Does the dollar have any enemies greater than its "defenders"?

World Bank President Bob Zoellick has done an important service with remarks he delivered Monday in which he said, "The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency. Looking forward, there will increasingly be other options." In fact, the only issue I take with his statement, delivered at the Johns Hopkins School of Advanced International Studies, is that it does not go far enough.

It has thus far been easy for most Americans to shrug off discussions of coming competition for the dollar as a reserve currency. First, of course, most Americans aren't even aware that the discussion is taking place and of those that are aware, most haven't the slightest clue how the international monetary system works -- which at least gives them something in common with most members of Congress and central bankers everywhere. (Zoellick is rightly pretty tough on the central banking community in his remarks, as well.)

Also, when Europeans or Russians starting talking about needing another currency so there is an alternative to the greenback, Americans tend to shrug it off as dollar-envy. It was not, of course, so easy to dismiss such suggestions when it came from the Chinese given their role as our principal creditor and the fact that they had more reserves than any other country in the history of mankind. But we put our hands over our ears and made "la, la" noises to drown out the discussion anyway.

Thus, whenever the issue arose, as it did again in discussions last week at the G-20 meeting, it has not had much resonance even among most members of the policy community in Washington. Many view the dollar as an immutable, unchanging fixture of the financial world ... even though recent experience has demonstrated that other than greed, there are few immutable, unchanging features of the financial world. This made it easy for the U.S. Treasury to simply mouth reassurances -- as Tim Geithner did last week -- that the dollar should remain the reserve currency without getting much questioning here at home. 

But Bob Zoellick is not a whacky, Gitane-smoking, eurocommunist with an anti-American agenda.    

He is a Republican, a Bush appointee, one of only a couple of dozen senior current or former U.S. government officials who can say they worked at Goldman Sachs, the true power center of international finance. So when he says don't take the dollar's place for granted, perhaps others in Washington will listen and start to focus more on the increasing likelihood that the growing chorus of those seeking change may well gain traction and as may the alternative currencies themselves -- be they Special Drawing Rights, the simulated money produced by the IMF for use with its members, or Chinese yuan.

Of course, Zoellick, whose remarks (which I read in "prepared for delivery" form) are typically thoughtful and also address the importance of the ascension of the G-20 and how this newly central group should take into consideration the broader rise of emerging economies, stops short of actually joining those calling for an alternative currency. It's easy to understand why, given his position.

But since none of the rest of us are president of the World Bank, we should not feel so constrained. There are plenty of good reasons why there should be one or more better alternatives to the dollar as a reserve currency than currently exist. Further, by not taking the discussion seriously we are less likely to play an effective role in the discussion about the future architecture of the system, consigning ourselves to a more reactive, sideline role.

First, there is no reason why one country should be given the responsibility or the right to play such a central role in determining international economic policies and outcomes. This is unlikely to be very persuasive here at home where most Americans first reaction is going to be, "Why the heck not? If not us, who? Don't we deserve it as the world's number one economy?" 

Given that the call for equity is not likely to be persuasive, what about basic American values like our belief in the benefits of competition. Look what has happened during this era in which we have not believed there was a real alternative to the dollar: We have behaved extraordinarily recklessly, piling on debt and practically taunting the world to find other options. It is clear, we don't have the discipline to manage the dollar properly as it is. We need the competition as much as anyone else.

Would a rapid selloff of dollars be potentially disastrous for America?  Absolutely. But, we are deluding ourselves if we don't think such alternatives already exist. Why is gold at such absurd heights and going higher? Further, there is plenty of evidence to suggest that oil and other commodities are regularly used as alternatives to currencies in what amount to forex trading strategies. In other words, markets demand such alternatives already. And any movement toward acceptance of new alternatives is likely to take a long time as investors cautiously adjust. So, we have to ask ourselves is the greater downside in embracing change or in clinging to a viewpoint that is both out of touch with emerging realities and promoting bad behaviors on our own part?

The international economic system will evolve with our cooperation or without it. Currently the biggest threat to the dollar is not those who seek alternatives but the U.S. policies that are pushing them in that direction.   It's time we engaged in this debate in a serious way, and Zoellick's remarks are a very constructive first step in that direction.

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