“The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question, i. e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth [….]?” (Zhou 2009).
The statement hidden in question appears to make instantly obsolete any existing debate about the role of national currencies as international reserve currencies, and opens the door to a question not really discussed after Bretton Woods and the theses Keynes expounded in that occasion on the subject, that is, the need for an international reserve instrument other than a national currency.
In this paper I argue that, in general, the choice of the appropriate kind of international reserve instrument is dictated by the kind of international division of labor prevailing in any given period. According to this model, that the Us dollar ought to have been the international reserve currency after WW2 is obvious; and that the dominance of the dollar ought to have been weakened in the early seventies and the Bretton Woods agreements dismissed is explained with the new role of the ‘Asian tigers’, a role associated with an emerging new form of international division of labor later to be called ‘international fragmentation of production.’ It follows that the question asked by Mr. Zhou is legitimate in that the current crisis and the widespread use of international fragmentation of production and global production networks, particularly efficient and vast between Us and China, calls for a new kind of international reserve currency. Furthermore, it is argued that the apparent wish by the Us and Chinese fiscal authorities to jointly control the dynamics of world aggregate demand, is also coherent with the underlying division of labor and the call for a ‘different kind’ of international reserve currency as well. Such reserve currency would be nothing other than a sort of dollar/renminbi weighted average instrument.
Thus, the paper shows that a specific form of the new international reserve instrument called for by Mr. Zhou would indeed show a greater degree of coherence with both the existing pattern of international division of labor between China and the Us and their roles as ‘producer of last resort’ and ‘consumer of last resort’ respectively than the Us dollar alone does.