July 2, 2014; Dollar Demise…or Continued Dollar Domination?

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Kevin: We have a guest today, David, Benn Steil, who wrote just a fascinating book on the economic context of where we’re living right now. It was called The Battle of Bretton Woods. It deals with Keynes, it deals with Henry Dexter White, that period of time when, really, the entire world was shifting to a dollar-denominated international monetary system.

David: That’s right, the proposals by Keynes, the proposals by Harry Dexter white in 1942, ultimately came to a head in 1944 and we came to an agreement. The Bretton Woods system centered the U.S. dollar in the world monetary system, and treated gold the same as the dollar, the dollar the same as gold. That system broke down by 1971. To look at what took place beforehand, and what led to its passage, and hence, what are the consequences of a post Bretton Woods fiat system, it is an excellent exploration. Benn Steil has some great historical insights. His particular area of expertise is economics. On a daily basis he is exploring these kinds of ideas and their practical outworkings at his post as Senior Fellow and Director of International Economics at the Council on Foreign Relations in New York.

Kevin: That is interesting, because we’re not just reading a book from a great historian, what we’re talking about is someone who actually in the group that is looking at and making decisions today. Dave, we’ve talked about this before; we talked about it last week. We are on the cusp of a change of the international monetary system, so it is well worth talking to the guys who are crafting the next one.

David: Benn Steil’s opinions, I think, are critical. If you want to see the direction of the next system, understand the inputs that current policy-makers are getting, certainly from the Council on Foreign Relations, certainly credibly, historically based, and this is not my first exposure to Benn. His book, going back to 2009-10, Money Markets and Sovereignty, was awarded the 2010 Hayek Book Prize. I’ve got one on the shelf that I would like to read, still, and I’ll get to it: Financial Statecraft: The Role of Financial Markets and American Foreign Policy. The title, alone, is full of intrigue, to me.

This one is, I think, very critical, knowing that there are changes afoot in the world monetary system. Will it help the dollar, will it hurt the dollar, who are the characters involved, in helping the dollar in the last go-round, as we crafted a system which put the dollar on the world pedestal, the central stage. The Battle of Bretton Woods, that is Benn’s book. That is what we’re here to discuss today.

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Benn, thanks for joining our conversation today. Just as a background, as we were talking about your book, The Battle of Bretton Woods, let’s discuss in some general terms what we saw as a progression in our monetary history. We had the gold standard, then we had the gold exchange standard, Bretton Woods, and then we have now a post-Bretton Woods fiat system. Maybe we could just look in general terms at the benefits and the drawbacks of those progressions, the four stages in our monetary history, if you will.

Benn Steil: Sure. I think it is important that you did draw that distinction between the classical gold standard of the late 19th century, and the bastardized version, as it were, the gold exchange standard that developed in the 1920s. Even Keynes did draw a big distinction between the two, and he actually had many nice things to say about the classical gold standard and the way it served to integrate the global economy, and facilitate global capital flows without creating a financial crisis.

Now, what was the key mechanism behind the success of the classical gold standard mechanism was that when gold flowed into a country, broadly speaking, interest rates were lowered, and when gold flowed out, interest rates were raised, and what this served to produce, broadly speaking, was a situation in which you didn’t get global imbalances emerging, so this was an absolutely key feature of the system that facilitated global economic integration in the late 19th century. The classical gold standard broke down during the 1st World War, as countries got rid of the formal gold backing for their currency in order to print more of it, in order to finance the war effort. Now, after the war, countries slowly came back onto the gold standard, but a number of big mistakes were made. I think perhaps the biggest one which undermined the system is that Britain decided to go back on the gold standard in 1925 at the same parity at which it left at the eve of World War I, and Britain had experienced significant inflation during the war, so it required significant deflation, and ultimately, gruesome recessions in order to go back on it, that old parity, and Britain was never able to adjust to that, either economically or politically.

Even more importantly, I think, some key countries in the system, in particular, the United States and France, did not obey the key unwritten rule of the system that when gold flowed into their country, interest rates were reduced; when gold flowed out, interest rates were raised. The United States, and France, in particular, sterilized gold inflows. They were hoarding gold. They were not using gold flows as a signal to push rates up or down, and this really served to destabilize the system, and of course, it collapsed entirely in the early 1930s after the great crash of 1929. Britain was the first major country to go off the gold exchange standard in 1931, and many countries followed suit thereafter. And of course, the 1930s was a decade of currency wars and trade wars, and many believed that it played a significant role in triggering the military conflict that became World War II.

David: You have, with that period, the 1930s, the idea that it was, among some circles, the gold standard which was responsible for the depression, and it is not very often made clear that actually what we had in the 1930s was not the classical gold standard, but as you described, a bastardized version, the gold exchange standard. Why do you think that distinction is not made?

Benn: I think it is a critical distinction to be made, and let me explain why I think it is important not to overlook the distinction. You have scholars of the Great Depression, people like Benn Bernanke, who are very critical of the Fed, rightly so, in the early 1930s, for pursuing too tight a monetary policy. But I have to emphasize that gold was flowing into the United States in the early 1930s, so if the Fed had been obeying the rules of the classical gold standard, it would have loosened monetary policy. So whereas many people like to blame the gold standard, per se, for the Great Depression, it was certainly not the classical gold standard that was responsible for it, by any means, rather it was poor discretionary monetary policy pursued by the major central banks, in particular, the U.S. Federal Reserve.

David: Now, with Bretton Woods, which was a quasi-gold standard, most of the benefits were passed through to the sponsoring country, the United States, and you really explore the personalities and the economic and financial background to the emergence of the U.S. and the U.S. dollar at Bretton Woods, what became the world monetary system post World War II. What would you say, in terms of benefits and drawbacks of this quasi-gold standard put together by a variety of countries, but ultimately sponsored by Harry Dexter White here in the United States?

Benn: That’s right. The Bretton Woods system was a version of the gold exchange standard that was implemented in the 1920s. The key distinction was that at Bretton Woods, through rather remarkable manipulations orchestrated by Harry Dexter White, the U.S. dollar was declared, in the IMF Articles of Agreement, basically, synonymous with gold, so it wasn’t just that the U.S. dollar would be backed by gold, but countries would be able to treat their dollar reserves as if they were gold, for the purposes of managing this new system that would be overseen by the IMF.

Now, the key problem in Bretton Woods is the same problem that afflicted the system in the 1920s. The U.S. government maintained complete discretion as to how to conduct its monetary affairs, and so ultimately the world was faced with what came to be known as the Triffin dilemma, that the United States would not be able indefinitely to both provide the world with sufficient dollar liquidity to facilitate growing international trade, and have sufficient gold reserves to maintain the fixed parity at $35 an ounce, and although many people say that the Bretton Woods era from 1946 to 1971 was really a golden period for the international monetary architecture, I think it is very important to recognize that it was not Bretton Woods, per se, that revived the global economy after the war. In fact, the Truman administration virtually mothballed the IMF in the late 1940s. In the early 1950s it did nothing. Countries which were already significantly over-indebted didn’t want to borrow from this institution. It was really the Marshall plan that was legislated in 1948 that played the key role in reviving the European economies and then the global economy.

Also, the monetary architecture established at Bretton Woods could really not be said to have started until 1961, when the first nine European countries met the requirement of the IMF articles of agreement that their currencies be convertible into U.S. dollars, but by that time, the system was already coming under enormous strain as the United States was losing gold reserves, when you had countries like France beginning to doubt seriously the ability of the United States to maintain the fixed parity with gold, and they started demanding their gold back. And of course, ultimately, that led to President Nixon’s closure of the gold window in 1971 in order to prevent the complete depletion of America’s monetary gold stock.

David: It is ironic to me, as you mentioned earlier, that the U.S. and France did not obey the rules under the gold exchange standard and were sterilizing the gold inflows and hoarding gold, and you have Jacques Rouffe, who was the financial attaché in London during the 1920s and 1930s, watch the devaluation of the pound, and then is advising de Gaulle to start hoarding gold again, and a lot of the outflows from the U.S. gold stock were going to France on Rouffe’s recommendations. It has an echo of the past, does it not?

Benn: It does. Rouffe agreed with Robert Triffin about the fundamentals of this dilemma, having a national currency, the U.S. dollar, operating as the international currency, but he disagreed with Triffin entirely as to what the proper solution to the problem was. Triffin supported Keynes’s idea of creating a new supranational currency. Keynes was going to call it bancor, which would be overseen by the IMF. Keynes had hoped the bancor would ultimately supplant the dominant international role of the U.S. dollar, whereas Rouffe wanted to go in an entirely different direction. He wanted to go back to the classical gold standard of the late 19th century, so the two disagreed entirely as to what the solution to the problem was.

David: Today there is a growing discontent with what we have, a unipolar monetary system focused on the U.S. dollar. Are there realistic alternatives? You have discussion of the SDRs, you have had production of an idea of trade-weighted basket of currencies. Many people other than Barry Eichengreen, but certainly he has formalized an approach, and wrote an article for Foreign Affairs a number of years ago on that particular topic. What are the realistic alternatives to the U.S. dollar?

Benn: I don’t SDRs are a realistic alternative for several reasons. First, right now there is no private sector invoicing or lending going on in SDR, so there is really no incentive for central banks to start holding more of this stuff, so it currently represents about 3% of global reserves, and without governments making extreme unprecedented efforts to establish the SDR as a global currency, it is not going upward from there. I think the most important point to emphasize is that neither the United States nor China, which, in my view, would be the key countries necessary to push forward a new monetary architecture – neither of those countries is willing to sublimate its monetary sovereignty to any sort of new supranational currency like the SDR, so I don’t think we’re moving in that direction.

I think the most likely alternative to the current monetary architecture is probably some sort of multipolar currency world with the Chinese RMB playing a much more significant role than it does right now. Right now it only represents a few percent of global reserves. But to give you a flavor of the challenge that the Chinese government faces in internationalizing the RMB, if the RMB were to only represent 5% of global foreign exchange reserves, that would mean that foreign official institutions would control 30% of the Chinese sovereign bond market. To put that in perspective, foreign official institutions control about 36% of the U.S. sovereign bond market, the U.S. treasury market, but the U.S. dollar represents 63% of global foreign exchange reserves. So China would have to institute enormous reforms in terms of the way its financial markets operate, in terms of increasing the depth of its sovereign bond market, in order to support the foreign official inflows that an internationalized RMB would require.

Furthermore, we really don’t have any historical precedent for a multi-polar currency world. Barry Eichengreen has referred to the early 20th century as such a period, a period in which it was not only the dollar and the pound sterling that had a major international reserve role, but the French franc and the German mark. We have to remember that in that period, these currencies were, effectively, credible vouchers for gold. We’re living in a totally different world today in which all the world’s currencies are fiat currencies. So, it was gold that was, in fact, the true international currency in the early 20th century, not those individual national currencies.

David: Well, that does raise that point. The post Bretton Woods system is an entirely fiat system. Are there different risks for surplus and deficit countries? When you look at the floating system that we have today, we’ve lost the automaticity that we had with the gold standard, leveling those imbalances. We don’t have a very good record, I would say, over the last 5-10 years, of managing surpluses and deficits. They continue to explode higher. What can be said, either positive or negative, about the post Bretton Woods fiat system?

Benn: The most positive thing one can say about it is that the world, despite periodic crises roughly every five years, has muddled on in terms of being able to continue to promote, on average, a decent economic growth without producing any sort of major protectionist backlash. Having said that, both deficit and surplus countries face important challenges in this monetary architecture. Let’s take deficit countries: One that is very much in the news today, Ukraine. I would argue that the Yonukovych government in Ukraine would still be in power today had the Federal Reserve decided to delay its taper, as many economists wanted it to do, for about a year. To paint the picture for you, in April of 2013, the Yonukovych government walked out of negotiations with the IMF over a 15-billion dollar financial assistance package because of the IMF’s insistence that Ukraine eliminate its energy subsidies. Instead, Ukraine decided to try to muddle through despite having an 8% current account deficit and budget deficit, by borrowing more money internationally, and they successfully issued a 10-year 1.25 billion dollar euro bond at a yield of 7.5%. Fast forward one month, May 22nd, Benn Bernanke makes his famous taper comments, suggesting that the Fed might, at some point in the near future, if economic conditions so warrant, begin to pare back or taper its monthly asset purchases. Countries with current account deficits around the world, Ukraine, in particular, saw their currency and bond markets hammered. Ukraine saw the yield on its 10-year sovereign bond soar to about 11%, a level at which it stayed for most of the rest of the year, and at that level, Ukraine was unable to continue to roll over its debt, and ultimately, as we know, turned to Russia for a bailout, and that produced a revolution that ultimately toppled his government. So you can see how the flaws in this monetary architecture can have a significant economic and political impact upon deficit countries.

How about surplus countries? Surplus countries like China, in particular, are taking an enormous risk, accumulating enormous current account surpluses, with the attendant large stockpiles of dollar foreign exchange reserves. They are basically betting that the U.S. dollar will continue into the foreseeable future to have roughly the same global purchasing power as it has today, and that is a display of confidence that we don’t know whether it will be ultimately warranted.

David: Just reflecting back again, the system as it was, the system as it has developed over the last 100 years, what circumstances would suggest the gold standard as a viable model, and has the spread of democracy, the introduction of universal suffrage, to a degree precluded the feasibility of the gold standard, with many of our fiscal commitments, really, politicizing national budgets?

Benn: Yes, I do think that is the case. We live in a world in which people expect the government to be able to take dramatic discretionary action when economic problems emerge. Now, I should emphasize that under the classical gold standard of the late 19th century, central banks did have room for maneuver to deal with various crises that might hit their banking sector, but it wasn’t the sort of a virtually unlimited room that, for example, the Federal Reserve has taken advantage of over the past six years. That said, you often hear from commentators that, “My god, if we had been on a gold standard, we would certainly be in another great depression today,” and that strikes me as being wholly nonsense, since if we had been on a classical gold standard, since gold would have been pouring into the United States if the Federal Reserve had obeyed the sort of golden rule of the gold standard, it would have significantly relaxed monetary conditions, exactly what it has done under a completely discretionary framework.

David: Interesting, interesting. Well, we always want to fast forward, go back and forth between what we see in history, and then our current context, and what we have today is, certainly, as Barry Eichengreen has described as an exorbitant privilege, with being the world’s reserve currency. What would the real costs be to the man in the street, of losing reserve currency status?

Benn: It’s an irony of the global financial crisis that, although it began in the United States in 2008, it actually served to reinforce the dominant global role of the U.S. dollar and U.S. treasury securities in the global monetary architecture, and that was a very fortunate position for the United States to be in because it allowed us to utilize extraordinary actions on both the monetary and fiscal front. These were actions that were not available to other governments. And now, of course, other central banks around the world also took extraordinary actions, but let’s look at some of those, even in the developed world, that do not issue important reserve currencies, countries like Sweden and Australia. If you look at the balance sheets of the Swedish and Australian central banks during the crisis, you find that during the periods when they increase liquidity significantly, their net foreign assets also plummeted. That means that they were forced to sell foreign assets, in particular, dollar-denominated assets, in order to raise dollars. Because in a crisis, banks are not demanding Swedish krona and Australian dollars, they are demanding U.S. dollars, and their central banks can’t print those, so we are in a very, very fortunate position in this country.

David: We look at the dominant economic school of thought today, the Keynesian school, John Maynard Keynes, the architect. The existing monetary order owes a lot to Harry Dexter White, and again, Bretton Woods, a post-Bretton Woods era now, there was conflict between these two men at Bretton Woods, certainly with national interests in play, Keynes prioritizing the ultimate return of the sterling and British presence in the world economy, and Harry Dexter White prioritizing U.S. interests. Which of these men would you say is, if you want to put it loosely, ruling the world from the grave, or has a greater lasting impact on the world of finance and economics?

Benn: Well, certainly, on the fiscal front, in terms of fiscal policy, John Maynard Keynes. Harry Dexter White was certainly not an original thinker in this regard. In terms of his official writing, you could describe him as being wholly Keynesian, so in terms of fiscal policy, the notion that in a major economic downturn, it’s the responsibility of the government to rely on financing in order to support the economy. That was very much pure Keynes.

In terms of the current monetary architecture, the big difference between the two at Bretton Woods is that White was obviously pursuing an architecture that would be in the national interest of the United States, a dollar-based international monetary architecture, one in which the U.S. would be able to use compete discretion in order to conduct its monetary affairs, whereas Keynes’s proposals were, quite naturally, geared to support British national interests. Keynes and the British, most assuredly, would have preferred a system in which the pound sterling would have revived its once-dominant global reserve currency role, but that wasn’t in the offing, because Britain was rapidly going bankrupt trying to finance its war effort. So Keynes’s proposal to create a new supranational currency, bancor, which he hoped would supplant the international role of the dollar, was a proposal that was meant to try to constrain the economic power that the United States would otherwise be able to wield in the world after the war. If you look at the specific proposals that Keynes made for managing this currency, for example, how bancor would be distributed among the participant nations within the IMF, he wanted it to be based, not on, for example, gold reserves, which was the focus of the United States, given that the United States had enormous gold reserves, about 80% of the world’s monetary gold stock, Keynes wanted bancor distributed on the basis of a country’s contribution to world trade, which was very convenient to Britain since Britain was bankrupt, but it still traded an enormous amount.

David: Then there is this question: We have the contrast of the men, the contribution on the fiscal side from Keynes, the monetary side from White. How did Harry Dexter White reconcile his pro-Russian espionage with his monetary policy which was decidedly pro-American, and decidedly dollar-centric? Am I lost in sort of an ideological haze? Perhaps you could shed some light on that?

Benn: White would never have seen himself as a traitor, despite the fact that he was clearly advocating policy positions within the FDR administration that were highly convenient to the Soviet Union. In certain instances, I think he clearly went well beyond the bounds of legality. But he would have seen himself as being an American patriot, that in making extraordinary efforts to help the Soviet Union, he was only helping an ally during the war effort, one which he believed after the war had the economic model that the world was going to be forced to replicate. He believed, rightly or wrongly, almost certainly wrongly, that Soviet-style economic planning was the way to go, and that the United States could only survive as a capitalist island in a sea of state trading for another 5-10 years after the war, and he really believed that the United States was going to be forced to accommodate itself to this rising economic power. In trying to aid the Soviet Union, he viewed himself as pursuing enlightened American national interests against what he saw as the dangerous isolationists on the Republican side of the aisle in Congress.

David: Fascinating. Again, looking back at the contributions of Keynes and of White, would you attribute the financial instability of the last decade to either the dollar system we have today, the broken down version of Bretton Woods, or to central bank pro-cyclical policies, whether you call that Keynesian or neo-Keynesian, but still tied to an activist model?

Benn: I would say that the periodic major crises you see in the developing world that are often kicked off by currency crises, are most definitely side effects of the dollar-based international monetary system that we are operating. Having said that, as you know, central banks today are undergoing a major debate as to what the proper way is of handling problems related to over-inflated asset markets. There is a passionate debate going on today about whether the problems that we were building up in this country in the middle part of the last decade could be ascribed to overly loose monetary policy, or an inability of the government, broadly formulated, to get to grips with a clear housing bubble that was growing in the United States. And many central banks today are coming down on the side of not using monetary policy to burst asset bubbles, but rather, pursuing some form of so-called macroprudential regulation, that is, specific regulations aimed at the asset markets where bubbles seem to be emerging, but it’s really an open question whether in the middle part of the last decade, if we had simply tried to restrain the growth of mortgage financing, for example, the credit bubble would not have just emerged elsewhere in the economy. So this is a major central policy debate that I think is going to dominate the agenda in the coming years.

David: 2011 was probably the greatest example of countries coming to the edge of solvency. You quote toward the end of your book, Walter Wriston, former head of Citicorp, and he said, countries don’t go bankrupt. Obviously, Citicorp at that time expanded their balance sheet and offerings around the world on that basis, and faced some major problems in the 1980s as we saw that issue. Now, we’ve had five years of crisis and response. Do you feel like this period of time has underscored Walter Wriston’s comment that countries can’t go bankrupt, or has it undermined that idea?

Benn: Well, they clearly do go bankrupt, and they are going bankrupt. Let’s take Greece, for example. There, where we are dealing with a country that almost certainly, despite an unprecedentedly large write-off of debt several years ago, is going to be entering, almost undoubtedly, into another major restructuring. Greece is not, in my view, going to be able to reduce its debt burden simply on the basis of more fiscal austerity. We are seeing crises re-emerge in Latin America again. Argentina and Venezuela would be at the top of the list. And we are seeing lots of other countries around the world exhibiting extreme financial strain, certainly, Ukraine, one we spoke about earlier in the discussion.

David: Before we move past Greece, it is interesting that in the worst period of time, when there was a lost more uncertainty, perhaps, you had their 10-year treasury bouncing between 10% and 20%, interest rates were sky-high. Now, bouncing between 5% and 7%, there is a real indication of peace and calm in that market, as if the worst is behind us, and we have a much brighter future, whether in Greece or the other peripheral European countries. The interest rate communication to the market is that all is well. Are we getting ahead of ourselves in coming to that conclusion?

Benn: I wouldn’t say that is necessarily the message. In terms of European rates, you can argue that there are low levels, at least in parts of the European Union. For example, German sovereign bonds are a reflection of the fact that the economy is expected to be in the doldrums for quite a number of years more, going forward, and that inflationary pressures, for that reason, will probably be very muted, because their countries won’t be up against production constraints.

David: How about Spain? Their 10-year treasury is less than the U.S. 10-year, or it was several weeks ago.

Benn: That’s right, the markets seem to have been very persuaded by Mario Draghi’s statement, the “Super Mario” back in 2012, that we will “do whatever it takes” to preserve the euro. But just like Greece, Spain is far from out of the woods. It is experiencing extreme fiscal strains. Unemployment is still very, very high in that country, and I would argue that country, and I would argue that the low yields we are seeing are more of a reflection of pessimism about future economic activity, than they are a vote of confidence in the future of the euro.

David: Two questions relating, again, to the dollar and the Chinese. What, in your opinion, do the bilateral trade agreements of the last 12-24 months portend for the U.S. dollar? Does somehow circumventing the dollar in trade and invoice settlement ultimately erode the dollar as a reserve currency?

Benn: Over the past six years, China has signed bilateral agreements with a number of countries, Japan, Brazil, Turkey, Russia, to begin trading without the U.S. dollar as an intermediating vehicle. Now, this sort of initiative is clearly in its embryonic phase, but my view is that if it should take off, it is actually a significant threat to the perpetuation of the multilateral trading system because of the key foundational role that the U.S. dollar plays in that system. Broadly speaking, countries are willing to run current account surpluses because they believe that the currency that they accumulate in consequence, that is, the U.S. dollar, will continue to hold roughly the same global purchasing power in the future that it does today.

If you take the U.S. dollar out of that picture, you see an entirely different scenario beginning to take hold. These countries, Brazil, Russia, Turkey, are highly unlikely to be willing to stockpile each other’s currencies, and if that is the case, what we can expect them to do is to take measures to balance their trade bilaterally. And if everybody institutes new measures to try to balance their trade bilaterally with everybody else, we go right back to the 1930s, that is, a world in which there was no multilateral trading system, and trade flows and economic growth collapsed because of it.

David: We have post-war Britain; they were in deficit. We have the U.S., which was, at that point, in surplus. How far would you take the comparison, today, between the U.S. – we’re the new deficit country – and China today, with their trade surpluses.

Benn: It’s fascinating that China, today, if you listen to Chinese officials, when they describe what is wrong with the global, financial, and monetary architecture, they lay the blame at the feet of the deficit countries, of course, the United States, in particular. They say it is the fault of these countries, the U.S. in particular, for pursuing lax monetary and fiscal policies. This is exactly the position that the United States took in the 1940s, that Harry Dexter White took into Bretton Woods. White told the American delegation at Bretton Woods that we would never allow foreign interference in our accumulation of current account surpluses in the United States. This is very much the Chinese position today.

But the United States, now being the world’s largest debtor nation, as Britain was in the 1940s, uses exactly the same language to describe the problems in the current major national monetary and financial architecture as Keynes and the British did in the 1940s. For example, in 2010, when former Treasury Secretary Tim Geithner proposed caps on persistent current account surpluses, and of course, this was aimed at China, this is exactly the sort of thinking that Keynes brought to Bretton Woods, and that the United States rejected in the 1940s, so very interesting parallels between the two, but they can be taken to extremes.

Because Britain was going bankrupt in the 1940s, because it did not print the currency in which it issued its debt, that is, it had to make payments abroad in U.S. dollars, the pound sterling was becoming irrelevant, the United States was able to impose its will on Britain at Bretton Woods. China is not in that position vis-à-vis the United States today. The United States is certainly not the supplicant that Britain was in the 1940s, or the 1950s, for that matter. Take the case study of Suez in 1956 when the Eisenhower administration pushed the British out of Suez by threatening to withhold vital IMF emergency financing support and provoking a sterling crisis. The United States could afford to provoke a sterling crisis at no cost to itself because U.S. holdings of British securities were trivial, amounting to about $1 per U.S. resident, whereas Chinese holdings of U.S. dollar-denominated securities today are enormous, amounting to about $1,000 per Chinese resident. So if China were to try to provoke a dollar crisis in order to discipline U.S. behavior, in the short-term, at least, it would be hurting itself as much as it would be hurting the United States.

David: You spent time in Nuffield College in Oxford doing your MPhil and DPhil, you know the tutorial system, and you know that we learn from the past, so as to move into the future with greater perspicacity. Who are the tutors we should learn from today, while we are crafting a monetary order which is suitable to the modern world? Is it Keynes, is it Hayek, is it Rouffe? Who would you suggest that we learn from?

Benn: I would say there are different strokes for different folks, there are different models for different nations. I would say for the key, major developed economies, say, the United States, the European Union, Japan, floating exchange rates à la Milton Friedman are the least worst solution for them, in terms of managing the interaction of their economies and their currencies. But when it comes to developing countries, the sort of semi-fixed exchange rate system advocated by both Keynes and White at Bretton Woods, is probably the least worst solution, because of the extreme effects that we can see in developing nation economies on the inflation front, on the trade front, when capital whip-saws in and out of the countries.

Basically, the financial crisis has taught them that in good times they should pursue a firm hand to keep their currencies and their imports down, and their exports and foreign exchange reserves up. Unfortunately, from the perspective of the United States, that is precisely the definition of currency manipulation, and that I why is see the current dollar-dominated international monetary architecture as being inherently unstable, because we continually teach developing nations that they need to build up the current account surpluses, they need to build up dollar reserves, they need to manage their currencies, manipulate their currencies. And of course, that produces an understandable political backlash in the United States, and these tensions, if they grow too much over time, can come to undermine the global multilateral trading system that we all depend on.

David: Benn, thank you for your comments, and I do look forward to digging into an older one of your books, but I think just as relevant today as ever, Financial Statecraft: The Role of Financial Markets in American Foreign Policy. We like to look at things from an interdisciplinary standpoint, and I think you do a great job integrating history, finance, economics.

Thank you for joining us today. I can’t recommend your newest book enough, The Battle of Bretton Woods – you wrote that in 2013 – a fascinating look at the history behind John Maynard Keynes, Harry Dexter White, and the monetary order that we have today. Thank you for joining the conversation, Benn.

Benn: Thanks so much for having me, David.