On the cusp of a new world economic order perhaps?
July 15 1944: More than 700 representatives- men in
dark suits mostly and smug smirks, clutching briefcases whose contents will play
an integral part in creating a new financial world order- from developed
nations have convened in the lush suburbs of Bretton Woods, New Hampshire. The
smokers among them are itching for a fag, desperately. The kings of double
shots, on the other hand, cannot wait for evening to come so that they can cool
their heads, meanwhile they rely on the strong coffee served at the meetings to
shush the previous night’s hangover. The philandrerers are also trying to make
the most out of their time here at this conference; their minds constantly
drift between the meetings’ proceedings and the steamy nights they have had at
their hotel rooms for the two weeks that they have been here.
Deliberations drag on for what seems like eternity
and just when everybody has had it up to here (points at the forehead) a
concession is arrived at on July 22. Pen is put to paper (or is it feather to
paper?) and just like that, 44 allied nations agreed to abandon the gold
standard and peg their currencies to the dollar while the dollar would be convertible to gold at $35 an ounce
effectively consecrating the US dollar as the world’s reserve currency.
Just to break it down for you a little: the gold
standard was a monetary system in which a country’s currency or paper money had
a value directly linked to a specific amount of gold. However, by 1944 or
earlier even, it had become difficult to maintain the gold standard so
alternative means had to be found or else many currencies would collapse. More
to that, by 1944 most of the allied nations had seen their gold reserves plunge
while the US had managed to stock up the largest gold reserves in the world at
the time.
By becoming a world reserve or global currency, that
meant that the US dollar would be accepted for trade throughout the world. But
the US dollar had already achieved that status way before the Bretton Woods
conference. World War 1 (1914-1918) had seen the US become a substantial
international creditor. What this meant is that, the loans in dollars from US
to European nations ravaged by the war ended up as foreign reserves in European
nations’ Central Banks. Furthermore, European industries were still reeling
from the impacts of the war which meant that imports from the US had to be
bought to meet the prevailing demand. This demand was backed up by rather
substantial holdings of dollars.
The US dollar’s status as the world reserve currency
has had benefits and costs to the US and the world economy at large. For
starters, the US can comfortably borrow from other nations (in dollars) and just
print more dollars upon the loans’ maturity. Additionally, given that the
dollar is the world reserve currency and has high demand, the US government is
able to borrow money at lower interest rates than other countries. The US has
also been able to benefit from reduced exchange risk because the reserve status
of the US dollar means that other countries hold significant reserves of the
currency, reducing exchange rate risk for the US and increasing the stability
of the currency’s value. The status of the US dollar as world reserve currency
has also made it possible for US companies to sell their products both at home
and abroad at high prices and accept dollars for the same. The fourth and
perhaps the most consequential benefit that the US has enjoyed from having the
dollar as a global reserve currency is that the US has been able to exert
otherworldly economic influence on other nations.
The costs have been felt largely by the rest of the
nations. One of the costs has been that there has been a greater general
feeling that the US has often times misused the dollar by issuing notes without
control thus causing inflation in its trading partner-countries such as India.
The second cost proceeds from the fact that the US has been using its economic
influence to dictate the political and economic spheres of other countries. The
most recent example being the start of the Russia-Ukrainian war in February
2022 when the US prohibited American dollar transactions with the Russian
Central Bank and fully blocked the Russian direct investment fund which meant
that Russia could no longer use the US reserves it held to prop up the
plummeting rubble .
It is especially because of this last reason that
countries such as China, Russia, Brazil and their allies have been trying to
end the dominance by the US dollar. The aforementioned trio as well as India
and South Africa formed BRICS in a bid to break away from the shackles of the
dollar. BRICS member countries have been intent on reducing their dependence on
the dollar and promoting the use of their currencies in and financial
transactions and international trade. It is also becoming clearly apparent that
both China and Russia are somewhat intent on propping the Yuan and Rubble
respectively in a bid to dethrone the US dollar. To do this, both countries’
Central banks have been aggressively racking up their gold reserves. In fact,
it is reported that the Russian holding of gold rose by one million ounces over
the past year.
But what does it take to become a global
currency?
Economists posit that some of the factors to
consider before determining the ascension of a
currency to global currency include; the depth and flexibility of a
country’s financial markets, government stability and transparency, and just
how much of the said currency is held and used in trade across the world.
Factor number one and three are somewhat more consequential.
In an article for the Carnegie Endowment For
International Peace blog, Michael Pettis writes;
The dollar is
the most widely used currency in international trade not just because of
network effects, but also for other reasons that are hard for other countries,
especially countries like China, to replicate. The world uses the dollar
because the United States has the deepest and most flexible financial markets,
the clearest and most transparent corporate governance, and (in spite of recent
sanctions) the least amount of discrimination between domestic residents and
foreigners.
This means that, for example, for China’s renminbi to
compete with the U.S. dollar, Beijing would have to be willing to present the
same benefits to foreigners. This includes giving up control of its current and
capital accounts and substantially reducing its ability to control credit
growth and the liabilities of its financial system.
All of these measures, at least for the foreseeable
future, are extremely unlikely. In fact, not only has Beijing shown no
inclination in recent years to accept any of these changes, but it has been
moving in the opposite direction, especially with the centralization of
bureaucratic and political power and the expansion of the state sector that
China has undertaken in the past several years.
According
to the Federal Reserve there was nearly $83 trillion in total global money
supply $48.9 million being M1. MI is the sum total of the money in circulation
including money banks hold in reserves as well as checks, demand deposits,
other types of checkable deposits and negotiable orders of withdrawal.
That
said, do you think China and Russia will succeed in upending the dollar’s
dominance?
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