On August 15th, 1971 (50 years ago) US President Richard Nixon declared that the ‘gold window’ was closed. The era of the convertibility of the dollar to gold was over, and the system that had been agreed upon by the victors of the war at Bretton Woods in 1944 collapsed: the regime of fixed but subject to periodical reviews exchange rates had lasted a quarter of a century.
Jeffrey Garten, Bill Clinton’s former Undersecretary of Commerce for International Trade and managing director of the Blackstone Group and Lehman Brothers, is now a historian who has written about Nixon’s decision. He recalls that the turnaround came at a time when the amount of dollars in circulation in the world was four times the amount of gold held in reserve, inflation was rising, Washington was withdrawing troops from Vietnam, and Nixon, the month before, had announced his visit to Beijing, a historic event.
In 1959, the economist Robert Triffin had explained to Congress that there were absurdities associated with the use of national currencies as international reserves
and that the contradiction was a built-in de-stabilizer
of the national monetary system. The end of convertibility did not eliminate these absurdities
; instead, it removed the only limit its creators had provided: the gold standard.
The power of inertia
Over the next 50 years, during which the Bretton Woods system was replaced by floating exchange rates, Triffin’s denunciation resonated on dozens of occasions and in many variations. The dollar’s dominance was undermined in a few moments of crisis — for example, when the US credit rating was downgraded in 2011 — but more often, crises increased its appeal as a safe-haven currency, like the umbrella most able to weather a storm.
Monetary historians derive a lesson from the resilience of the dollar and, before that, from the long persistence of the monetary system based on the pound sterling well beyond the UK’s relative decline compared to a rising United States (which had surpassed the UK’s output by around 1870). The key factor explaining the resilience of monetary systems to setbacks and the loss of economic clout is the enormous inertia of the systems that govern the daily lives of billions of people as well as millions of businesses and institutions. This includes the persistent reluctance of the rising powers to claim the driver’s seat. This does not reduce the negative effects of Triffin’s absurdities
, or the attempts of other powers to reduce or constrain the hegemony of the dominant currency by demanding that the global monetary system be adapted to a multipolar world.
The most important operation since 1971 in reducing the damages of currency fluctuations, of devastating devaluations and revaluations, has been the creation of the single European currency. The ongoing Next Generation EU project for Europe’s energy and digital restructuring will also constitute a decisive step in elevating the euro from an essentially regional to a world currency if it succeeds in stabilising and permanently establishing a common debt market.
A sheriff dollar
and speculative currencies
An idea has emerged in recent years, and has been strengthened as a result of pandemic of the century: new digital technologies which expand the online purchasing of goods, services, and securities, and simplify payments and monetary transfers — may be the shortcut to reforming the international monetary system.
This hypothesis has found a foothold and impetus in two main events. On the one hand, the use of the dollar as a surgical weapon in power relations. The weaponization of the US currency, tested during the strategic dispute with Iran and contested in the tensions with Russia and China, has even been deployed against the banks and companies of allied countries that violated Washington’s sanctions. On the other hand, an unexpected and revealing shock came from Facebook’s attempt to launch its own private and international digital currency, Libra, tapping into its social network of about 3 billion users. The highest institutions have closed ranks against the irruption of private capital in the field of monetary sovereignty. Mark Zuckerberg’s operation has been suspended but not abandoned: renamed Diem, it seems to be waiting for an opportunity to re-emerge.
The phenomenon of private digital currencies
, which are not currencies but speculative bets, has grown stronger during the pandemic, reaching dizzying heights and falls, depending on the sponsors who indulge their adventures (such as Bitcoin, inflated or deflated by Elon Musk, Amazon or JPMorgan) or the severity of the regulators (as in the case of Binance, banned in the UK).
Sovereign digital coins
Plans by some central banks to launch or accelerate the issuance of their own digital currencies, which are referred to by the acronym CBDC (Central Bank Digital Currency), were initially motivated by the need to provide a service which makes use of the most prevalent payment technologies, and to deny any ground to dangerous private currencies
. Worldwide, according to Maria. Demertzis of the Bruegel Institute, only one-fifth of payments are made in cash, with large differences between countries.
Gillian Tett, of the Financial Times, thinks central banks are getting on the digital currency bandwagon for two reasons: they fear that, because of the abnormal issuance of trust money to finance quantitative easing, the monetary system has become unbalanced; and they think this has been excessively overburdened during the pandemic. The journalist is sceptical about the ability of central banks to make digital currencies work, mainly because of the risk of displacing the banking system, which is the manager and beneficiary of most payments and transfers. A slice of bank fees is now shared with mobile phone operators, which have an increasing weight in the transactions of younger generations. The global income of these fees is estimated by the Bank for International Settlements (BIS) at about 1% of GWP.
The Economist sees govcoins
as a giant risk, but one that must be taken. The new incarnation of money
, by creating a direct interface between citizens and the Fed or ECB, will be safer and cheaper. But there is a risk of losing control of the banking system, especially in times of crisis; or govcoins
may even become the state’s panopticons to control the population; finally, there is the fear that they will alter the games of geopolitics, offering an alternative to the dollar and open markets. Either way, this will be the next great experiment in finance
and promises — writes The Economist — to be a lot more consequential than the humble ATM
.
The BIS, in its 2021 Annual Economic Report, called central bank digital currencies an opportunity for the monetary system
to ensure its systemic risk regulation, liquidity and integrity. The real challenge, the BIS notes, will be the creation of a huge amount of personal data, which poses management and protection problems.
Two opposing positions emerge among monetary historians. Berkley’s Barry Eichengreen is the main exponent of the sceptical point of view: CBDCs are coming. But they won’t change the face of international payments. And they won’t dethrone the dollar.
Princeton economic historian Harold James, however, sees a turning point in monetary history: As the digital revolution accelerates, the national era in money is drawing to a close. […] we are moving toward another new monetary order
, The process is just beginning. Technological determinism applied to power relations monetary relations being one of them — is imprudent. On the contrary, it is certain that these new monetary battles will contribute to the unprecedented tensions of the contention between powers.
About 50 central banks are studying digital currencies. Some intend to distribute their future digital currencies through national banking systems (the wholesale model), while others are considering a direct relation with their citizens (the retail model), The burning issue is the cross-border use of digital currencies.
The challenge of the digital yuan
A joint report by the BIS, the IMF and the World Bank for the upcoming G20 gives an account of a survey conducted in early 2021 among 50 central banks, 18 in advanced countries and 32 in emerging countries: only 8% of them are willing to also use their currencies abroad from the outset, both wholesale and retail. There are four countries, China being one of them, which intend to reach monetary agreements with their trading partners. For China, this will first and foremost be with emerging markets along the new Silk Roads and beneficiaries of Beijing’s investments and loans.
China has been conducting a pilot experiment for a year, in some provinces. The weekly Nikkei writes that initially the Chinese idea was of a digital yuan for domestic use, but in July a government white paper announced that its use in cross-border payments was being considered. Beijing thus confirms the strategic objective of the internationalization of its currency, currently underrepresented at 2.5% in the world’s foreign exchange reserves and cross-border payments, while China has exceeded 12% of world exports of goods and services, according to the IMF’s figures. The Nikkei article gives both a defensive version of the Chinese line (there are concerns that Washington is weaponizing the dollar to impose sanctions on China
) and an offensive one (China’s race to develop a central bank digital currency has to be seen in the context of Beijing’s efforts to wrest global influence and power from the US
).
First sparks between the two shores of the Atlantic
Within the Fed there are positions against sovereign digital currency, while they re-evaluate the role of private ones that call themselves stablecoins
because they guarantee their legal tender
with reserves of conventional currencies.
In late June, Vice President Randal Quarles spoke out against the adoption of a digital currency by the Fed, questioning its legal authority. Quarles considers it unlikely
that the dollar’s role as the dominant currency in international financial transactions will be threatened by a foreign CBDC
. The dollar has nothing to fear from competition from stablecoins, and indeed a global US dollar stablecoin network could encourage use of the dollar by making cross-border payments faster and cheaper, and it potentially could be deployed much faster and with fewer downsides than a CBDC
.
Christopher Waller, a member of the Fed executive, also stands firmly on Quarles’ side. Facebook’s rehabilitation after the condemnation in 2019 iS evident. Diem, the upgraded version of Libra, offered the Fed and ECB its infrastructure to distribute their future digital currencies. Fabio Panetta, member of the ECB executive, replied: This is the opposite of the line from ‘The Godfather’: it’s an offer that can’t be accepted. […] There are tasks and functions that the central bank cannot relinquish
.
The Governor of the Bank of France François Villeroy de Galhau considers a European digital currency to be an urgent issue for three reasons. The share of dematerialised payments
during the pandemic rose from 51% to 70%: We, as a central bank shall never abandon cash; but this commitment cannot be our sole response to technological change
. The emergence of new instruments of Big Tech, the crypto-assets and stablecoins, could threaten our monetary sovereignty and our mandate to safeguard financial stability
. Finally, the launch of foreign CBDCs, and in particular the digital yuan which is already accessible in the major Chinese cities
, means that the international role of the euro may risk losing momentum. The ECB’s digital currency should be launched in partnership with commercial banks, not against them.
Burkhard Balz, a member of the Bundesbank executive, seems to be overcoming the German central bank’s traditional reluctance to measures that weaken the fiduciary currency. It is a matter of proportions: the balances of eurozone commercial banks amount to €14 trillion, about ten times the cash circulating in euros. Sovereign digital money will be a third form of money, alongside euro cash (fiduciary money) and commercial banks’ balances at the central bank (bank money). But that isn’t all: A digital euro is also seen as a great opportunity for the autonomy of Europe. […] Because payment transactions are now considered as an important factor also from a geostrategic point of view.
In the age of dirigisme rediscovered by state powers, the central bank’s digital currency has a centralizing role that China and Europe intend to wield.
Lotta Comunista, July-August 2021