks to hold it as a reserve. In short, barring a return to an commodity based reserve (gold? palladium? silver? oil? a basket of valuable commodities?) the system is going to fall apart sooner or later, creating the bancor now, or worse (and more likely) trying to use SDRs as an international reserve, is too little too late.

breandan81

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