1. The End of Bretton Woods and Initial De-Dollarisation. Gold, the Euro and SDRs.[1]

The end of the Bretton Woods international monetary system has been the subject of a vast amount of economic literature, yet the progressive unfolding of the consequences of such an occurrence does not cease to surprise and offer new interpretations.

The declaration of the dollar’s inconvertibility into gold (Nixon 1971), the creation of OPEC, the two major oil crises (1973 and 1979) and the rapid succession of these events were the initial diagnosis, which is still valid, but that can now be completed. The international monetary system – as was said at the time – had lost its true anchor, i.e. gold, which is indispensable as long as relations among states are governed by power and not by law. Protection against the arbitrary nature of paper dollar needed to be created. Three possible proposals were being compared: 1) returning to gold (Charles De Gaulle, Jacques Rueff); 2) adopting a global flat money whose issuance did not depend on the US (Robert Triffin’s IMF special drawing rights–SDRs); 3) creating a regional currency, the reliability of which was supported by the expected level of constitutionalisation of relations among the member states (Mario Albertini’s euro).

Triffin was convinced that to create a world currency first the currency of an area on the path to political integration like Europe needed to be created, which triggered the long march towards the EMS, the ECU and finally the euro.

Two significant traces of support for the French proposal to return to gold, indicative of a lack of trust at the global level, are the gold reserves still held by the Banque de France and the Bank of Italy and the pricing policy of OPEC at the height of its monopoly. The former mainly reflects the mood of the moment, but central banks still avoid selling gold, which has since skyrocketed. The latter deserves attention in the transition from the gold-exchange standard to the dollar standard. The oil-exporting countries tried to peg the oil price, denominated in dollars, to that of gold and succeeded for a few years; then, when the increase in the gold price made it impossible, the euro became available. Since then the oil price has been more stable in euros than in dollars.

2. Paper-Dollar or Oil-Dollar? ²

The decisions following the dollar crisis (1971-73) were generally interpreted as a transition from the gold-dollar to the paper-dollar. Giving up exchange rate stability freed the US from any remaining commitment to the rest of the world (and creditors in particular); the liberalisation of capital movements disarmed nation-states vis-à-vis international finance (i.e. Wall Street) and the dollar-denominated oil price encouraged producer countries to accumulate revenues at the London branches of the American banks. These are the pillars of the subsequent distortions, the exorbitant privilege (Giscard d’Estaing) and the paper pyramid (Guido Carli). However, if it were really only paper, why would the “free world” countries, as they were called at the time, accept it? Perhaps they were not as free as they were claimed to be. Certainly, during the Cold War the confrontation with Communism forced states to strongly endorse American politics. European integration itself was undertaken under the US umbrella. However, the end of the Bretton Woods system was such a radical unilateral change in the post-war economic architecture that it seems unlikely that it was accepted without anything in return.      It could be thought ex post that this exchange involved not only the defence of the allies against the Soviet Union (which probably had neither the will nor the strength to attack anyone), but above all the guarantee of energy supplies through the combination of the Pentagon and Wall Street. Therefore, one could say that the paper-dollar was actually an oil-dollar. However, the military and financial conditions on which trust in this “guarantee” was based have progressively weakened with the decline of American hegemony, the many wars lost or “not won” and the 2008 financial catastrophe.

3. The Acceleration of De-Dollarisation.

After 1820, China, isolated from the hubs from which the industrial revolution spread, was deeply impoverished compared to Western countries. It was only the new paradigm of the scientific revolution (transport, information technology and communications) that made it possible to establish an international labour organization combining the technologies of developed countries with the low labour costs of emerging countries. After the great divergence there was a new convergence, which however costs the suffering of those “dissatisfied with globalisation”. Here it is interesting to note how this turning point has put China and Asia in general, with India on the launch pad, back at the heart of the world economy, therefore ranked first in energy consumption. Why should oil supplies from Saudi Arabia to China, at this point, be listed and paid in a currency subject to third power policies? Albeit still in its infancy, there are clear signs of the internationalisation of the renminbi, confirmed by its inclusion in the SDR basket: the creation of institutions similar to the IMF and the WB, the network of agreements for mutual payments in national currencies and no longer in dollars among the BRICS countries, an SDR-denominated loan issued by the WB and reserved for the Chinese market and, in 2018, the launch of the oil futures market in renminbi. As has already happened for the US, the renminbi holdings by the oil-exporting countries can be reinvested in Chinese assets and contribute to internationalising the renminbi and progressively de-dollarising the oil market. Finally, in early 2019, Russia, which had already reduced its dollar reserves in favour of gold, sold another 100 billion dollars to buy euros, renminbi and yen, thus continuing a march to close the gap between the composition of its own currency reserves and that of the SDR basket.

The 1973 and 1979 oil shocks led consumer countries to adopt energy-saving policies. Alarms on “resource limits” and climate change resulted in policies for the search for renewable energy. Europe was at the forefront. However, the US was focused on searching for technologies to extract oil from deep rocks and horizontal drilling. In the short term, shale-oil and shale-gas, despite the negative impact on the environment, particularly on deep waters, have allowed the US to return to self-sufficiency. It will be able to become net exporter, thus, inverting its relationship with producing countries compared to the past: no longer customer, but competitor. Therefore, the rift within OPEC and the rapprochement of Saudi Arabia to the Russian Federation is not surprising. The recent withdrawal of US troops from Syria and Afghanistan may be read as a realistic transfer of power from Trump to Putin and Erdogan in the Middle East.

So then why are sanctions against Russia and Iran continuing to be tightened? They actually make the dollar inconvertible in these areas. The US’s demand that the whole world be subjected to its own law makes trade and financial transactions in dollars with these countries too risky (just remember the ten billion dollar fine imposed on the BNP, which it paid not to be expelled from the SWIFT clearing system, i.e. from the US financial market). The contradictions in US politics speed up the de-dollarisation process. Indeed, the safest way to avoid penalties is not to use the dollar in transactions with sanctioned countries.

4. Multi-Currency System and the SDR

The de-dollarisation process has generated an international multi-currency monetary system, based on the five component currencies of the SDR basket: USD 41.73%, EUR 30.93%, CNY 10.92%, JPY 8.33% and GBP 8.09%. Each of these currencies is mainly used intra-regionally, despite being widely accepted – especially the first two – also in payments, bonds and inter-regional currency reserves, alongside gold (corresponding to “primitive law”) and SDRs themselves (a creation of the “developed law”).

The dollar’s weight in the SDR basket is out of proportion compared to the current importance of its issuing country in the world economy. During the last IMF reform, the US obtained recognition of the financial weight of the currencies alongside the commercial one, thus increasing the weight of the dollar and the pound sterling. Without this innovation, the latter would have almost been reduced to zero due to the entry of the renminbi. During the next review of the basket, the weight of the City may have moved elsewhere, given that London is still the main euro market today. Did the Brexiters think about this? As mentioned above, the dollar’s convertibility in some areas can be restricted through a US political decision alone, thus making the regulation of trade and investment uncertain. Last but not least, the dollar is the currency of the most indebted country in the world, which continues to increase its debt year after year to finance appalling deficits in the current balance of payments. The mechanism is the same one we have seen with the pound sterling: a fallen empire finances the maintenance of its previous standard of living and military force by getting into debt, in other words, by selling assets, which are often toxic. Every time a bubble is deflated (real estate, dot.com, Enron, the stock market, bonds with cleverly constructed underlyings, etc.) savers from the rest of the world get fleeced to the benefit of US consumers. The whole world knows that “it’s not good” and tries to get out of this trap.

The euro is the only currency with broad commercial and financial distribution that is fully convertible throughout the world and not subject to sovereign whims. In addition, the euro area has an active current account balance and can invest in the young world to create the income necessary to support its ageing. However, the creators of the euro – technicians and politicians – have always thought and declared that it would not replace the dollar, like the latter did with the pound sterling, as the international currency because its ambition is to contribute to world monetary stability, a common asset, and not just to snatch up a slice of American seigniorage. It has always been clear that the Robert Triffin “dilemma” not only applies to the dollar, but to any national currency claiming to be the world’s currency. If Europe lost this aspiration, it would remain without a soul, just when the US has divested itself of its residual values

The internationalisation of the renminbi is in its infant stages, despite the economy’s outstanding performance, its entry into the SDR basket and the great vision of the “Silk Road” through which Xi Jin Ping intends to shift the Chinese economy from exports to investment in the medium-term and from the United States to Europe and Africa in the long-term. Although the financial weight of the renminbi outside its borders is still limited, as well as its presence in global currency reserves, the tumultuous development of the Asian financial markets, Shanghai in particular, suggest other developments^[3]. Japan and the ASEAN countries, which Trump has unexpectedly freed from the free trade agreement wanted by Obama, certainly do not want to jump out of the American frying pan into the Chinese fire. Yet, if the US does not remedy its mistake, this just might happen. The renminbi would still be present at a regional level, albeit immense, while at the world level the Triffin “dilemma”, which former governor of the PBoC Zhou Xiao-Chuang indeed mentioned in 2009, would also apply to the renminbi.

Lastly, the yen and the pound sterling are currencies that are geographically limited (the former) and residual (the latter).

Here a summary opinion on the primary players in the international monetary system has been offered; however the conclusion is clear: none of the five component currencies of the SDR basket alone can perform the functions of an international currency. We are left with only two options: gold for war and special drawing rights for cooperation.

The values of Europe as a “gentle power”^[4] and its interests as the world’s leading trading power converge in one direction: strengthening the euro in its sphere (which is not only limited to the Eurozone) and working to peg potential monetary areas (Russia, Africa, the Gulf and Iran) to the SDR. The first steps to facilitate an orderly de-dollarisation concern Africa and Western Asia. The formation of the African common market and the launch of the European plan with Africa would be facilitated by the adoption of an African unit of account pegged to the SDR (corresponding to the European unit of account–EUA phase of European monetary integration). Sanctions, in compliance with the agreements signed by the European Union, could then be bypassed through a primitive form of bartering, which is necessarily bilateral, or through a developed form of multilateral clearing, thus developing an SDR market in a neutral financial centre like the one already created by Kazakhstan in Astana.

More generally, we need to work on strengthening the supra-national institutions created by the Americans after World War II – when they alone dominated them – and that today they are boycotting so as not to share their sovereignty. We need to have the courage to face a period of isolation of the US and to implement every initiative Europe can so that it can again be an important pillar in the international order, according to Obama’s plan, and no longer a rogue power.

[1] Elena Flor, SDR: from Bretton Woods to a World Currency, Peter Lang, 2019.

[2] Elena Flor,” Oil, Wheat and Currencies”, The Federalist Debate, XXX, 2017. no. 3, pp. 10-12. Valentina Tosolini, Analysing Commodity Prices: Trend for Crude Oil and Wheat in US Dollars, Euro and SDR, Robert Triffin International - Centro Studi sul Federalismo, January 2017.

[3] Miriam L. Campanella, The Changing Geography of Finance. Shifting Financial Flows and New Hubs: Shanghai and Paris?, Robert Triffin International - Centro Studi sul Federalismo, March 2018.

[4] Tommaso Padoa-Schioppa, Europe, a Civil Power, Federal Trust, London, 2004.