Bretton Woods III

The development of a polycentric global monetary system is a challenge to our system of nation-states.

Delegates to the Bretton Woods Conference, 1944. Source: History Today.

Zoltan Poszar’s recent research note on the emergence of “Bretton Woods III” has attracted a considerbale amount of attention for a short, technical research note, but the fuss is understandable: Poszar, Credit Suisse’s head of short-term interest rate strategy, is an authority, and his argument, which he makes succinctly, is eye-catching – and particularly appealing to anyone with a commitment to cryptocurrency, for which Poszar predicts a potentially bright future. Poszar suggests that out of 2022 monetary shock - the sanctions imposed on Russia - the semi-stable “Bretton Woods II” regime that balanced on the monetary relationship between the US’ massive deficit and China’s massive surpluses, is now appearing a “Bretton Woods III”, based (in part) on a new commodity money system, with the renminbi at its centre, opposing the old credit money system of the US dollar.

The original Bretton Woods agreement

The periodisation is quite satisfying, not least because it cues up an understanding of each of these global monetary orders as subject to its defining contradiction. For Bretton Woods I, the actual Bretton Woods arrangements as put in place after the conference there of 1944, this was the inherent instability of making one currency – the dollar - the lynch-pin of a global system of fixed exchange rates, and then attempting to tie that currency to a gold “anchor” – the requirement that the Federal Reserve would always exchange dollars for gold, to anyone, US based or otherwise, at the fixed rate of $35/ounce.

The theory was that the (semi-)fixed exchange rates would remove the monetary instability of the interwar years, in combination with strict controls on capital, whilst the gold link to the dollar would stabilise its own value. In the immediate postwar years, this worked well: the US was a major exporter to the rest of the world – the foundation, in fact, of the entire industrialised system, having suffered less material destruction than Europe and Asia – and the overvaluation of the dollar relative to gold was not apparent.

The problem, as economist Robert Triffin first pointed out to a Congressional Committee in 1959, was that the status of the dollar as the reserve currency peg for the rest of the world was creating a persistent excess demand for dollars outside of the US. To supply this as the source of dollars, the US was compelled to run deeper and deeper current account deficits with the rest of the world – buying up their goods and services with dollars that the rest of the world demanded. As Western Europe and Japan recovered, their exports into the US grew rapidly. But this widening US deficit threatened the claim of the US government to keep the dollar fixed to a gold price: with far more dollars circulating outside of the US, the pledge to always meet demands for its conversion at a high price threatened to run down its own gold reserves, threatening the credibility of the pledge.

The combination of persistent deficits and outflows of gold would, in Triffin’s prediction, eventually explode the whole system. As US external deficits widened, and combined with rising government borrowing to meet the cost of the Vietnam War and domestic programmes over the 1960s, speculative pressures against the dollar-gold peg grew in offshore markets, exploiting the price gap between the US government’s fixed price for gold, and the market price obtainable outside. When both Britain and France, alarmed by the strains in the system, announced their intentions to convert dollar holdings to gold, President Richard Nixon unilaterally ended the convertibility of gold in August 1971. The entire system of pegged exchange rates had disintegrated by early 1973.

The system could have survived if, as Triffin himself suggested,

European governments and central banks were willing to abandon to the political, monetary,and banking authorities of the United States their sovereignty over the management and use of reserves… is hard to see how they could be willing to underwrite blindly in this fashion future deficits of the United States irrespective of their amounts and of the multiple and variegated causes of their emergence
and continuance. (quote)

That is to say: if developed-world governments outside of the US were prepared to abandon the national sovereignty their post-WW2 system explicitly promised them, allowing the US government to determine their reserves policy and so, therefore, ultimately determine their monetary and economic policy in a fixed exchange rate system, the system could, perhaps, have held.

But there was no reason to expect them to do this: the implication would be that non-US countries would be prepared to squash their own domestic economies, limiting spending and growth, for the benefit of maintaining the US’ capacity to keep the dollar as global reserve currency and allow the US its own freedom to run whatever domestic economic policy it saw fit: massively increased military spending, “Big Society” programmes, huge wage increases, whatever it liked.

Conditional sovereignty

This point about sovereignty is central. Once the international order had been restructured, post-WW2, around the core idea of independent, sovereign states, hard limits were set on the form of international economic order that might be sustainable over time. And once economic development, in the form of national economic growth, became the dominant goal for economic strategy to be pursued by an independent national state – as it did, universally, from the end of the War – the range of options was narrowed further.

These constraints on sovereignty have never applied fully to the US. Shattering the Bretton Woods regime broke the bind it was in. Internationalising its own financial system, stripping away controls on the movement of capital and domestic regulations on its growth, enabled the expansion of its domestic economy on the basis of – as Yanis Varoufakis has elsewhere described it – a tribute paid to the centre of the system.

Financialisation and global production

In the years after the collapse of the original Bretton Woods system of fixed exchange rates, was that the US could enjoy a different form of monetary sovereignty. In a world of rapidly expanding capital flows, with dollar-denominated assets as their foundation and the dollar itself demanded in the majority of global trading, persistent demands for the dollar globally, notably in fast-growing less developed countries, would create a the “exorbitant privilege” for the US in the form of persistently low interest rates on the back of exceptional demands for US assets. Presidents Reagan, GW Bush and Trump all merrily exploited this to run yawning government deficits, driven by military spending; their hapless Democratic alternates were more inclined to push domestic austerity.

Options for the rest of the world were rather more restricted. However, the expansion of the financial system with the forced ending of the Bretton Woods agreement, and – critically – the disappearance of controls on capital - created the option for a form of finance-led growth at the national economy level; but this was only a coherent system organised around the central role of the dollar and its status as the world-money of the whole system. National-level financial systems could integrate with each other and, in defiance of the nationally-organised system of the original Bretton Woods design, disintegrate the relationship between domestic production and consumption in favour of the integration of domestic consumption into the value chains organised globally.

This disintegration of the national economy was the crucial element in the financialised reorganisation of the world economy over the years of globalisation. As organised through the neoliberal model of governance, applied in some form to close to every economy in the two decades after 1990, the opportunity to run domestic consumption entirely out of kilter with domestic production was more than an extension of the venerable principle of comparative advantage, in which the commodity grasp of economy could be extended by mutually beneficial trade; it was, importantly, the extension of the principle of international trade deeper into the sphere of production: of the finer and finer division of labour, on an international basis, and the search for the lowest relative cost of production available.

For the developing world this opened up a plausible model of growth that looked to the integration of global financial flows to domestic capital accumulation, geared towards the rapid expansion of exports. This was not the post-war ideal of import substitution, rapidly rising domestic incomes, and (eventually) the creation of a major domestic market: low wages, austerity, and high forced savings were the typical outcome, combined with a painfully large exposure to international financial flows – financial crises multiplying from the 1980s onwards.

Bretton Woods II emerges

Nonetheless, by the early 2000s, after the entry of China into the World Trade Organisation and, a decade before, the collapse of the Eastern bloc, the system had seemingly stabilised. In an influential 2003 paper, Dooley, Landau and Garber (DLG) describe the unbalanced-but-stable global economy of the time as a fundamental continuation of the original Bretton Woods plan. The developed world moved out of the original fixed-exchange rate regime from the 1970s onwards, but the emergence of new fixed exchange rate monetary policy regimes in the developing world, especially Asia, allowed a similar form (they argue) of economic development to take place: export-driven, based around an undervalued currency and high national savings rates. Private capital inflows from both the older developed economies (“capital account regimes” in their paper’s terminology) and public capital inflows from the emerging market economies (“trade account regimes”) enabled the US to both maintain its role as the centre of the global system of flows and finance domestic economic growth.

Put together, this system could appear stable, at least for a significant period of time – DLG suggested another decade or so. High rates of growth in the emerging markets would eventually lead to their displacement of the developed economies as purchasers of private US securities and the growth of their own domestic markets but, until that point was reached, this “Bretton Woods II” regime would hold. There was a major internal contradiction in the regime, just as there was with Bretton Woods I: the continued expansion of dollar assets held by the rest of the world implied the continual growth of dollar liabilities in the US domestic economy (and also for other developed-world economies, themselves hitching on to the growth of the global financial regime).

Bretton Woods III

Now Poszar at this point argues that the Bretton Woods II regime held even through the 2008 financial crisis, which saw the (brief) inversion of capital flows across the globe, the collapse of major banks, and (once the dust had settled) the significant involution of the global financial system – volumes of cross-border financial flows remaining down on their pre-2008 peaks, as a share of global GDP. The internal contradiction of the “Bretton Woods II” regime appeared to manifest itself: the imbalances of the global economy becoming manifest as the developed country domestic credit bubbles the global financial regime enabled burst, and the banking systems that had sustained them collapsed.

Poszar suggests (or at least this is my reading) that the effectiveness of the US government a “backstop” to the private financial regime, primarily through the use of swaplines from the Fed to other central banks, meant the Bretton Woods II regime held – held, in fact, right the way up to the Russian invasion of Ukraine last month. As sanctions were imposed on Russia, preventing its central bank making use of its own reserves – remember, a core component of BWII was the growth of official currency reserves in emerging market economies – this forced its reliance on alternative sources of trade and foreign currency.

Replacing BWII, Poszar argues, is a new “Bretton Woods III” regime, with the renminbi newly strengthened as an alternate major reserve currency – and, crucially, one backed by commodities (“outside money”) rather than, as we have enjoyed since 1971, a credit money form (“inside money”).

I’ve written a little already about the appearance of a polycentric global economy – one no longer dominated by a single hegemon. Polycentricity in the global money system – something that, if it stabilises, would be unique in the previous history of capitalism. Giovanni Arrighi and Charles Kindleberger both present versions of the thesis that the international capitalist economy requires a single hegemon for its organisation, around which all other economies and currencies gravitate: in Arrighi’s historical account, this moves from Genoa, to Amsterdam, to London to, as today, New York/Washington.

The organising concept here (at least for Arrighi) is the presence of what Marx called a “world-money”: the ultimate arbiter of value in the global system, as expressed in monetary from, and (in a Hegelian twist) the immanent form of monetary value under capitalism. Periods of hegemonic shift – as with, say, the passing of the sterling-oriented Gold Standard into the Bretton Woods system – are periods of dangerously radical instability. If we are not in the transition to a different hegemon – and it would be an ambitious stretch to claim China is anything close to this – but to a world where there are multiple, potentially competing world-currencies would be a radical departure. So, too, would be the return of a commodity money-form as one of those competing “world-monies”, in the form of the commodity-backed renminbi. The contradiction here would be less internal to the monetary regime, as external, occurring in the clashes between the different monetary regimes. This needn’t involve a clash of equals: a smaller, more tightly regulated commodity-money regime could confront a looser, but larger credit-money regime.

Global instability

This is interesting speculation, so far, although the lines of development look broadly correct. The missing element seems to me to be the relationship between forms of money and sovereignty: that in a “Bretton Woods” world, as established by agreement at the end of WW2, the primary form of sovereignty would be that enjoyed at a national level, by independent nation states, free (for much of the world) from their colonial pasts. This conception had to be fought for - the anti-colonial struggles mattered - but it became the dominant consensus. Bretton Woods institutions were themselves designed, initially, as a compromise between the demands of national sovereignty and the need to maintain a functioning global system; that one country, the US, was able to exploit its own sovereignty to a maximal extent (relative to all others) was primarily a function of its victory in war, and then the maintenance of that absolute advantage ever since – most dramatically with the ending of the Cold War, and the creation of a uniquely unipolar world.

If that US economic advantage is now starting to appear relative rather than absolute, particularly regarding the emergence of China as a “peer competitor”, it would also indicate the opening up of a shift in the form of sovereignty that will exist in such a world. Speculation around this question, certainly since the end of the Cold War, has been continuous: the conditioning of national sovereignty by the global system has been a recurring theme in radical critiques of neoliberalism and globalisation, and produced versions of its own backlash, often expressed as a variants on a “populist” theme: a reassertion of the demand for national sovereignty by “the people”, whether (in the Laclau/Mouffe formulation) expressed to the left or right.

The presence of multiple, competing world-money forms threatens something still more dramatic. If we take what Charles Tilly called the two “master process” of the modern era,  “the creation of a system of national states and the formation of a worldwide capitalist system”, it has been the formation of global monetary system, with a single, hegemonic world-money at its centre that allowed these two potentially conflicting processes to be reconciled: not without tensions, obviously, as the somewhat potted history above suggests, but at least organised to the point of not provoking outright collapse. Multiple world-monies, and the presence of competing forms of world-money – commodity-money (“outside”) versus credit-money (“inside”) suggests a radical new indeterminacy for the world-system as a whole, without the obvious means to reconcile them.

Throw in the instability of the environment – surely now the overdetermining factor in all considerations about the future – with the disruption to the fundamental processes of material production that this implies, and the future prospects for the presumed public goods of the modern world (peace between nation-states; prosperous national economies) are shaky indeed.

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Needless to say, national politics isn’t remotely rising to the occasion. Rishi Sunak’s “Spring Statement” this week unravelled within hours of its presentation, in predictable fashion: he is a creature of the Treasury and, as such, unable to rise to the scale of crisis and monetary regime change we are entering. Reports this weekend say he is – again, predictably – already looking at further support for households facing rising prices, high debts, and low wages. This will presumably be the pattern for the rest of this year, at least.

I wrote a bit about Sunak over here for the New Left Review blog. Also on the blog is an excellent summary of the political economy of Russia, and overview of the last few decades, by economist Cedric Durand.