Bretton Woods, 80 Years and Counting
Luis Leighton Carvajal ??
Feliz de Impulsar, Crear y Promocionar Nuevas Redes de Negocios
We are placed in the historical context 80 years ago, shortly after "D-Day", an event that began the Allied counteroffensive during World War II.
During several days in July 1944, in Bretton Woods, New Hampshire, United States, a meeting was held between more than 40 finance ministers of the Allied countries, which cemented the shape that our current world would take.
The meeting in question resulted in the US dollar becoming the new global reserve currency.
Since then, the United States of America has possessed unusual power over all the economies of the world, since every good produced that can be exported requires dollars to be traded.
This has been a privilege and a blessing for this country throughout this time, since the need to obtain and maintain large amounts of dollars arises from all over the world to facilitate international trade.
An Unequal Privilege
The world of finance in our time has positioned itself as one of the most thriving and transcendental sectors of society.
In fact, nothing of importance is achieved today without sufficient financing or access to credit.
Furthermore, the largest actors in the global financial market are the central banks of each country, which print money on demand, and which can give the signal that moves the markets, leading to more wealth or large losses just with a comment from their directors.
The fiduciary money system that prevails in our era, and especially the central banks, creators of it, have a unique privilege, considering between the creations of goods and creating money, there is a universe of distance.
This great power that central banks have to manage the markets and print fiat money on demand is at the same time their greatest weakness, as we will see later.
But, what is the big difference between the productive and financial worlds?
Imagine, for example, the process of producing and exporting rubber, a highly demanded commodity for the production of tires and all types of rubber products.
Rubber is a type of resin that emanates from the rubber tree, which grows mostly in Southeast Asia.
To obtain it, you have to plant, water and maintain hundreds of thousands of plants, with their respective agrochemicals every day of every month, with enough water and enough sun, on countless hectares, with thousands of farmers and specialist professionals, with production techniques. With the sufficient storage space, sufficient land, sea and air transportation capacity, plus countless hours of administration work, commercial management of multiple financial institutions and local and transnational companies, etc.
In sum, hundreds of thousands of hours of work, use of countless specialized tools, countless amounts of electrical energy, oil and gas for the operation of equipment, machinery and means of transportation.
Countless hours of physical and mental human labor to obtain a quality product to be sold in the international market.
All this in exchange for dollars, a fiduciary currency whose origin is so simple that it may even sound unreal.
How a Dollar is Born
In a previous article (1 ) I mentioned how the world's money went from being a medium of exchange backed by gold and became fiat or fiduciary currency (a promise to pay).
In simple words a dollar is created in two ways:
1) When the United States Treasury Department issues a debt certificate (bond) and delivers it to the Federal Reserve.
For this example let's put a bond for one billion dollars.
The Federal Reserve receives the bond in question and, as a next step, puts it up for auction to the highest bidder.
Some of the bidders may be large banks or prestigious financial institutions (the billion must not be paid immediately but rather become credits on the financial institution's balance sheet), which ensures that the final holder of the bond will receive the initial amount (the principal) plus interest at what the bond has been auctioned (currently about 4% annually).
Once the auction takes place, the Federal Reserve issues the amount of dollars equivalent to the value of the bond and transfers it to the United States Department of the Treasury (the government's treasury itself) in an electronic transfer.
The United States Treasury thus undertakes to pay the interest annually to the holder of the bond, plus the value of the principal (the billion) at the end of the period, which can be between 5 and 20 years.
This principal amount plus interest on it becomes federal debt.
领英推荐
2) The second way dollars (and indeed all fiat currency) are created is through credit on commercial banks.
Every time someone requests a loan from a financial institution, it digitally inputs the sum in its books, not having the need to have the actual amounts, but can allow itself to create that money based on the underlying assets set as collateral (a property, a vehicle or another seizable asset).
Commercial banks do not necessarily have all the money they lend, rather they only require between 10% to 30% of the reserves, in a model called Fractional Reserve Banking.
When a bank lends money, it makes sure that you will pay the amounts owed, until the debt is extinguished once it is paid. Otherwise, the financial institution has the power to take possession of the collateral in order to liquidate it and cover the amount of the credit.
In the event that the financial institution is ultimately unable to recover the amount owed, insurance is executed that covers the debts and is incorporated as part of the cost of taking out a loan.
An Unbalanced Scale
If you noticed the example of rubber, its production requires a lot of human effort and consumption of natural resources to finally obtain a marketable product.
Once the rubber in our example is put on the market, it will be traded for dollars, which, as mentioned, required a few clicks to be created, with a comparative energy expenditure close to zero.
The example of rubber is just one of thousands that can be mentioned, as it is the case of every commodity or manufactured product, from copper cathodes to computer chips, from fashion clothing to merchant ships. Every good produced in our world requires countless man-hours of work and large inputs of energy to be produced, packaged, transported and marketed.
This is not the case of the US dollar, which as a world monetary reserve currency, only requires the participation of about fifty people with authority behind their desks and a few computers connected to the Internet to come into existence.
Having power over the world's reserve currency is equivalent to power and wealth and one of the greatest hallmarks that a powerful country can achieve.
The Decline of a Currency
The dollar as the world's reserve currency turns 80 and there are ominous signs of the decline of its reign, as little by little it has been losing attributes that served as its structural support (2 ).
The dollar has no longer been backed by gold since 1971 and in 2024 the petrodollar agreement has just expired, so today the US dollar is just a promise to pay (debt).
Today the dollar is a geopolitical tool to reward or punish, depending on whether you are a friend or enemy of the West.
The US debt has reached 35 trillion dollars (million of millions) as of the date of this publication, and continues to grow at incredible speeds difficult to measure (3 ).
It is estimated that when Ronald Reagan took office in January 1981, the US debt was one trillion dollars. Today only the payment of interest on the debt is equivalent to that same sum annually.
The FED's great ability to print money is, at the same time, its weakness, especially when we think about the fact that money printing is the biggest cause of inflation in the world.
If we know that the mandate of each central bank is to control inflation, we will understand the vital contradiction in which the most influential financial institution on the planet is involved.
The BRICS countries (Brazil, Russia, China, India and South Africa, and several more) want to replace the dollar's status as a reserve currency to gain control over their trade and, in turn, gain power as geopolitical rivals to the United States. They already have multiple initiatives, some of which are already making a dent in the significance of the dollar at a global level, such as, for example, selling US bonds (public debt).
The end of the reserve status of the US dollar can bring the end of the fiat system altogether. That is of which all the world's currencies, which would lead to an eventual Bretton Woods 2.0, which would define the new pattern to follow from then on.
80 years ago, in the middle of World War II, the foundations of the economy and the world we enjoy today were laid.
What we hope as ordinary people today is that the switch to a new financial system brings stability and not excesses, and even less so that to achieve said stability we must go through another great war.
Blessings,
Luis Leighton