The future of the International Monetary System
DISCLAIMER: I’m not an active investor and don’t have any formal education or training in economics or financial analysis. I’m a 14-year-old from Toronto, Canada who simply has a deep interest in the field.
The method in which the world has thought of value, wealth and money for much of history has fundamentally been based on pure belief. Whether it be from the gold standard or our current fiat system.
It’s always been about who speculates the value of gold goes up or who speculates the state of the economy and consumer spending will go down.
Just to give you some context. This isn’t an article about cryptocurrency and your typical anti-establishment jargon. It’s about my prediction I’m attempting to share about the direction of the International Monetary System in the next 10–20 years.
But before that let’s see the history of the International Monetary System our world has gone through.
The Bretton-Woods System, say hi to Gold!
After World War Two, leaders from the 44 allied nations came together to build a new international monetary system. They wanted to avoid creating a new system like the Treaty of Versailles which created economic and political tensions by putting the financial burden of the war on one nation.
The goal was to prevent the many severe economic shocks and debts from World War One and The Great Depression. The Monetary System during the Great Depression and World War One relied on competitive devaluations operating from volatile investors and traders from places like Wall Street.
So the greatest economists from the allied nations thought of a new system called the Gold Standard, pegged to… well, what you guessed Gold!
The idea was to have the US Dollar pegged to the value of Gold and the rest of the 43 allied nations currencies respectively pegged to the value of the US Dollar with a maximum diversion of 1%.
The benefit of this system was that it created very little volatility as gold was a fairly reliable and stable commodity then. This especially helped with the creation of reliable international trade and very little economic conflicts among the growing number of allied nations.
This is one of the many factors which contributed to the time between the 1950s and 1960s to be considered the golden economic era in America.
However, with the supply of gold coming to a standstill and the price of gold rising at alarming rates. In 1971, President Richard Nixon announced the “temporary suspension” of the US Dollar’s conversion relative to the Gold Standard and soon after, in 1973, the Bretton-Woods System was abolished.
What Happens After the Golden Era? Confusion? Collapse?
Along with the end of the Bretton Woods System, President Nixon gave members of the International Monetary Fund the option of choosing any form exchange arrangement other than the Gold Standard. This left most of the nations generally with these options:
- Allowing the currency to float freely
- Pegging to another currency or basket of currencies
- Adopting the currency of another nation
- Creating a Monetary Union or Currency Bloc
Most developed nations decided to create a currency that would float freely meaning central banks could control the supply and demand accordingly. The idea of a floating currency gave more power to the forex market and central banks to control the value of the currency.
Most developing countries or countries with large American influence decided to peg their currency to the US Dollar, while most developed countries like Japan, the US and Canada decided to create free-floating currencies. The reason why most developed countries chose free-floating currencies was because of the rise in oil prices.
During the abolishment of the Bretton Woods System, geo-political tensions were rising in the Middle East (a major oil-producing region) with the Yom-Kippur War, the Iranian Revolution of 1979 and the Iran-Iraq War.
Most of the developed nations like Japan, Canada and the United States who adopted free-floating currencies were also the same nations that were increasing their dependence on importing oil from the Middle East.
With the supply of oil coming to radical slow down in the Middle East due to geopolitical conflicts. The price of oil dangerously rose. Oil became a rare, scarce and sacred commodity in these developed and mainly industrial nations.
To prevent the radical deflation of the respective nations’ currencies and a major economic recession from looming. The governments of these nations had to create a free-floating currency which would give central banks of their respective nations the power to raise or lower supply and demand of their currency.
The Integration of Digital Currencies?
Companies like Paypal, Stripe and Square have done an amazing job of transitioning money from physical notes we transfer to computerized mathematical nodes as part of a larger network constantly being iterated upon. But it begs to ask, how institutions will keep up with this transformation.
The method in which a Central Bank usually injects money into the economy isn’t through handouts to banks or people. Instead, it’s usually through a practice called Open Market Operations where governments buy and sell securities using different tools.
To see how to deal with the advent of digital currency, we can take a look at how banks in Sweden are dealing with the rise of digital money. Sweden’s a nation where only 13% of the population reported using cash in 2018 according to the National Public Library.
In Sweden, payments are done using either debit or credit cards or a mobile app created by the nation’s big banks called Swish.
If every country were to adopt the same plan as Sweden, it would be a dream for banks giving them more power than ever over consumer spending and the circulation of money.
However, with blockchain-based payments also gaining traction in many different communities. A purely centralized mobile payment system doesn’t seem to be the future.
The New World Order?
This is one of my favourite tweets with regard to cryptocurrency and markets.
At the moment, we’re at the end of a long term debt cycle which has been building up ever since the end of World War Two. Many economists and investors have warned in the past that if we were to start a new debt cycle there would have to be another major worldwide conflict or urging issue.
The current COVID-19 pandemic is catastrophic however, I also think it’s the same global crisis needed to push in the new world order. We’ll be forced to push the change which would have normally taken several years into these few years until the world is healed with a vaccine mass-produced and given to the world.
A very niche group of people around the world think that in these few years cryptocurrency will be the next stock market, IPO’s (Initial Public Offerings) will be replaced by ICO’s (Initial Coin Offerings).
But I beg to differ, current cryptocurrencies give very restricted control to one central bank or institution.
Although, the idea that no single entity or organization can profitably and sustainably control a large active cryptocurrency, attracts much of the current crypto community’s support.
I think we’ve all learned from hundreds of years of different models of governance:
Humans cannot operate on a monetary system mismanaged. Humans need a system of accountable governance.
The future international monetary system seems to be a system involving more of big tech rather than big banks. Why do I say this?
The US Dollar has about 4.7 billion users (this number comes from the population of people in nations that have their currency pegged to the US Dollar or use the US Dollar as a currency).
While Facebook as of Quarter 2 of 2020 had about 2.7 billion active users, Google more than 2 billion active users and Apple with more than 1.5 billion active devices.
Banks like JPMorgan and the Bank of American have a meagre 62 million and 66 million active accounts respectively. Even though these big banks technically have trillions of dollars in assets under management and are still to this day responsible for much of the money dispersed into the economy. Their scope of users is simply limited.
While Big Tech companies don’t really have a border, and instead they have of the largest user bases of almost any private organization.
Companies like Facebook have already “attempted” to create Libra and companies like Apple successfully integrated platforms like Apple Pay now with over 400 million active users.
I could easily see a future in the 5–10 years where central banks will have a much lower dependence on purchasing and selling securities and assets with big banks to control the supply of money.
Instead, I see a future where companies like Apple, Google and Facebook will have blockchain-powered platforms in partnership with Central Bank issued digital currencies (not necessarily cryptocurrencies).
There could still be securities like bonds and derivative assets. However, I see them in the form of smart contracts in the pipeline between the respective national Central Banks of each country and these Big Tech Companies.
I don’t think it would be an absolute surprise if we were to see big tech companies get involved with the method in which central banks control money flow.
If you’d like to discuss this in more detail or just wanna chat about anything related to emerging technologies and economics. Please feel free to reach out to me ;)
Email: rishabchakraborty7@gmail.com
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Personal Website: www.rishabchakraborty.com
