50 Years After Bretton Woods, the US Dollar’s Throne Is in Play

50 Years After Bretton Woods, the US Dollar’s Throne Is in Play

David Z. Morris  Fri, August 13, 2021

This Sunday, Aug. 15, will be the 50th anniversary of the end of the Bretton Woods currency system. After World War II, major nations essentially agreed to peg their currencies to a gold-backed dollar. But by 1971, faith in the U.S. dollar was eroding, forcing President Richard Nixon to end the dollar’s convertibility to gold. This ushered in the current status quo of relatively free-floating “fiat” currencies.

That long-ago decision still has major implications today. Over the past few months, massive coronavirus pandemic relief spending in the U.S. has triggered worries that faith in the dollar’s soundness could be shaken again as it was 50 years ago. The dollar’s share of central bank balance sheets is still a dominant 59%, but has been slowly declining – threatening to take with it a number of economic and political advantages.

David Z. Morris is CoinDesk’s chief insights columnist. This article is excerpted from The Node, CoinDesk’s daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.

To better understand the road ahead, I’ve been examining the viability of various currencies as central bank reserves, including the euro, the Japanese yen and the Chinese yuan, as well as bitcoin or other digital instruments. That analysis will be published soon, but I wanted to hit on a few highlights of what I learned talking to currency experts.

First, despite high anxiety about the yuan’s rising influence, China faces a deep, possibly unsolvable conflict between its global currency ambitions and its domestic economic agenda: The Chinese Communist Party maintains tight currency controls to encourage domestic investment, but a reserve currency must be freely tradable.

Between that conundrum and the inconsistency of Chinese regulation, experts are generally skeptical that the yuan can climb much in the global reserve rankings anytime soon. Japan, meanwhile, doesn’t sell enough debt abroad for its bonds to take up a large share of global reserves.

Among current options, the euro seems to be the most serious competitor to the dollar, thanks to the large eurozone economy behind it and the relatively open and responsible management of the European Central Bank. A major recent step that makes this more plausible was the ECB’s decision to issue eurozone-wide bonds to fund pandemic relief programs.

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