Time for Bretton Woods 2.0

It is rumored that the Chancellor of Germany, Angela Merkel, is reading everything she can to try to understand President Trump. One suggestion for her reading list would be The Fate of Empires and Search for Survival by Sir John Glubb. In his short essay, Sir John starts with a truism:

“The only thing we learn from history,’ it has been said, ‘is that men never learn from History.”

This truism may be in jeopardy since it seems that Donald Trump has learned from history and is taking its lessons seriously. In Sir John’s essay he divides the life of an empire into six eras: 1.) The Age of Pioneers, 2.) The Age of Conquest, 3.) The Age of Commerce, 4.) The Age of Affluence, 5.) The Age of Intellect, and finally 6.) The Age of Decadence.

Sir John suggests that each of these Ages hold characteristics that if mitigated can delay or even prevent the ultimate demise of an empire. It might be argued that the United States is in the transition between The Age of Commerce and The Age of Affluence. If indeed we are in that stage of a nation’s life that suggests that we are past our zenith point then the policies that President Trump is implementing are exactly the right countermeasures to forestall our decline. But one important countermeasure has, as of yet, not been discussed: the reversal of the debasement of currency.

At the height of American power in 1944, diplomats from America and Great Britain huddled at Bretton Woods, New Hampshire to establish a monetary system for the postwar world in an effort to bring about monetary stability and prevent competitive devaluation of currencies. The treaty that was hammered out established world reserve currencies and required that countries with reserve currencies would tie their currencies to the gold standard. This was a good idea that worked well until the world’s economies grew beyond the sum total of all the gold in the world.

If you were to pile up all of the gold in the world, the total value of that small hill would be worth less than six trillion dollars. The current economic activity of America alone is more than three times that sum. As the American economy grew in the 1960s (The Age of Commerce) the limiting effect of tying currencies like the dollar to the gold standard became very apparent, and in 1971 the Nixon administration realized the system’s flaw and unilaterally withdrew the dollar from the gold standard, for all intents and purposes doing away with the Brenton Woods Treaty.

This measure seemingly made the U.S. currency a free-floating fiat currency. But simultaneous to the abandonment of the gold standard, the Nixon administration negotiated with the Kingdom of Saudi Arabia to establish the petrodollar. Saudi Arabia agreed to accept only U.S. dollars for the purchase of oil. This prevented a free-fall devaluation of the dollar since the dollar was still tied to a commodity -- instead of gold it was oil. Perhaps the Nixon administration was betting that Saudi Arabia would always remain friendly to this idea. However, as turmoil in the Middle East continues, escalate the odds against this bet are steadily increasing.

In 2015, Vladimir Putin, of the Russian Federation and King Salman of Saudi Arabia met in Moscow to see if Russia might join the OPEC cartel so that world oil production could be regulated with the intent of maintain a substantial profit margin for the member nations. The negotiations fell through on one sticking point, the petrodollar.

Vladimir Putin’s antipathy toward the West is well documented. He has always hated the fact that the U.S. dollar is a world reserve currency and that the World Bank and the IMF are both essentially tools of America and the Federal Reserve Bank. From a Russian perspective, these institutions support economic development only if it benefits the interests of the West. In a long-term plan to undermine this economic dominance of America and her allies, Mr. Putin established that payments for exported oil and gas from the Russian Federation must be in rubles or gold. 

There is another player on the world stage that would like to see the dollar knocked off its perch as the reining currency, and that is China. The Chinese yuan is not a free-floating currency, rather, it is tightly controlled by the communist government with the intent to make Chinese manufactured goods cheaper than any other country’s domestically produced manufactured goods. The Chinese government ties the value of the yuan to the U.S. dollar, so when the dollar rises in value so does the yuan relative to other currencies such as the Euro or Yen.

As the relative value of the dollar has risen in the past few weeks, the cost of Chinese manufactured goods in Japan and Europe has risen. Inadvertently, China has now accomplished what it was trying to prevent -- allowing other counties to compete with the Chinese manufacturing base. Additionally, over the objections of American financial institutions, in October of 2016 the yuan was established as a world reserve currency by the IMF and is now on par with the yen, the euro, and the dollar. The yuan will likely displace the Japanese yen in the global trading market in less than a decade. Could this be signaling the end of the dollar’s dominance in the world economy? This may seem like an unlikely scenario to many, but according to currency transaction company SWIFT.com, the U.S. dollar accounted for just over half of the financial transactions on the international stage in 2016. This market share position is due in large part to that fact that the U.S. dollar is the petrodollar. What would happen to the dollar if it were to share that position with another currency; or worse be replaced?

As we search for survival, we must not forget that the United States has the largest commodities exchanges in the world. More coffee, coal, gold, oil, timber, cotton, corn, hops, barley, etc. are traded on the Chicago and New York exchanges than anywhere in the world. Commodities are the very foundation of any economy, side by side with labor. An increased value of one begets and increased value of the other. In 1992, then Secretary of State James Baker proposed renegotiating the Bretton Woods Treaty. Baker was proposing that world reserve currencies be tied to an index based upon domestic commodities market exchanges. If such a treaty were to be achieved, it would prevent governments from instituting political control over currencies and allow productivity of raw materials to be the standard by which the value of a currency is measured. This would be a self-regulating process, preventing governments and speculators from manipulating currencies. The end result would be that eight hours of labor in Bavaria, Germany growing and harvesting hops and barley would be worth the same as eight hours of labor of the same job in Wisconsin. The organic forces of the marketplace would be allowed to guide the world economy toward greater and more equitable prosperity and freer trade.  

By tying the U.S. dollar (and all other world reserve currencies) to a commodities market index, and not the petrodollar, the dollar would be insulated from a potential dumping of the petrodollar in favor of the yuan. Such a scenario cannot be ignored. If the host countries holding the status of world reserve currency signed on to a commodity based currency exchange, they would have to adopt domestic policies that encouraged productivity, not inhibit it, lest they risk economic lethargy. The side effect would be less government interference in an economy, fostering free and fair trade at home and abroad.

Taking such action would prove Glubb wrong by actually learning from history. President Trump has broken all the rules so far. Why not this one?

It is rumored that the Chancellor of Germany, Angela Merkel, is reading everything she can to try to understand President Trump. One suggestion for her reading list would be The Fate of Empires and Search for Survival by Sir John Glubb. In his short essay, Sir John starts with a truism:

“The only thing we learn from history,’ it has been said, ‘is that men never learn from History.”

This truism may be in jeopardy since it seems that Donald Trump has learned from history and is taking its lessons seriously. In Sir John’s essay he divides the life of an empire into six eras: 1.) The Age of Pioneers, 2.) The Age of Conquest, 3.) The Age of Commerce, 4.) The Age of Affluence, 5.) The Age of Intellect, and finally 6.) The Age of Decadence.

Sir John suggests that each of these Ages hold characteristics that if mitigated can delay or even prevent the ultimate demise of an empire. It might be argued that the United States is in the transition between The Age of Commerce and The Age of Affluence. If indeed we are in that stage of a nation’s life that suggests that we are past our zenith point then the policies that President Trump is implementing are exactly the right countermeasures to forestall our decline. But one important countermeasure has, as of yet, not been discussed: the reversal of the debasement of currency.

At the height of American power in 1944, diplomats from America and Great Britain huddled at Bretton Woods, New Hampshire to establish a monetary system for the postwar world in an effort to bring about monetary stability and prevent competitive devaluation of currencies. The treaty that was hammered out established world reserve currencies and required that countries with reserve currencies would tie their currencies to the gold standard. This was a good idea that worked well until the world’s economies grew beyond the sum total of all the gold in the world.

If you were to pile up all of the gold in the world, the total value of that small hill would be worth less than six trillion dollars. The current economic activity of America alone is more than three times that sum. As the American economy grew in the 1960s (The Age of Commerce) the limiting effect of tying currencies like the dollar to the gold standard became very apparent, and in 1971 the Nixon administration realized the system’s flaw and unilaterally withdrew the dollar from the gold standard, for all intents and purposes doing away with the Brenton Woods Treaty.

This measure seemingly made the U.S. currency a free-floating fiat currency. But simultaneous to the abandonment of the gold standard, the Nixon administration negotiated with the Kingdom of Saudi Arabia to establish the petrodollar. Saudi Arabia agreed to accept only U.S. dollars for the purchase of oil. This prevented a free-fall devaluation of the dollar since the dollar was still tied to a commodity -- instead of gold it was oil. Perhaps the Nixon administration was betting that Saudi Arabia would always remain friendly to this idea. However, as turmoil in the Middle East continues, escalate the odds against this bet are steadily increasing.

In 2015, Vladimir Putin, of the Russian Federation and King Salman of Saudi Arabia met in Moscow to see if Russia might join the OPEC cartel so that world oil production could be regulated with the intent of maintain a substantial profit margin for the member nations. The negotiations fell through on one sticking point, the petrodollar.

Vladimir Putin’s antipathy toward the West is well documented. He has always hated the fact that the U.S. dollar is a world reserve currency and that the World Bank and the IMF are both essentially tools of America and the Federal Reserve Bank. From a Russian perspective, these institutions support economic development only if it benefits the interests of the West. In a long-term plan to undermine this economic dominance of America and her allies, Mr. Putin established that payments for exported oil and gas from the Russian Federation must be in rubles or gold. 

There is another player on the world stage that would like to see the dollar knocked off its perch as the reining currency, and that is China. The Chinese yuan is not a free-floating currency, rather, it is tightly controlled by the communist government with the intent to make Chinese manufactured goods cheaper than any other country’s domestically produced manufactured goods. The Chinese government ties the value of the yuan to the U.S. dollar, so when the dollar rises in value so does the yuan relative to other currencies such as the Euro or Yen.

As the relative value of the dollar has risen in the past few weeks, the cost of Chinese manufactured goods in Japan and Europe has risen. Inadvertently, China has now accomplished what it was trying to prevent -- allowing other counties to compete with the Chinese manufacturing base. Additionally, over the objections of American financial institutions, in October of 2016 the yuan was established as a world reserve currency by the IMF and is now on par with the yen, the euro, and the dollar. The yuan will likely displace the Japanese yen in the global trading market in less than a decade. Could this be signaling the end of the dollar’s dominance in the world economy? This may seem like an unlikely scenario to many, but according to currency transaction company SWIFT.com, the U.S. dollar accounted for just over half of the financial transactions on the international stage in 2016. This market share position is due in large part to that fact that the U.S. dollar is the petrodollar. What would happen to the dollar if it were to share that position with another currency; or worse be replaced?

As we search for survival, we must not forget that the United States has the largest commodities exchanges in the world. More coffee, coal, gold, oil, timber, cotton, corn, hops, barley, etc. are traded on the Chicago and New York exchanges than anywhere in the world. Commodities are the very foundation of any economy, side by side with labor. An increased value of one begets and increased value of the other. In 1992, then Secretary of State James Baker proposed renegotiating the Bretton Woods Treaty. Baker was proposing that world reserve currencies be tied to an index based upon domestic commodities market exchanges. If such a treaty were to be achieved, it would prevent governments from instituting political control over currencies and allow productivity of raw materials to be the standard by which the value of a currency is measured. This would be a self-regulating process, preventing governments and speculators from manipulating currencies. The end result would be that eight hours of labor in Bavaria, Germany growing and harvesting hops and barley would be worth the same as eight hours of labor of the same job in Wisconsin. The organic forces of the marketplace would be allowed to guide the world economy toward greater and more equitable prosperity and freer trade.  

By tying the U.S. dollar (and all other world reserve currencies) to a commodities market index, and not the petrodollar, the dollar would be insulated from a potential dumping of the petrodollar in favor of the yuan. Such a scenario cannot be ignored. If the host countries holding the status of world reserve currency signed on to a commodity based currency exchange, they would have to adopt domestic policies that encouraged productivity, not inhibit it, lest they risk economic lethargy. The side effect would be less government interference in an economy, fostering free and fair trade at home and abroad.

Taking such action would prove Glubb wrong by actually learning from history. President Trump has broken all the rules so far. Why not this one?