Opinion
Dedollarization drive: What would John Maynard Keynes have thought?
Summary
- With the greenback enjoying an incumbency advantage, many efforts to dethrone the US dollar have fizzled out over the decades. Keynes had envisaged an International Clearing Union (ICU) that could issue a new global currency. He’d have understood today’s efforts.
John Maynard Keynes sought a post-World War II monetary system that constrained the clout of the US. America emerged from the conflict as the planet’s undisputed financial power, with Great Britain playing a much reduced role. He didn’t entirely get his way.
The lenders that surfaced from a crucial 1944 meeting in Bretton Woods, New Hampshire—the International Monetary Fund (IMF) and the World Bank—were subject to great American influence. The dollar was cemented as the driving force in the foreign-exchange market, a position it holds today despite challenges.
At the conclave that ratified the deal, Keynes invoked Sleeping Beauty, the ballet by Tchaikovsky. He hoped good fairies would guide the custodians of this new order, according to a biography by Zachary D. Carter.
The idea that the dollar can be dislodged from its pedestal or taken down a few notches won’t die. At times, that objective may seem as distant as a fairy tale.
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Time and again over the past 80 years, developments have looked, initially, like presenting a serious problem for the greenback’s primacy: Richard Nixon’s decision to end the system of fixed exchange rates, the birth of the euro, big deficits in the US budget and current account, the subprime crisis, and the rise of China.
Now another pretender has run into headwinds: The Bank for International Settlements (BIS), a club for central banks, is considering pulling the plug on a pilot cross-border payments platform championed by Russia and aimed at getting around US sanctions.
The initiative in question is mBridge, which was developed by the central banks of China, Thailand, Hong Kong and the UAE. The rostrum holds out the tantalizing prospect of being able to send money around the world without relying on US banks.
Its future was among topics discussed at last month’s annual meetings of the IMF and World Bank, Bloomberg News reported. Agustín Carstens, who leads the BIS, made clear the organization can’t support a project involving countries that are subject to sanctions, as Russia has been since sending troops into Ukraine in 2022.
The central bank in Moscow is among the targets. Underpinning the penalties is the primacy of the US in international finance and the dollar’s role as first among equals.
It’s natural that President Vladimir Putin would want to chip away at the currency’s hegemony. It’s the same with China, a far more consequential economy, which isn’t subject to sanctions. Beijing does, though, support Moscow and has a long-term goal of eroding the dollar’s supremacy and carving out a bigger role for the yuan.
The latter has been happening incrementally. The yuan still accounts for only a small portion of global reserves. Most cross-border lending is done in the greenback, which has the lion’s share of the $7.5 trillion-a-day forex market.
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China has pinned some hopes on a digital version of the yuan. An early trial of the electronic version of its money in 2022 was a big success and ought to have concentrated minds at the US Federal Reserve, my Bloomberg Opinion colleague Andy Mukherjee wrote. He also identified mBridge as a potential flashpoint.
Whether the route offered by mBridge succeeds or fails, Putin will keep trying. As will China, though less provocatively. Its economy is far more integrated in global markets than Russia’s, and Beijing manages the yuan against a group of currencies that has the dollar at its core.
Putin loves to poke at the dollar, though he tends to backtrack and quickly acknowledge the very hard road to dislodging it. The Brics nations—whose original members were Brazil, Russia, India, China and South Africa—often talk a good game about diminishing the US currency, only to crash into reality.
Aside from the advantages of incumbency enjoyed by the greenback, other countries simply don’t have the same incentives as Putin to circumvent it. This was one takeaway from a recent summit of Brics leaders in Kazan, Russia.
Keynes had envisaged an International Clearing Union (ICU), at which every participating central bank would open an account, according to Carter in The Price of Peace: Money, Democracy and the Life of John Maynard Keynes.
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This ICU would have the ability to issue a new global currency at will, as well as penalize or reward nations with persistent trade surpluses or deficits. What he had to swallow was a set-up with the dollar at its core and a bailout institution largely funded by the US.
“The partnership was over and with it Britain’s time as a great power," Carter writes. The US team at Bretton Woods spent much time wooing the Soviet Union, but Josef Stalin balked. Russia, in the post-Soviet era, required significant assistance from the IMF. Keynes, who married a Russian ballerina, would have appreciated the irony. ©bloomberg
