The Key Currency:FOREX

The hostility of the less developed countries to the Group of Ten and its 'monopoly power' reflects at once their awareness and their intense resentment of this fact.

On the other hand the Group of Ten--- which itself includes some currencies in a minor key--- has not been all that effective in arriving at the kind of collective responsibility for the system that Montagu Norman and Benjamin Strong thought they had achieved in the 1920s, or that the 'key currency' school thought was achievable on the basis of latter-1930s' experience.

The fundamental reason has been that the overwhelming dominance of the dollar through most of the postwar II period has enabled the other currencies to coast intellectually on the basis of carping about the behavior of the United States, while concerning themselves less about the system as a whole than about their own position in it.

When the U.S. Administration finally tired of the burden of holding the umbrella for the rest and challenged them to display some genuine leadership out of the impasse that resulted, it was the United States that by good poker-playing exercised all the leadership that was displayed.

But whether skill in winning at poker redistributes the stakes in an economically desirable fashion is not a question to which economists have ever been willing to return an affirmative answer.

Since one key currency now exists by virtue of postwar II history and both the other alternatives will have to be created by deliberate agreement among sovereign national states at a considerable cost to themselves in terms of economic policy autonomy, there is a strong historically-based probability that the one-key-currency system, otherwise known as the dollar standard, will prevail.

An alternative outcome depends either on the mismanagement of the dollar continuing and being sufficiently offensive and disruptive to the other major countries to prompt them to a defensive establishment of a rival European currency; or on the responsibilities of the key currency role becoming sufficiently onerous to the U.S. Administration to prompt it to force the pace of evolution of the Special Drawing Rights (SDR) system. 'Benign neglect' of the U.S. balance of payments by a President anxious for re-election points in the former direction; the current U.S desire for exchange rate freedom points in the other.

But inertia in the absence of crisis may carry the day. The confidence problem in a fixed exchange rate system in which reserve assets are gold, to a certain extent, same with currencies convertible into gold has two aspects: the possibility of loss of confidence in the ability of a particular country to maintain its existing exchange rate--- which may be speculation on either devaluation or revaluation; also true with the loss of confidence in the ability of the reserve currency country to maintain its exchange rate, which is inevitably speculation on a devaluation relative to gold or the other currencies in general.