Bretton Woods and Bitcoin
A look at the last 75 years of monetary policy
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We’re all here because of the creation of a decentralized, non-sovereign asset called Bitcoin. Bitcoin has caused millions of people to re-imagine the very essence of money. It has spawned thousands of offshoots, many with cult followings, created novel forms of fundraising, and enabled new business models facilitating permissionless economic activity.
And now, this whole ecosystem which we call crypto has grown large enough to gain the attention of the President, the Secretary of Treasury and the Chairman of the Federal Reserve.
Let’s step back for a second and recognize the profundity of that.
Three of the most powerful people in the world are giving the time of day to an internet money that has meme’d its way into existence.
A large part of this is thanks to Libra, and the fact that over two billion people could soon be using a purely digital form of money. In the process of figuring out what this Libra is, and how it compares to true cryptocurrencies, many people have been forced to question what they consider money.
This is likely only the start and as regulators, bankers, and lawmakers start to ask these questions, you can expect many more conversations that could alter the future of money.
We’ve been living in a fiat world for the better part of the last half-century. But, it wasn’t always this way and the monumental shifts in monetary policy during the 20th century shaped where we are today.
Perhaps none of them as important as the agreements made at Bretton Woods 75 years ago.
The post WWI depression era was marked by competitive currency devaluations, discriminatory trade blocs, and high tariffs which many believe exacerbated the tensions leading up to WWII.
In an attempt to resolve these issues leaders from 44 allied nations met in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference, known better as the Bretton Woods conference. At the end of three weeks the attendees emerged with a new monetary system that established the U.S. dollar as the world reserve currency.
At the time, most countries were on the gold standard. However, the U.S. held ¾ of the world’s gold meaning it was difficult for other countries to sustain their monetary base. The solution? Fix their exchange rates to the greenback. The result? The U.S. was left as the only country that could effectively print money, albeit still backed by their gold reserve redeemable at a rate of $35/oz where it remained for the next few decades.
By fixing exchange rates to the USD, it alleviated competitive devaluations to gain an edge in foreign trade. The International Monetary Fund (IMF) was also established at the conference and funded by member nations for the purpose of lending money to countries in a currency crisis.
Bretton Woods was effective at stabilizing currencies after bouts of hyperinflation experienced post WWI.
However, keeping the USD fixed to gold left a limited amount of the world reserve currency. After a few decades the U.S. felt it wasn’t adequate to service the worlds demand so they began to break the peg, eventually suspending convertibility altogether bringing us to the fiat system we know today. Even though the dollar was no longer redeemable for gold and exchange rates were free floating based on market forces, the USD remained the world reserve currency.
This brings us to the world we live in today — a paradigm of modern monetary theory employing quantitative easing and low or negative interest across the board. General distrust of our financial system has led to people looking for alternatives which can explain how a new idea like cryptocurrencies have been able to grow in such a short amount of time.
If the current trends continue, and we see cryptocurrencies reach escape velocity where world leaders seriously consider it a direct threat to their control, its not unlikely that we see another gathering of the world elite making decisions that will shape the course of the next century.
The only question is do they accept crypto or try to fight it?