Bretton Woods On The Verge Of Annihilation – OpEd

Greg PenceOctober 11, 2022

China’s economic boom has made America confront a crisis that is totally different from all of the post-World War II crises. By challenging the Bretton Woods organizations and the “global rule of the dollar” in international trade, this new crisis can establish the commodity-oriented era -against the dollar-dominated one. With logical commercial cooperation with Europe, the Middle East, and the Indo-Pacific, Beijing has provided a platform that many countries in these regions are also eager to pursue their interests based on a new kind of financial and monetary order outside the dominance of the United States, the World Bank, and the International Monetary Fund.

This process has created a serious challenge to the American financial system, which planned for the all-out dominance of the dollar after the victory in World War II. In the system that was established in the United States in 1945 in the form of the “Bretton Woods Organizations”, the value of an ounce of gold was backed by 35 US dollars. But this system collapsed in 1970 due to the lack of enough gold to back the dollar. In 1971, the United States terminated the convertibility of the US dollar to gold, and the dollar itself was used to back the dollar. During the last half-century, the dollar has been used as a political, economic, and security currency in world trade that all countries in the world had to accept.

Beijing tried to strengthen Yuan, turn it into the global currency, and create the “Petro-Yuan” in order to end the dominance of the dollar. In addition, it provided the reserves needed to support Yuan by buying gold mines in African countries and also Founded “Asian Bank” by using Petro-Yuan in its transactions with Russia, India, Turkey, Britain, and BRICS countries. Asian Bank is now a major rival or even alternative to the Bretton-Woods system.

Before the start of the Ukraine war, China’s expansion of economic relations with European and Asian countries was based on a new order in which countries tried to guarantee a more stable international arena and tried to adopt multilateralist approaches in economic transactions by withdrawing from Bretton Woods organizations. In spite of the fact that the war in Ukraine has transformed the conditions, it is no doubt crystal clear that the decline of the dollar has been ignited.

The scene set in previous paragraphs inevitably leads us to the question that whether the United States will be able to keep on with the costs of its global crises-stirring with having the privilege of “global rule of the dollar.” In addition, it should be noted that unlike the crises of 1997, 2008, and 2020, in which new supporters were found to save the American financial system, now and in a condition in which sophisticated sanctions have been imposed on Russia, China, and Iran, the monetary and banking system of the United States is not able to find an easy solution to get out of this abyss; therefore, Europe and America are facing the effects of inflationary processes and have been forced to raise interest rates to lower inflation, which is not a long-term solution.

On the other hand, the intimate cooperation between China and Russia in the last decade originated from the common understanding they had about the source of threats to their interests, presenting a new definition of the order based on the notion of “Rising East and Declining West.” 

However, the West believes that this order should change and it was because of this belief that USA and Europe incessantly supported Ukraine in Russia or Nancy Pelosi, in a rare act, visited Taiwan. In other words, the West wants to demolish the multilateralist order that had made Beijing and Moscow closer to each other. By continuing the war in Ukraine and creating tension in the ” One China” policy, the USA is pursuing a strategy so that eventually Beijing and Moscow will have no other choice but to defer or wage a war.

Now the question that persistently looms is what the fate of the dollar, as the supporter of the USA power, will be in this volatile situation. In the second-world money system that led to the creation of the Bretton Woods organizations, the paper dollar was the savior of the economic recession crisis in the 80s, 90s, and 2008, and the US Treasury issued bonds or unbacked dollars for compensating the budget deficit.

However, the USA is now grappling with an inflationary economy with excessive withdrawals from the US treasury, especially during the Corona period, and it needs more dollars to balance its trade deficit but it does not have enough dollars. Favorable conditions in which the US trading partners, such as Canada, Mexico, China, Japan, and Germany, exported to the United States and received paper dollars or credit dollars, in turn, do not exist anymore due to sanctions or economic recession created by the Ukraine war.

Previously, strategic goods, including oil, were traded with dollars, and the supply and demand market for dollars was always balanced. However, in the current conditions in which fewer dollars are moving into the market because of the energy provision crisis and major oil exporting countries are not as inclined as before to receive dollar from China and India, as the major oil importers, the USA treasury will not be able to print more bills. 

In the previous era of the American economic recession, countries such as Japan, China, and Germany were forced to buy US dollars and bonds in order to prevent the fall of the dollar and the collapse of the world’s financial structure; they even had to buy more bonds when their prices fell so that the value of their bonds will be saved. However, in the current situation, even the strong economies of the world cannot neutralize the inflation caused by the dollar by buying bonds or investing in the USA.

The current situation of the American economy, with increasing inflation and approaching the threshold of recession, has put it on the verge of collapse, and the undisputed position of the United States, which was based on the two axes of dependence of countries on providing energy security and the role of the dollar in global trade, has faced severe shocks. The fact that the USA can no longer maintain China’s dependence on the dollar and that Beijing and Moscow are also more willing to cooperate with each other indicates political and economic changes in the global arena.

Considering that the US economy is bleeding due to the effects of Corona and the costs of the war in Ukraine, the debt and budget deficit of the United States have also reached the stage of an explosion, and Beijing is also determined to gradually replace the dollar with an alternative currency or remove it using bartering or at least not to provide its foreign exchange reserves to the US Treasury, the Bretton Woods organizations will face a serious challenge. Therefore, America and Europe have two ways ahead for maintaining the superiority of their financial and commercial system: the creation of a new financial system beyond the Bretton Woods organizations to restrain Beijing or entering into a war with China and Russia. However, there are many uncertainties in both cases.