Time for a new Bretton Woods

US Treasury Secretary last week linked trade to values and called for a new Bretton Woods in the article attached below. Post World War 1, “Europe had been pulled apart, a decade of easy monetary policy up to 1929 had been unable to paper over major political and economic changes that had created huge rifts in societies. Labor markets and family structures were changing. A pandemic, inflation, then economic depression, deflation and trade wars had left the continent economically wrecked.”

What was the original Bretton Woods agreement? Bretton Woods agreement established the rules for monetary management for commercial and financial relations in largely what is called the G7 nations. It was an obligation to adopt a monetary policy to fix external exchange rates by tying its currency to gold and to prevent competitive devaluation of currencies. It established the International Monetary Fund to bridge temporary imbalances of payments. The US held two-thirds of the worlds gold and fixed the value of the US Dollar tied to the anchor of gold convertibility. The other currencies then pegged their value to the US Dollar and the mechanism for stable foreign currency rates became operational in 1945.

In 1971 the US terminated convertibility of the US dollar to gold and making the dollar a fiat currency. Currencies became free floating and some countries pegged their currency to a basket of currencies. Since then countries have again resorted to monetary devaluations to pump their economies, printed large amounts of fiat currencies, engaged in quantitative easing policies, loaded central bank balance sheets with debt in an attempt to revive the economy and sustain employment.

However, the actual impact of these policies has not matched the intent for the most part. while unemployment has declined, asset price bubbles have grown, debt bubbles have grown while inflation has also grown. The Bretton Woods system did not allow for countries to print money blindly as money creation was tied to gold, a limited resource. Another key legislation in the US called the Glass Steagall act was enacted in 1933 which essentially prevented proprietary trading by banks and segregated commercial banking from retail banking. This key legislation was terminated in 1999 which then allowed investment banks and retail banking to once again speculate in the financial markets and some blame the elimination of the Glass Steagall act as a primary reason for the 2008 financial crisis.

Gold is now at an all time high with current market prices hovering around USD 1,950 per ounce. With the advent of crypto currency like Bitcoin, which many believe is the alternative to holding gold, is currently trading at USD 41,336 but is extremely speculative and volatile with prices touching almost USD 60,000 at one point. There are some similarities between gold and bitcoin where only a limited amount of bitcoins can be minted which makes it a strong contented for an anchor to fiat currencies, just like gold was between 1945-1971 period. But the problem with crypto currencies in its digital format is that crypto assets can be hacked and stolen, and they are used also popular to hide illicit wealth generated from illegal activities.

While the US Dollar still retains its global dominance, Treasury Secretary speaks of a bi-polar world with China, Russia with its petrodollars and a few other renegade countries attempting to build their own financial muscle and currency. The world would split and would need to choose one over the other which makes global trade difficult.

What would the new Bretton Woods look like?