The system has occasionally faltered, perhaps most dramatically in the 2008 global financial crisis. But historian Adam Tooze’s account of that crisis, Crashed, argues that the crisis demonstrated the power of the US, which was finally able to to stabilize the rest of the world economy via a system of Federal Reserve “swaplines”. These offered politically favored countries like Britain very cheap dollars in an emergency and granted them a bailout of domestic financial institutions.
This gave the US enormous weight – whether you can choose to save someone or not, you have immense power over them, Tooze argues. Even the threat of removing emergency support can give you power. But it was this show of force that helped sow the seeds of the system’s steady collapse as we see it today.
Precisely because the US was able to exercise its money power in ways that suited its broader interests – so only its closest allies had access to swaplines, but any country might need dollars in an emergency – it incentivized other countries to withdraw as much as possible from the dollar-centric international monetary system.
end of the dollar regime
Since 2008, other economies, led by China, have grown faster than the US, and some close US allies, such as Britain, have fallen behind. Covid has also dramatically shaken the whole system and we are still very much living with the virus and its aftermath – in terms of health, broken supply chains and the very high debt caused by lockdowns.
When the US clearly dominated the globe, as it did in the post-Cold War years, while also being the largest economy, technological leader, and greatest military power on the planet, there was little room or purpose to admit it do a withdrawal. But as US power has waned on these various dimensions, so have the risks of exiting the system for countries contemplating it.
On the other hand, the risks of staying within the dollar system – especially if you are outside the charming circle of close US allies – have also increased dramatically with Russia’s invasion of Ukraine and the subsequent imposition of sanctions on Russia. When tanks rolled over the border almost a year ago, the US and its allies reacted swiftly: Russia’s free access to the dollar payment system was summarily blocked, just as Iran was blocked earlier in the last decade.
This sudden restriction was a huge red flag for all other countries that rely on the global dollar payments system, says Zoltan Poszar, head of global strategy at Swiss bank Credit Suisse. If Russia could be excluded with US government approval, any country could. Poszar believes that alongside the opportunity to withdraw from the system created by the relative decline of the US compared to other major powers, the Russian invasion of Ukraine created the incentive to withdraw in order to avoid a country moving possibly finds itself in the future, at the mercy of Washington’s whims.
Poszar believes a new, multipolar international monetary system is emerging, which he has dubbed “Bretton Woods III,” borrowing from the idea that the world has passed through three different international monetary systems since the end of World War II. The first was drafted in 1944 at the Bretton Woods Conference in the US, where the Allied powers were attempting to lay down the ground rules for the functioning of the post-war international monetary system. This accord created the World Bank and International Monetary Fund, which are still with us, and a system of fixed exchange rates pegged to the dollar (and then to gold), which is not the case: the system collapsed in the early 1970s when the US refused to keep the dollar’s fixed gold price any longer.
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