From Bretton Woods to Bitcoin

Vladimir Putin recently declared that “the Bretton Woods system is dead”. The world needs an alternative, and Bitcoin appears to be an obvious choice.

Imperial Currency

Monetary hegemony rarely lasts more than 100 years. The Florentine florin, which reigned supreme in the fourteenth century, was eventually dethroned by the Portuguese real. Then came the Spanish real, the Dutch florin, the French livre, the British pound, and finally the dollar.

Here is a great infographic tracing the evolution of the share of different currencies in international foreign exchange reserves since 1900:

Nothing about #dedollarization is new or startling. Take a look at this#datavisualization on reserve assets to see why.

Takeaways:

1️⃣ The dollar’s rise wasn’t sudden. It occurred over several decades. It first succeeded in the 1920s, then conceded to the British pound after… pic.twitter.com/est7OPy7Tk

— James Eagle (@JamesEagle17) June 7, 2024

It was from the 1950s that the dollar definitively supplanted the British pound. The transfer of power took place at the Bretton Woods conference. The 40 allied nations agreed that the dollar would become the cornerstone of the international monetary system.

The United States was in a strong position as most of the world’s gold reserves were in Fort Knox (about 70%). The American war effort was not entirely free… In this regard, let us recall the famous declaration of President Truman two days after Hitler’s invasion of the Soviet Union:

“If we see that Germany is winning, we must help Russia, and if Russia is winning, we must help Germany, and thus let them kill each other as much as possible, although I do not want to see Hitler victorious in any case.”

In short… The dollar, the only currency freely convertible into gold, became the international reserve currency. It was decided that one ounce of gold would be worth 35 dollars and that all exchange rates would be fixed.

This convertibility into gold was a way for the old continent to ensure that the United States would not finance their imports with the printing press. Until…

1971

The Bretton Woods system collapsed in 1971 when President Richard Nixon suspended the conversion of the dollar into gold. Since then, exchange rates have “floated”.

US Treasury Secretary John Connally had this famous saying to an angry European delegation: “The dollar is our currency, but it’s your problem”.

This decision was taken for two main reasons. The first is that European and Japanese exports became more competitive in the 1960s. This resulted in a decrease in the United States’ share of global production, which reduced the need for dollars. European countries therefore decided to drain the American gold stock, which would fall from 20,000 to 8,000 tons.

Secondly, Washington knew that the national oil peak reached in 1971 would significantly worsen its trade deficit. The price of a gallon of gasoline increased by 20% between 1964 and 1970.

It was then that Secretary of State Henry Kissinger orchestrated the greatest geopolitical coup of the United States: the petrodollar. Check out this article for a story of this fascinating history.

The short story is that Saudi Arabia and other OPEC member nations were forced to sell their oil exclusively in dollars. So much so that despite the end of the Gold Standard, all industrialized nations had no choice but to keep their foreign exchange reserves in dollars.

Fifty years later, the US currency is once again at the center of geopolitical tensions. The Russian president reiterated this again last week.

Petrodollar, no!

Vladimir Putin reiterated at the St. Petersburg International Economic Forum that the world needs a new international monetary system:

“The Bretton Woods system, based on the gold standard, has long been dead. […] The United States abandoned it for the system enshrined in the Jamaica agreements that decoupled the dollar from gold,” he said.

“In fact, what is the basis of this Jamaican system that still exists today? Trust in the American economy. In the current global financial system, there is no other guarantee, so to speak, than trust in the American economy.”

The problem is that Americans benefit greatly from the end of the Gold Standard. For the Russian tsar, “public data shows that the United States owes about $54 trillion to the rest of the world”. This figure probably represents the cumulative external deficit of the United States.

The existence of this massive external deficit is due to central banks holding several trillion dollars in reserve in the form of Treasury bonds (public debt). These are as many dollars that are not converted into other currencies and that artificially support the dollar’s value. And this, despite a chronically deficient trade balance. Only the United States benefits from such a privilege.

Not only do the United States benefit from the system, but they abuse it (disconnecting entire countries from the SWIFT network, freezing foreign exchange reserves, etc). Between the militarization of the dollar and defaults (“freezing”), it is not surprising to see the BRICS making dedollarization a priority.

From this point of view, the war in Ukraine can easily be perceived as an attempt to destabilize Russia in order to slow down the dedollarization of which Moscow is the standard-bearer.

From Dexter White to Satoshi

Little by little, the BRICS are substituting their national currencies for the dollar in their exchanges as well as in their foreign exchange reserves. In 2023, the share of gold (17.60%) in the reserves held by central banks exceeded that of the euro. The top spot still goes to the dollar, at 48%.

[Note that while India recently repatriated 100 tons of gold from London, its Chinese neighbor recently stopped buying: Our article on this subject]

However, gold is not a payment system. It is difficult to send nuggets by post. Hence the interest of BRICS in a CBDC payment system. The mBridge project spearheaded by China is probably the most advanced as an alternative to the SWIFT network.

But to be popular, the mBridge payment system will need to offer more advantageous conversion rates than the current system centered around the greenback. This will be very difficult. There will be no direct conversions between the Vietnamese dong and the Uzbek som. It is not realistic. Large volumes will be required, which necessitates a standard. The dollar currently plays this role of pivot, but what will it be in the BRICS system?

The Chinese yuan? India won’t want it. Gold? Problem, it doesn’t travel over the internet. We would be back to promises that will end like in 1971. In other words, Vladimir Putin promises a payment system “free from political pressures, abuses, and external sanctions,” but will it be competitive?

Why not adopt a solution that has proven itself for over 15 years: Bitcoin? A stateless and non-censorable currency, it is a payment system and a monetary standard, two-in-one.

Bitcoin is the perfect solution to the global store of value problem (absolutely finite money supply) and a reliable payment system. It would allow all nations to trade on equal terms, which we absolutely need to ease geopolitical tensions.

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