Wed, Aug 4, 2021
by Ousmène Jacques Mandeng
50 years ago, the Bretton Woods system of fixed exchange rates came to a sudden stop. It seemed the end of an era of multilateral and rules-based monetary cooperation considered critical to facilitate international payments. Many international payment problems remain. There is now seemingly new economic policy momentum to address those. While Bretton Woods resulted in relying de facto on a single currency, recent attempts seem to be eying towards currency diversification. New efforts by the G20 to explore central bank digital currencies (CBDC) as part of a roadmap to enhance cross-border payments and its wider implications for the international monetary system represents a rare multilateral effort to recalibrate international monetary relations. Maybe CBDC can resume where Bretton Woods left.
On 15 August 1971, U.S. President Richard Nixon announced famously on T.V. to “suspend temporarily the convertibility of the dollar.” The announcement ended the foundations of the Bretton Woods system, led to the adoption of floating for the main currencies and severed the link between money and gold. The system was launched with the United National Economic and Financial Conference at Bretton Woods, New Hampshire, in July 1944 with the establishment of the International Monetary Fund (IMF) to constitute a framework for the economic recovery after World War II to enable a resumption of international trade seen as critical towards high levels of employment and real income. The system stipulated that the value of all currencies shall be expressed in terms of gold or the U.S. dollar at fixed exchange rates (par values) and that the dollar was convertible into gold on demand. Countries were meant to maintain balanced international trade to minimise any exchange rate revaluation pressures.
Nixon elaborated that “[i]n full cooperation with the International Monetary Fund and those who trade with us, we will press for the necessary reforms to set up an urgently needed new international monetary system. Stability and equal treatment is in everybody’s best interest.” He thereby responded to a long-held criticism advanced in particular by French President Charles de Gaulle during the mid-1960s, that the system lacked equal treatment as the U.S. had been bestowed with an “exorbitant privilege” that gave little incentives to the U.S. to adjust its mounting external imbalances leading to a decline confidence in the system ultimately precipitating the U.S. measures to end the system. De Gaulle called for a return to a system that offered a neutral anchor and where countries’ incentives for maintaining external equilibriums were aligned.
The central role of the dollar meant that liquidity to conduct international transactions depended largely on the U.S. making available dollars; at the same time, too many dollars led countries to doubt the dollar’s gold peg, a flaw associated with the Triffin dilemma of American-Belgian economist Robert Triffin. He saw as an inherent problem the use of national currencies for international payments. As a remedy Triffin proposed a single global currency or the use of multiple currencies for international payments. While private initiatives around global stable coins seem to eye the former, the G20 may now have embarked on the latter.
The G20 is exploring how CBDC may serve to enhance the efficiency of cross-border payments including through options for access and interlinking CBDCs. CBDCs promise new approaches in international payments by offering novel functionalities, reach and utility of central bank money that should lead to a more diversified and efficient payment system based on more direct international payments relations. The ECB in its report on a digital euro emphasised that CBDC could strengthen the use of the euro in international transactions. The BIS acknowledged that issuance of CBDC by foreign central banks could enhance the status of international currencies at the expense of others.
The use of multiple currencies would provide for more sources of international liquidity and reduce reliance on the existing small number of national currencies used for international payments. While currencies need to meet essential attributes to be trusted as settlement medium in international transactions including but not limited to monetary policy credibility and financial market depth, CBDC may, all else being equal, offer additional features that may also allow smaller currencies to play a greater role. China’s aim to advance internationalisation of the renminbi is believed to rest in large part on the relative advantages of a renminbi CBDC. While emerging markets including China represent nearly half of the world economy, their currencies play almost no role in international transactions. The orderly integration of emerging markets currencies into the international monetary system remains one of the greatest challenges for the international economy. CBDC could play an important role there.
The diversification of the international monetary system would be a novel approach. The Bretton Woods system may have failed because it relied excessively de facto on a single currency. CBDC may now offer new approaches to shift the relative attractiveness of currencies and support proliferation of smaller currencies for international payments. Multiple currencies may come closer to the notion of a neutral anchor as individual currency dominance may decline. For that to happen, future CBDCs will need to be inter-linkable. This time, fixing would not be to a national currency but possibly to common new digital payment standards.
Ousmène Jacques Mandeng, Visiting Fellow, London School of Economics and Political Science