Downhill Since Bretton Woods: ‘Unipolar US Dollar’ Mutated Into ‘Politically Weaponized’ Tool
A US-dominated monetary framework was put into place 80 years ago in Bretton Woods. It bred everything ranging from chronic deficits and speculative bubbles to politically-motivated sanctions, while allowing the greenback to reign supreme. Since the system’s collapse, global economies have been dealing with the blowback of its inherent failings.
Since the US dollar was made the “de facto steward of the global economic system” by the Bretton Woods Agreement it has abused that role, Paul Goncharoff, chief manager of consulting firm Goncharoff LLC, told Sputnik. The greenback has degenerated into a “unipolar and unreliable, politically weaponized” tool, he noted.
The creation of BRICS has motivated many countries to embark on an organized effort to dedollarize and break free from the vicious political cycle, as pointed out by the experienced financial analyst.
“The “extraordinary privilege” enjoyed by the USD as the lead global reserve currency has over time tested the discipline, resolve, and trust of the United States government… It was found wanting, as what should have been economically sound objective decisions steadily degenerated into politically “weaponized” short-term actions that were hugely expensive for the rest of the world,” he said.
The US dollar was officially crowned the world’s reserve currency, backed by the world’s largest gold reserves, when the international monetary system known as the Bretton Woods system was forged at the eponymous American resort in New Hampshire in July 1944. At the time, delegates to the United Nations Monetary and Financial Conference agreed to establish the International Monetary Fund (IMF) and what became the World Bank Group to regulate mutual settlements and currency relations. The system lasted until 1971.
“The Bretton Woods system agreed to at the end of WW2 set out the rules to govern monetary and commercial relations among the United States (the leader), and what is generally understood to be the “West” consisting then of 44 countries. The Bretton Woods system mandated the convertibility of their currencies into U.S. dollars to within 1% of a fixed rate, with the dollar convertible to gold bullion for foreign governments and central banks at the established rate of US$35 per troy ounce of gold. This also was where the International Monetary Fund (IMF) was created to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits,” Goncharoff clarified.
In effect, the system had all of the worlds’ currencies pegged to the dollar, and the dollar pegged to gold. The fixed exchange rate system required non-reserve countries to give up the independence of their own monetary policy, regardless of the need for adjustments in response to changing domestic economic circumstances.
By the 1960s, the dollar was grossly overvalued, as the US did not have enough gold to cover the volume of greenbacks in worldwide circulation due to the “constant and growing US balance-of-payments deficits,” Goncharoff pointed out. That implied that the United States could not fulfill its obligation to redeem dollars for gold at the officially set price, “much like the significant current balance of payments deficit and debt profile the US is showing today although wholly unlinked to gold as the key marker,” he added.
“The era of Quantitative Easing (QE) over the past two decades is clearly illustrative of the lack of an anchor in US monetary policy, which sadly every non-USD country who wish to remain aligned with it must pay for… exorbitantly,” said the pundit.
When then-President Richard M. Nixon rolled out his New Economic Policy in 1971, it signaled the demise of the Bretton Woods system of fixed exchange rates. By 1973, all currencies were permitted to float freely.
“The broad agreements called the Jamaica Accords were understandings that ratified the end of the Bretton Woods monetary system. They took the form of recommendations to change the ‘articles of agreement’ that the International Monetary Fund (IMF) was founded on. These accords allowed the price of gold to float vs. the US dollar and other currencies within agreed parameters. These parameters often went outside of the agreed valuation corridor, similar to trying to force a Genie of value to remain bottled. It is sufficient to look at what the current price of gold is in USD terms internationally to appreciate the blowback against the restrictive USD,” Goncharoff remarked.