50 Years After Bretton Woods, the US Dollar's Throne Is in Play

This Sunday, Aug. 15, will be the 50th anniversary of the end of the Bretton Woods currency system. After World War II, major nations essentially agreed to peg their currencies to a gold-backed dollar. But by 1971, faith in the U.S. dollar was eroding, forcing President Richard Nixon to end the dollar’s convertibility to gold. This ushered in the current status quo of relatively free-floating “fiat” currencies.

That long-ago decision still has major implications today. Over the past few months, massive coronavirus pandemic relief spending in the U.S. has triggered worries that faith in the dollar’s soundness could be shaken again as it was 50 years ago. The dollar’s share of central bank balance sheets is still a dominant 59%, but has been slowly declining – threatening to take with it a number of economic and political advantages.

To better understand the road ahead, I’ve been examining the viability of various currencies as central bank reserves, including the euro, the Japanese yen and the Chinese yuan, as well as bitcoin or other digital instruments. That analysis will be published soon, but I wanted to hit on a few highlights of what I learned talking to currency experts.

First, despite high anxiety about the yuan’s rising influence, China faces a deep, possibly unsolvable conflict between its global currency ambitions and its domestic economic agenda: The Chinese Communist Party maintains tight currency controls to encourage domestic investment, but a reserve currency must be freely tradable.

Between that conundrum and the inconsistency of Chinese regulation, experts are generally skeptical that the yuan can climb much in the global reserve rankings anytime soon. Japan, meanwhile, doesn’t sell enough debt abroad for its bonds to take up a large share of global reserves.

Among current options, the euro seems to be the most serious competitor to the dollar, thanks to the large eurozone economy behind it and the relatively open and responsible management of the European Central Bank. A major recent step that makes this more plausible was the ECB’s decision to issue eurozone-wide bonds to fund pandemic relief programs.

That’s ironic given that rising global debt levels are also a pillar of the case for central banks to hold bitcoin as part of their reserves. The coronavirus has fueled a massive surge in global debt, which as of earlier this year stood at 365% of global GDP.

If the world were a single country, that ratio would be a five-alarm fire – especially because so much of it is held by central banks of the countries that issued the debt, which economists including Eswar Prasad argue amounts to money printing. The case for individuals to hold bitcoin rests on the idea that central banks are inevitably tempted to debase their currency through this sort of inflationary policy.

The same argument could be made for central banks: that the debt of other countries presents a large and rising risk. Bitcoin, by contrast, is effectively a commodity rather than debt, making it safer from some perspectives. For now, however, bitcoin’s price volatility remains a major obstacle to national adoption.

Nonetheless, interest in the idea has exploded since El Salvador first dipped its toes in. Much of that has been from countries with weak currencies, such as Argentina, where President Alberto Fernandez this week expressed a degree of openness to using bitcoin.

This, I think, is where to watch for the next major wave of bitcoin adoption: smaller nations with troubled currencies or histories of monetary mismanagement. For them, bitcoin is something entirely novel: a store of value that’s not dependent either on their own central bank, or a potentially hostile third nation. It’s clear they’re paying attention to the possibilities.