News Ticker

After Bretton Woods: The Declining Influence of the US Dollar

F-22

Nearly 60 years since it was agreed, the Bretton Woods Settlement is under pressure and the Dollar’s position in the global economy is changing. Bretton Woods arguably had two major flaws, the first was its failure to deal with unbalanced trade and capital flows and the second was the de facto control of the global financial system given to the United States. Maynard Keynes, one of the architects of the Bretton Woods Settlement, was concerned about the failure to adequately deal with trade imbalances. However, as Varoufakis notes, “the United States which emerged from the war as the world’s powerhouse, had no interest in restraining its own capacity to run large, systemic trade surpluses with the rest of the world.”[1] Bretton Woods, together with the Marshall Plan, established the US dollar as the world’s primary currency, it is unlikely that the US dollar will be able to maintain this status throughout the 21st-century.

One threat to the US Dollar’s dominant position under Bretton Woods, comes from the relative decline of the United States, as Pettis noted, “The US must address the role of the US dollar as the world’s reserve currency and the way this role forces the US into absorbing volatility and shortfalls in demand that originate abroad. ….. The current system, in other words, is inherently unstable and will sooner or later force the US economy into a position of choosing either to take on excessive risk or to abdicate its role as shock absorber.”[2] Pettis added, “.. my argument does not need the 21st Century to be an American century, an Asian one, or a multi-polar one. All it requires is that the ‘globalized’ world experience faster economic growth than the US. If this happens …… it seems to me that the flat or mildly upward sloping line that represents the benefits to the US of the global trading system and the steep upward sloping line that represents the costs, if they haven’t already crossed, must cross soon.”[3] The problem for the global economy is that there is at present no obvious replacement for the US Dollar as the dominant trading and reserve currency. The Euro has to resolve its own internal problems, notably the position of Greece and the other southern Mediterranean members, and the Chinese renminbi has been weakened by the events of the summer of 2015.

A second threat to the dominance of the Dollar comes from US policy. Arguably the Post-War financial settlement, which established the United States as the world’s banker, also implied that the advantages of the financial system would be shared universally, but in recent years the US has increasingly seen the dominance of the Dollar as giving it a military, as well as a financial, advantage. Ian Bremmer, the president of New York-based Eurasia Group, referred to the “weaponization of finance”.[4] During the “War on Terror” financial intelligence was developed as a tool to trace the financing of terrorist groups and to track their leadership, but this process has widened to include asset freezes, a prohibition on the use of the US Dollar by third countries, and other financial actions. David Cohen, who moved from being the US Treasury Under Secretary for Terrorism and Financial Intelligence, to become deputy director of the Central Intelligence Agency, said in June 2014 that U.S. strategy is “premised on the simple reality that all of our adversaries, to one degree or another, need money to operate, and that by cutting off their financial lifelines, we can significantly impair their ability to function.” The effectiveness of these policies, in terms of security, was acknowledged by Ian Bremmer who said on 5th January 2015 that, “the U.S. dollar has been a much stronger lever of American power internationally than our combat forces have been over the course of the past couple of years.” [5]

On the 10th December 2015, at Chatham House, Acting US Under Secretary Adam Szubin outlined the extend to which the US relies on sanctions policy to achieve policy objectives when dealing with Russia, Iran and terrorist groups like ISIS. Without the dominance of the US Dollar, it is difficult to see how such policies would be effective.

© Andrew Palmer, 2016

[1] Varoufakis, Yanis – “The Global Minotaur”, Zed Books, London, 2013, pp.66-67

[2] ibid – Pettis

[3] ibid – Pettis

[4] Atlas, Terry and Mayeda, Andrew – “How the Treasury Got into the Spy Game”, Bloomberg Business, 20th January 2015, http://www.bloomberg.com/news/articles/2015-01-20/financial-intelligence-grows-as-u-s-weapon-to-fight-bad-guys- accessed 13 September 2015

[5] Atlas, Terry and Mayeda, Andrew – “How the Treasury Got into the Spy Game”, Bloomberg Business, 20th January 2015, http://www.bloomberg.com/news/articles/2015-01-20/financial-intelligence-grows-as-u-s-weapon-to-fight-bad-guys- accessed 13 September 2015

Leave a Reply