JOHN Maynard Keynes, the towering British economist, reshaped how the world thought about economics in the 20th century.
His impact was never more evident than during the 1944 Bretton Woods Conference, where the framework for the post-World War II global economy was hammered out.
Keynes wasn't just any participant at this pivotal moment - he was the intellectual force behind bold proposals that could have steered the world down a different path, especially when it came to the question of a global reserve currency.
Keynes had a grand vision. He believed that, to avoid the chaos of trade imbalances that had plagued economies during the Great Depression, the world needed a neutral international currency - a currency not tied to any one nation's whims or fortunes.
He called this proposed currency Bancor, and it would be managed by a global central bank, the International Clearing Union.
His plan was to create a system where no country could hoard wealth or sink into debt without facing consequences. Bancor was Keynes' way of ensuring fairness in the global economy, a way to level the playing field between creditor and debtor nations alike.
But Keynes ran into a juggernaut: the United States.
Fresh off the victory of World War II and with its economy booming, the U.S. was in no mood to let go of its newfound economic dominance. The American delegation, armed with its own vision of the future, insisted that the US dollar, backed by gold, should become the world's reserve currency.
Keynes, foreseeing the risks of tying global stability to any single nation's currency, opposed this.
He knew that granting one country - especially a superpower - the keys to the global economic engine would tilt the system. His vision was rejected, and thus the dollar became the global currency, a decision whose reverberations continue today.
At the same conference, the world saw the birth of two global financial institutions: the International Monetary Fund (IMF) and the World Bank. These institutions were created to keep the global economy stable and to help rebuild war-torn nations.
The IMF, with its mandate to ensure monetary cooperation and financial stability, became the guardian of the world's exchange rates, while the World Bank took on the mission of financing reconstruction and development.
Keynes had one more vision: he wanted a global trade system governed by an International Trade Organisation (ITO). The ITO would oversee trade policies, settle disputes, and prevent protectionism.
But this time, the U. Congress balked. Fearful that the ITO would erode US sovereignty and limit its control over trade, they refused to ratify the charter. Instead, the world got a stopgap: the General Agreement on Tariffs and Trade (GATT) in 1947.
GATT was designed to reduce tariffs and create a level playing field for global trade, but it was always a temporary solution.
Decades later, after multiple rounds of negotiations, GATT would give birth to the World Trade Organisation (WTO), the modern overseer of global trade rules.
In retrospect, Keynes' battles at Bretton Woods reflect the tension between visionaries who sought global solutions and those who wielded power in the here and now.
His dream of Bancor may have died in those negotiations, but the dilemmas he raised - about imbalances, fairness, and the dangers of a currency system tied to one nation's dominance - continue to shape debates on the global economy to this day.
And while the IMF, World Bank, and WTO are now pillars of the international system, they stand as reminders of the compromises made when ambition met the hard realities of geopolitics.
Triffin's Paradox
Robert Triffin saw the future of the global economy with remarkable clarity, and his warning still echoes through the halls of finance today.
Back in the 1960s, Triffin pointed out a paradox at the heart of the US dollar's role as the world's reserve currency - a paradox that had the potential to unravel the very system it was meant to sustain.
On the one hand, for the dollar to function as the global currency, the United States needed to supply it to the world, which meant running persistent trade deficits.
But here's the kicker: those deficits, essential for global liquidity, would eventually erode trust in the dollar, undermining its very position as the reserve currency. This is what became known as the Triffin Paradox.
Triffin's dilemma was this: the US must keep feeding the world with dollars, but the more it did, the more the global financial system would be built on a foundation of US deficits.
Sooner or later, this growing imbalance would make people question the dollar's stability, setting off a potential crisis of confidence. The U.S. was trapped—its global role demanded deficits, but those deficits carried the seeds of future instability.
Exorbitant Privilege
This led to a situation where the US enjoyed what French economist Valéry Giscard d'Estaing famously called an exorbitant privilege.
By having the world's reserve currency, America could run deficits without the immediate consequences that other nations would face. It could finance its spending by simply printing more dollars.
Economists like Barry Eichengreen have elaborated on this, showing how the US can borrow cheaply and maintain a living standard that is, frankly, out of sync with its economic fundamentals. It's like running a tab at the world's expense.
But here's where things get complicated: the US has been effectively exporting inflation to the rest of the world.
As the Federal Reserve prints more dollars to cover deficits, those dollars flow into foreign reserves, inflating economies from Asia to Europe. This process can destabilise other countries, driving them to manipulate their currencies to remain competitive.
When one country devalues its currency to boost exports, it can set off a chain reaction of retaliatory devaluations - enter the era of currency wars. It's a dangerous game where everyone races to the bottom, threatening global stability.
Countries adjusting their currencies to stay competitive isn't new, but when the US is at the center of it all, the stakes are higher. The Triffin Paradox essentially makes the US both the global banker and the biggest borrower, and that puts strains on the system.
Sure, it's an advantage in the short term, but over the long haul, these imbalances add up, and the risk of financial crises increases - just look at the global financial meltdown of 2008.
Empirical evidence backs up Triffin's concerns. For decades, the US has run consistent trade deficits, while countries like China and Japan hoard vast reserves of US dollars.
These imbalances are a direct result of the dollar's reserve currency status, allowing the U.S. to finance its debts and deficits without paying the full price. But it also means the US is sitting on a ticking time bomb.
As US debt balloons, confidence in the dollar's future could wane, prompting countries to look for alternatives - whether it's the Chinese yuan or new digital currencies.
So, while the US enjoys this exorbitant privilege, it's also playing a dangerous game. The system works - until it doesn't. And as Robert Triffin warned decades ago, the US can't have it both ways forever.
The world might need dollars today, but that demand could shift as the risks of this imbalance grow. When the music stops, and countries start questioning the dollar's role, the US could find itself in a bind that no amount of dollar printing can solve.
*The writer is an adjunct lecturer at Universiti Teknologi Petronas, international relations analyst and a senior consultant with Global Asia Consulting. He has a background as a senior researcher at the Malaysian Institute of Economic Research. The viewpoints articulated are solely those of the author.