Rise in stable coins echoes Bretton Woods

Ousmène Jacques Mandeng is director of the consultancy boutique Economics Advisory Ltd and visiting researcher at the Faculty of Public Policy of the LSE. He is currently working on many large central bank digital currency (CBDC) projects and other blockchain-related payment applications. Here he explains why the requests for stable coins recall the times defined at the Bretton Woods conference.

Fifty years ago, a perplexed Richard Nixon dropped a financial bomb. The dollar is no longer fixed on gold. The forex market was in turmoil as the mechanism behind the fixed exchange rate system was shut down overnight. The Bretton Woods era is over and a new financial order has formed.

So far, it has continued without serious difficulties. Floating rates remain the norm in many currencies. With the exception of the euro, there have been no other major multilateral attempts to revert to the fixed exchange rate system.

However, the introduction of so-called global stablecoins by the private sector suggests that there is still an interest in reverting to the Bretton Woods style financial order.

Cryptocurrency claims are as strong today as they were then, but still difficult to implement.

To explain why, we must delve into the political economy that shaped the global financial order. The Bretton Woods system emerged under the leadership of the United States during World War II. The idea was to establish a post-war fixed exchange rate framework to facilitate the resumption of international trade, which is considered important for the sustainable growth of GDP and employment. In this system, all currencies were represented in dollars or gold. The system was adopted at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire in July 1944, and the IMF was established to confirm that exchange rate revaluations were approved.

This system has been very successful. It is based on the tradition of the gold standard, which was the international monetary standard in several variations, from the last quarter of the 19th century (with interruptions during WWI and WWII) to Bretton Woods. You can believe that you have built an economic and financial globalization.

However, while all fixed exchange rates gave the international economy a de facto common currency and hence promoted trade, countries soon had to subordinate their national economic policies to maintaining fixed exchange rates, a system . Showed considerable tension.

In 1965, criticism increased as to the unjust enrichment of the United States, especially since the United States was able to cover what they called “exorbitant privileges” with its own currency. The United States was also increasing its dollar-denominated debt to finance the Vietnam War, reducing confidence that it had enough money to cover it. In the early 1970s, US gold reserves plummeted as dollar holdings were continually converted to gold after various attempts to limit the convertibility of gold into dollars. On August 15, 1971, the United States unilaterally decided to close the “golden window”, ending the Bretton Woods regime.

The idea behind the global stablecoin is similar to the idea of ​​fixed exchange rates. It is based on converting your national currency into a third currency or a basket of currencies. There are different approaches, but the most promising is the common currency with a floating interest rate that circulates in parallel with the currencies of existing countries. The stable supply of coins around the world is dependent on national currency auctions, and convertibility into national currencies is required at common exchange rates. Global Stablecoin needs to be flexible to respond to positive and negative demand shocks. However, the definition of an “optimal” currency or basket is complex, and no attempt has been made to offer a single global stable coin under a wide variety of economic conditions across the country. Also, you shouldn’t.

Of course, Global Stablecoin is only stable until it is otherwise. When demand collapses, conversion to a national currency is, in principle, easy, as it is not constrained by the broader economic policy considerations of an ordinary national currency. However, switching very quickly from a stable coin can drastically reduce the liquidity of the coin, facilitate conversion, and create depreciation pressure if convertibility is questionable. Without credit and liquidity mechanisms, stablecoins can block holders. In order for a stable part to function as an effective support and build confidence, a support mechanism must be introduced to convey maximum confidence in convertibility.

Currently, we do not intend to overhaul the current system. However, global interest in stablecoin has shown a willingness to overcome restrictions on the domestic currency and adopt a moderate suitability for international trade. It is in the same logic that the Bretton Woods system was created. The first attempts by the government, such as the IMF’s Special Drawing Rights and the European Monetary Unit, had various consequences. If so, the private sector can fill the void.

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