When the world economy heads into crisis, the international currency system often breaks down. This occurs either because debtors can't meet their obligations, or because creditors fear they are not being repaid in sound money. The first condition exists today in the euro zone; the second is likely to emerge in the China-U.S. relationship.

So how might these conditions change the system? Much discussion concerns whether the U.S. dollar will be replaced as the global reserve currency by the Chinese yuan or whether it will simply be one of a number of reserve currencies that includes the euro, yuan and yen.
The global reserve currency is the one that forms the largest proportion of the holdings of central banks. More broadly, it is also the currency most likely to be accepted by merchants worldwide. In my view, the debate about whether the dollar will be replaced by the yuan is a bit of a red herring because such a shift will not occur quickly.

As of 2010, about 60 percent of all foreign-exchange reserves were denominated in dollars, giving the U.S. currency a critical mass. Investors are still comfortable with holding it; despite the country's fiscal problems, in times of crisis, the dollar is regarded as a haven. It will take a long while for international investors to become confident that a Communist-led government will always respect their rights.

China's Enormous Economy

By 2020, if current trends are realized, China will become the world's largest economy. The nation's foreign-exchange reserves already give it significant power as a creditor nation. But even if foreigners wanted to hold yuan instead of dollars, there would be constraints on their doing so. And removing the constraints would probably cause the yuan to soar, something that the Chinese are keen to avoid.

So it seems unlikely that the next 10 years will see a yuan standard replacing a dollar standard. But might the present crisis conditions lead to some other sort of change? Might countries, for example, be driven to enter a new arrangement comparable to the 1944 Bretton Woods pact, in which the world's major industrial states agreed to adhere to a global gold standard to stabilize international currencies?

David Fuller's view This is interesting conjecture from Philip Coggan and while "crisis" has probably been the most frequently used descriptive word in economic reports since 2008, no one could seriously equate today's debt problem with the real crisis of WW2, which led to the Bretton Woods Agreement in 1944.

There is a fair degree of hyperbole in describing today's problems as "a global debt crisis" or "crisis of capitalism". Are the Asian-led growth economies in crisis? Obviously not. I would question whether the USA's consumer, state and central government debt burdens qualify as a genuine crisis, although they are certainly long-term problems. The Eurozone is in a crisis entirely of its own making but even this has probably passed its nadir now that the ECB is functioning as the lender of last resort.

I would also argue that there is no "crisis of capitalism", although capitalism is too often abused by the serious problem of low ethical standards.

I do not expect to see a new global currency system within the next decade. It would be almost impossible to agree upon and no government is seriously lobbying for a new Bretton Woods today. Instead, the world is still adjusting to the comparatively new and highly competitive world of globalisation. While sometimes controversial in the west, this has already proved to have far more advantages than disadvantages.

For evidence, just ask the hundreds of millions of people in the developing world who have emerged from poverty and into the middleclass during the last ten to twenty years. In the west, the results are mixed. Many people have seen their standards of living decline, at least temporarily, as the global playing field becomes more level. However the corporate Autonomies - successful multinational companies which have grown way beyond their home countries - have flourished as never before thanks to globalisation.

So if not a new Bretton Woods, what kind of a currency world are we likely to see over the next decade?

I think it will be multipolar, with four main reserve currencies - USD, EUR, JPY and CNY, in line with the size of their respective economies, or in the case of the euro, economic block which it represents. All are flawed, by definition as they are fiat currencies, and by current circumstances.

Of the USD, EUR and JPY, the greenback is clearly the most influential and most liquid, but it is a debtor currency, as is the EUR and while Japan has a trade surplus its govenment debt is enormous. The CNY is a creditor currency and while China has embraced command capitalism, its communist party rulers have yet to show any real interest in democracy.

On a long-term basis, the JPY's role as a reserve currency is likely to decline as the Japanese economy slips in the global GDP growth stakes. The EUR is still a political construct and an experimental currency, but it should survive so long as the will to hold it together remains, and even with slow growth Europe will still be a large economic block. The USD should retain its role as a haven currency in times of perceived crises, due to liquidity and also the stability of a mature democracy. The CNY's is certain to be an important reserve currency as it becomes fully convertible and China grows to become the world's largest economy. Eventually, I assume that the INR and BRL will become reserve currencies, provided that the economies of Brazil and India remain largely on a growth trajectory.

Last but not least, in a world of fiat currencies gold will remain a monetary currency in the eyes of many investors. As such, it will probably do best when short-term interest rates remain low, as is the case today in many countries.