Over seventy-five years after the Bretton Woods agreement was inked, inadvertently making the U.S. dollar the world’s reserve currency and a weapon perhaps many times more powerful than a nuclear bomb, is it time to revisit our 20th-century choices?
Itwas the moment that Margaret Targent had been dreading. For weeks on end, she looked out of the window of her farmhouse in Reading, Pennsylvania, hoping that it would be her son Nicholas back from the Front in Europe, but dreading to see that the face in uniform was one she did not recognize.
The uniform of the United States Army in the “Great War” (as it was then known) would be both a symbol of hope and hopelessness to Margaret.
And unfortunately, on this cold, windswept morning in late October in 1917 would be one that would fill Targent’s life with hopelessness and doubt.
As the uniformed Lieutenant bore the unfortunate news of her son Nicholas’s untimely passing at the European Front, thanking her family for their service, Margaret collapsed into a heap on her front porch sobbing inconsolably.
Hours later, Margaret’s husband Theodore, would find her in the same position, freezing from the cold, staring blankly into space and mumbling incoherently.
After the war that was supposed to end all wars finally drew to its conclusion, the refrain “never again” was heard from all corners of the American political spectrum.
Americans of every stripe questioned the need to travel across vast oceans to send their young men to death, fighting in battles that had little to do with their great nation.
In the ensuing years, the United States withdrew from the international stage, allowing other forces to fill the power vacuum that the champion of the global world order had left in its wake.
America, fatigued from a war that it had little ostensible interest in, over issues that seemed foreign and far, had turned its back on the rest of the world and fell into “splendid isolation” — that foreign policy which took the view that America was safe because to the north, a weak neighbor, to the south, a weak neighbor, to the east, fish, to the west, fish .
Yet in a few short decades, the United States would be unwillingly drawn into another global conflict, this time many orders of magnitude more destructive and more vast than ever before.
But one of the byproducts of the Second World War was American hegemony and financial dominance through Bretton Woods.
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the victorious powers of the United States, Canada, and most of Western Europe and Australia, with the defeated Japan adopting the same soon after surrender.
The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states.
The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1% by tying its currency to gold and the ability of the International Monetary Fund to bridge temporary imbalances of payments.
Also, there was a need to address the lack of cooperation among countries and to prevent competitive devaluation of currencies, which is how Bretton Woods was born.
For more than seven decades since, the United States has arguably become the world’s most powerful nation since, because of Bretton Woods and American influence has stretched far beyond its shores because of the mighty dollar.
American bond and stock markets are the largest and deepest, global trade is settled in dollars and commodities such as oil, gold and yes, even Bitcoin, are priced in dollars.
But under the Trump administration, the expectation that the United States would not weaponize the dollar has been called into question.
From companies to whole countries, the Trump administration has been bringing the sharp end of the dollar to bear on those who they do not agree with.
From European companies doing brisk business with Iran to the Shanghai Pudong Development Bank running dollars for North Korea, the power of the dollar is such that Washington can shut off access to the dollar-denominated world at the drop of a penny.
But some experts are of the view that the dollar may not have the dominance it once possessed, which has led to talk of the Chinese yuan overtaking the dollar as the global reserve currency.
Speaking to The Edge Singapore, James Wolfensohn, a former president of the World Bank and current co-chair of the Bretton Woods committee says,
“The economic strength of the West is weakening. China and India demand a leading position in the organization of the international community.”
“China has already applied its global influence to bring together most of the nations of the world to be shareholders in a new global investment bank — the Asian Infrastructure Investment Bank (AIIB) — an institution that can do much of the work currently done at the World Bank.”
But perhaps Wolfensohn may be just too quick to write off the West.
For starters, much of Chinese debt to African countries is ironically denominated in dollars. China may have the yuan, but when it comes to splashing cash around, if it ain’t green, it ain’t seen.
Then there’s the questionable value of these dollar-denominated loans funding infrastructure projects in Africa, with reports of railways to nowhere in Kenya and shiny new stadiums and conference halls that remain unused and fall into disrepair common across the continent.
And China itself is pulling back on its forays overseas as its economy slows and the dubious economic value of these projects becomes increasingly apparent and expensive.
And while many countries have signed up to the AIIB, these same countries continue to court the United States to maintain its security umbrella, in particular in the Asian region, with worries over Chinese ambitions over the South China Sea hanging over the area like the Sword of Damocles.
More importantly, despite China’s significant clout when it comes to global trade, its current account is not fully convertible — which means that its value as the global reserve currency is suspect at best.
To be sure, the Chinese yuan is unlikely (for now at least) to be a real contender to dethrone the dollar’s dominance.
But many of the factors which led the dollar to dominate global trade and commerce have been undermined in the last seven decades.
Under the 1944 Bretton Woods treaty, 44 countries, including the United Kingdom, Australia, China, and the then-U.S.S.R. agreed to peg their currencies to the dollar, which was in turn pegged to the price of gold, fixed at US$35 an ounce.
Bretton Woods also stipulated the standardization of international trading norms, specifically free-flowing trade.
Countries would settle their balance of payments in dollars, which were fully convertible to gold, following which the dollar became (at least in the eyes of the rest of the world) as good as gold.
The 1971 removal of the dollar’s peg to gold is well documented — since then, the United States has been granted carte blanche to print as many greenbacks as it likes, with the knowledge that it would not need to back the same with the equivalent in gold.
But despite the dropping of the dollar’s gold peg, the world has still been satisfied to continue trading in dollars because there were several implicit guarantees of using the dollar.
First, that the United States would use its considerable military might to ensure freedom of navigation and trade flows across the world. Second, that the United States would adopt a prudent monetary policy that would not seek to devalue the dollar. Third, that the United States would defend the rule of law globally with its considerable military might.
All these three assumptions have come into question during the Trump administration’s reign.
Under President Donald Trump, the United States has favored bilateral negotiations for which it will always have the upper hand as opposed to multilateral institutions.
The Trump administration has called into question Washington’s willingness to act as the global policeman, repeatedly marching to the beat of a nationalistic drum — in other words, countries should fend for themselves.
But even more alarmingly, the Trump administration has hinted repeatedly at devaluing the dollar.
Which is leading some to question whether or not the dollar’s dominance is sustainable.
In a research paper released earlier this year, French economist Pierre-Olivier Gournichas noted that dollar hegemony is not indefinitely sustainable,
“The global economy would have to transition at some point in the future, either to another single anchor, or to a multipolar environment.”
And what could be more multipolar than a decentralized currency?
Mingjian Li, associate professor at the Institute of Defense and Strategic Studies at the S Rajaratnam School of International Studies in Singapore adds,
“When we have a financial crisis that originates from the U.S., because of the hegemonic position of the U.S. dollar, it (the United States) is able to export some of its problems to other countries.”
Most recently, what started out as the domestic trouble of defaults in the U.S. subprime mortgage market, quickly became an issue for the entire world and lead to a global credit crunch.
Emerging markets could not stomach the reduced foreign investment, trade and remittances and faced growing trade deficits, currency devaluations, increased debt and higher rates of inflation.
When the dust had settled, emerging market economies had lost an estimated US$2.6 trillion in output, according to a report by the United Kingdom’s Institute for Public Policy.
And while it was a flood of dollars that eventually helped to resuscitate the ailing global economy, as Saxo Capital’s global macro strategist, Kay Van-Petersen notes,
“We’re always looking for this displacement of the global reserve currency.”
Because the cause of the problem was also the solution doesn’t mean that we should accept the status quo.
The amount of reputational damage that the Trump administration has wrought on American institutions is hard to measure and their impact is likely to continue being felt decades from now.
Whereas other countries begrudgingly allowed the dollar to form the basis of the global reserve currency, the urgency with which to seek out alternatives has never been more apparent.
Which is why there is a growing segment of the investing population that is seguing into alternative assets such as cryptocurrencies which can serve both as a store of value and a means for the transfer of the same.
Viewed from the lens of decentralization, over-reliance on the United States was always going to be a risky proposition.
Just as the United States turned its back on the world in the aftermath of the First World War, only to be drawn into the Second World War, there are no guarantees that subsequent administrations will feel the need to tend to the costs of maintaining the global world order.
If America shrinks away from its role as the global leader, other forces will fill that vacuum and as the experience of the Second World War clearly demonstrated, those forces are unlikely to be benign.
The dollar is dominant for a reason, but the Trump administration at least seems to have forgotten what that reason is.
The privilege to borrow cheaply and spend prodigiously is not free, but it is easy to sometimes forget the cost because the bills are subtle and unseen.
Expectations are sometimes unspoken.
Which is what makes the dependence on the dollar as the lifeblood of global commerce so unsatisfactory.
Any country regardless of its track record will always be susceptible to bouts of political inconsistency, but not every country’s political inconsistency results in another country’s economic turmoil.
Against this backdrop, would it not be preferable to adopt a decentralized approach to how we transfer and preserve value?
Because dollar dominance is not entirely satisfactory, does it necessarily mean that our rush to replace it should create another hegemon, one which may not be as democratic as these United States?
The very essence of cryptocurrencies is that of practicing democracy, one which cannot be easily usurped or undermined by factional interest or hijacked by a specific group.
Bitcoin and its ilk are all at once everywhere and nowhere and it’s hard to control and manipulate that which you cannot focus.
But don’t get me wrong, Bitcoin is no panacea either.
That its values are still measured in dollars means that dollar dominance is here to stay for a while longer.
While cryptocurrencies may be some ways away from usurping the dollar, it ought to at least enter the conversation.
Patrick is an innovative entrepreneur and a lawyer passionate about cryptocurrencies and the business world. He is the CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. He understands the business concerns of founders and business people helping them to utilise the legal framework to structure their companies to take advantage of emerging technologies such as the blockchain in order to reach greater heights. His passion for travel, marketing and brand building has led him across careers and continents. He read law at the National University of Singapore and graduated with Honors in the Upper Division and joined one of Singapore’s top law firms, Allen & Gledhill where he was called to the Singapore Bar as an Advocate & Solicitor in 2005. He created Purer Skin, a skincare and inner beauty company which melds the traditional wisdom of ancient Asian ingredients such as Bird's Nest with modern technology. In 2010, his partner and himself successfully raised $589,000 from the National Research Foundation of Singapore under the Prime Minister’s Office. He has played a key role in the growth of Purer Skin from 11 retail points in Singapore to over 755 retail points in Singapore and 2 overseas in less than a year. He taught himself graphic design, coding, website design and video editing to create the Purer Skin brand and finished his training at a leading Digital Media Company.