Seventy years ago the world's money-men met at Bretton Woods to redesign the international monetary system. The conference was a battle of two ideas: multilateralism versus unipolarity. Britain, reeling from war, was represented by John Maynard Keynes and his idea of a 'bancor' common global currency. The US dispatched Harry Dexter White, who sought outright dollar dominance. By most accounts, it was a geopolitical mugging; White and his dollar prevailed.
Last weekend, the forum Reinventing Bretton Woods (RBW) convened in Hangzhou, China, together with a high-powered group of Chinese wonks. Is a new global monetary architecture in the offing?
Bretton Woods was a once-in-a-century moment when the overstretched hegemon faced a rising challenger for leadership of the global order. Washington demanded the dismantling of Britain's empire. It also made the US dollar the global currency, anchored to gold, which it then possessed in abundance. This, probably only by good luck, worked for two decades. But by the 1960s the world's money was inflating faster than gold reserves and there had been a decade-long run on Fort Knox. In 1973, the US dismissed the gold linkage altogether. Thereafter, the dollar had no 'anchor' but itself. In a self-reinforcing spiral, it became the dominant safe asset for foreigners and their central banks. This 'Dollar Trap' has actually deepened since the global financial crisis. As the Americans said, the dollar now is 'our currency and your problem.'
China is angry, although its reasons are complex. Chinese policymakers rage against the dollar's 'virtualisation' and the financial trickery of Wall Street. They decry American 'exorbitant privilege.' They rail against the 'spillover' effects of the Fed's monetary policies. For them, the dollar is the embodiment of American hegemony.
In 2009 China's central banker, Zhou Xiaochuan, called for a supra-national global currency, a sort of monetary UN reminiscent of Keynes' bancor idea. Others have repeated the call. The IMF's special drawing rights (SDRs) are about as close as we ever got to a world currency, yet SDRs are merely baskets of other reserve currencies, notably the dollar.
Most Chinese instinctively feel the yuan should be a reserve currency, and it is popular as a settlement currency, booking 17% of its own world-topping trade last year. But in global foreign exchange markets it still ranks only eighth, and to meet the IMF's criteria, it would need to be 'freely useable', which essentially means an open capital account. This is probably years away. Still, most observers view a multipolar world of core reserve currencies (dollars, euros and yuan) as likely, and desirable, in the long run.
Yet China enjoys the status quo. It can fix its exchange rate while the US cannot. China is the world's greatest saver and capital exporter, and it seems far more interested in increasing its claims on the world than vice versa, even as it admonishes Washington for its fiscal laxity. That is why China is not yet ready to displace the dollar as the world's reserve issuer. Meanwhile, it sensibly encourages an offshore yuan market in Hong Kong, similar to the dollar's own Eurodollar market.
There is a deeper truth evident in the RBW forum: this is what a dissatisfied rising power looks like. One fierce fellow from China, a bank chief economist, said: 'we don't dream about the US giving up its power without a major conflict.' But Beijing has not proposed a better architecture to supplant the greenback's hegemony. The Americans smugly indulge the complaints: 'there is no lack of (our) understanding, just a lack of consensus, and no better alternative.' The frustration was summed up by a Chinese SAFE bureaucrat: 'we're not happy with the current system but we can propose no other.'
Photo by Flickr user ePsos.de.