Super Currency: What It Is, How It Works

What Is a Super Currency?

A super currency is a hypothetical global currency or supranational currency, that would be backed by a basket of reserve currencies at the International Monetary Fund (IMF), and form the basis for a new global monetary system. The idea has attracted new interest after the financial crisis, and it has been promoted by China and the rest of the BRICS (Brazil, Russia, India, China, and South Africa).

Understanding a Super Currency

A super currency would replace the current U.S. dollar-dominated system, which some blame for the increasingly frequent global financial crises since the collapse in 1971 of the Bretton Woods system of fixed but adjustable exchange rates – because of its volatility. And many, like neo-Keynesian economist Joseph Stiglitz and investor George Soros, see it as a new direction for the development of the global economy.

Prior to that, economist John Maynard Keynes had proposed at Bretton Woods a supranational world currency known as Bancor as early as the 1940s as a way to promote global monetary stability, but this was rejected in favor of the gold-backed currency system. The Bancor currency would have been used in all international trade and to settle global financial transactions. The idea gained renewed interest following the 2008 global financial crisis but again failed to gain traction.

Replacing the U.S. Dollar System

In 2010, the United Nations Conference on Trade and Development called for a new global currency to replace the U.S. dollar as the world's dominant reserve currency. As envisaged, a greatly expanded special drawing rights (SDRs) at the IMF, with regular or cyclically adjusted emissions calibrated to the size of reserve accumulations, would be the basis for a global super currency that would contribute to “global stability, economic strength, and global equity."

But in reality, neither the U.S., the E.U., or China are ready to coordinate their macroeconomic policies or give up sovereignty to the degree that would make such a system work—especially given the current state of the global financial system and the volatility in emerging markets. To see how stressed and strained such a system can become, one need only look at the European sovereign debt crisis—and the eurozone's zombie banks—or the history of currency crises and the countries that have tried to maintain currency pegs and failed, like the British pound in 1992, the Russian ruble in 1997 and the Argentinean peso in 2002.

The Future of Global Money

Despite all the predictions of the dollar's demise, the U.S. dollar will remain the world's reserve currency, however, many financial commentators talk about the rise of the Chinese yuan. It is clear that the U.S. is not going to willingly give up the petrodollar system. Perhaps the balance in world money and power politics will shift once China gains economic parity with the U.S. and if the yuan becomes a contender to the dollar.

Or, perhaps there will be multiple global currencies in the future, that exchange on a single market system. In any case, for the time being, reserve currencies like the dollar, the euro, the sterling, the Japanese yen, and China’s renminbi, effectively already act as supranational currencies.