Discover more from Learning by Proxy with Vivek Srinivasan
Bretton Woods is not dead, but it just might be
Bretton Woods established the primacy of the dollar. That supremacy is under threat.
During the Second World War, Britain was in a precarious position. They were running out of money for the war effort and America had switched to ‘Cash and Carry’ business with Britain. This meant that Britain would have to pay and buy the goods in America but shipping it to Britain was their own responsibility.
Exchange rates were manipulated by all countries as they were pegged by the government. This in turn meant that there was not too much faith left in the currencies themselves.
Since the currencies were not pegged to the market, a country could engage in competitive devaluation and make their exports cheaper. No tariffs or taxes could protect local businesses because one could continue to devalue. At the time, there were not a lot of diverse products that populated the world. Production was focused on basic commodities. The potential to hurt each other was quite high.
It was near impossible to tell what the actual value of a currency was and many countries had resorted to demanding payments in gold. It was in this background that the Bretton Woods meeting was organised with the finance ministers of all of the allied powers, some 40 countries came together. They decided…
The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold (or 0.88867 gram fine gold per dollar).
Essentially, the value of gold was determined as a constant number of dollars. Also, that the US Dollar was the only currency that was convertible to gold. The value of every other currency was pegged against the dollar.
Everything was fine, till the next major war. Nixon got the US embroiled in the Vietnam war which sucked away resources. He also pissed off the Middle Eastern countries by siding with Israel. On the one hand, gold was being burned in Vietnam, on the other, there was no oil in the country, and the economy looked like Biden was managing it. In desperation, he threw out the gold peg. This meant the US government could issue as much currency as it wanted without backing it with gold. The dollar convertibility to gold went out the window. The US dollar from that point had value because the US government said so. Like that we ushered in the era of fiat currency.
At the same time, Kissinger’s chicanery in Saudi Arabia resulted in the US dollar becoming the default currency for the purchase of petroleum.
Every time someone tells me that we do not operate under the Bretton Woods system, I want to throw a brick at them. Because…
The primary goal of Harry White, a treasury department official, was to establish the primacy of the dollar. Although the gold peg was gone after Nixon, all currencies still continued to be exchanged against the dollar.
Also, they created three organisations of Neo-imperialism at Bretton Woods - the International Bank for Reconstruction and Development which would go on to become the International Monetary Fund, the World Trade Organization and the World Bank. These were tools of oppression invented to keep the “Global South” continuously indebted.
Every bank in the world maintains NOSTRO and VOSTRO accounts. NOSTRO is Latin for ‘ours’ and VOSTRO, ‘yours’.
Let us say you had to import something from France. The currency that France uses is Euro. India uses the Indian Rupee. But…
The bank in India would convert the Indian rupee to US dollars and send it to their VOSTRO account in France. That money is converted by the bank in France into Euros and then credited to the seller.
When America buys stuff from China, they pay China in US dollars. China could ask for it to be converted to Yuan and transferred to China but China will need US dollars to buy petroleum. Hence they leave that money parked in a NOSTRO account at the US Federal Bank. That money often is far greater than what China needs and hence they end up investing that money in US Treasury Bonds to get some returns on it rather than sit there depreciating. This is the source of the infinite cash that seems to be available to the US for the debt that they issue.
In effect, when the Americans buy stuff and their payment is just moving dollars from one account in the Federal Bank to another. It is as if they got all of that stuff for free!
This fact alone explains why they have the largest economy in the world.
In the last 2 years, America issued $ 4 Trillion in debt, a quarter of its GDP. Any other economy would have seen its currency take a beating, but America did not.
Let us do something about it
And then the war in Ukraine happened. America engaged in the most naked and perverse manipulation of the financial system against the Russians. Many countries started thinking, today it is Russia what if tomorrow it is me?
Since Bretton Woods declared the US Dollar as the only currency convertible to Gold, every nation maintained a peg to the Dollar. About 150 currencies can maintain a single peg and convert between one another using that peg.
This relic of the Bretton Woods is what makes the Dollar omnipotent today.
At a time when 2 dozen countries are wondering if they should introduce digital currencies. In a world of digital finance with billions of transactions being settled every hour; would it be backbreaking to maintain 1000 currency pegs? The crypto guys seem to be able to, they are not even organised!
The Reserve Bank of India (RBI) has put in place a mechanism to settle international trade in rupees “in order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in the rupee”. The central bank’s move has come in the wake of increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine and sanctions by the US and the EU.
The RBI mechanism is expected to facilitate importers and exporters to avoid rules that prevent the use of a global currency such as the US dollar for trade with certain countries. After Russia attacked Ukraine, several countries had imposed sanctions on Russia. Indian companies which were looking for alternative modes of payment for imports can make use of the new mechanism.
Source: Indian Express
I had written an article on India’s greatest tech export in March this year. India has been making a huge push to increase UPI adoption across the world and slowly and steadily the protocol has found acceptance including in France.
What will settlement in Rupee do for India?
[…] it will enhance our integration in the global economy via increased trade and FDI flows. India is now the sixth largest economy in the world and an important trading partner for several countries. In 2021-22, India’s total trade with the world was valued at over $1 trillion, with exports crossing the $400 billion mark for the first time in a fiscal year.
the internationalisation of the rupee will promote the development of financial markets. International evidence, as noted by an ADB Study (2014), suggests that currency internationalisation in terms of trade settlement has a significant and positive effect on the development of a financial market.
It would alleviate the problem of the ‘original sin’, which is the inability of countries to borrow abroad in their own currency and lies at the core of currency crises and financial fragility.
India has been witnessing a high trade deficit. As per latest data, trade deficit rose by 87.5% to $192.21 billion in 2021-22 as compared to $102.63 billion in the previous year. The primary reason for this burgeoning growth has been an increase in the prices of key commodity imports, particularly crude oil. It is anticipated that using the rupee for major imports will help reduce the trade deficit.
the policy decision for rupee internationalisation will go a long way in increasing India’s trade with its South Asian neighbours. With Nepal and Bhutan, India’s international transactions were previously also officially allowed to be conducted using the rupee. Geographical contiguity reasons aside, this had also helped India emerge as the largest trading partner for both these countries.
Source: The Wire
These are strange times and many geopolitical contours are being re-drawn. India is trying to see if it can create a pole apart from that of the US dollar in this situation. The oil and gas ban by the west on Russia might aid the cause quite a bit.
Bretton Woods must eventually die, I am sure this is not going to be the cause. But it certainly is the opening salvo.