The Evolution of the Offshore US-Dollar System: Past, Present and Four Possible Futures

Today’s era of financial globalization is characterized by an unprecedented expansion of global financial flows. Partly, these flows form the counterpart to global value chains and the globalization of trade in goods and services. In the last few decades, however, they have been increasingly decoupled from the real sector. The financial infrastructure that enables this expansion is the international monetary system. The international monetary system’s setup crucially influences issues such as financial stability, social inequality and the global distribution of power. Despite this significance, conceptualizing today’s financially globalized international monetary system has proven very difficult.

A new journal article by Steffen Murau, Joe Rini and Armin Haas describes the current setup of the international monetary system as paradigmatically based on the creation of private US Dollar (USD)-denominated credit instruments abroad and thus labels it as “Offshore US-Dollar System.” The creation of USD offshore developed in the 1950s and 60s in co-evolution with the Bretton Woods System and, in the 1970s, replaced it. Since the 2007-09 Financial Crisis, this system has been backstopped by the Federal Reserve’s network of swap lines which are extended to other key central banks. This systemic evolution may continue in the decades to come, but other systemic arrangements are possible as well and have historical precedents.

The article sketches the institutional evolution from the Bretton Woods System to today’s global Offshore US-Dollar System. It also discusses four trajectories that would lead to different setups of the international monetary system by 2040, taking into account how its hierarchical structure and the role of offshore credit money creation may evolve. In addition to a continuation of USD hegemony, the authors present the emergence of competing monetary blocs, the formation of an international monetary federation and the disintegration into an international monetary anarchy.