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What changes will digital currency bring to the global financial order? From the current point of view, currency digitization will become an important participant in the third anchor search of the global monetary system.
Original title: “Ouyi OKEx Research Institute: Looking at the Future Impact of Digital Currency from the Changes of International Monetary System”
Written by: OKEx Research Institute
Recently, as domestic DC/EP started internal testing, people’s attention to digital currency has increased, and all sectors of society have also started to discuss it. One of the most popular views in the current market is that “digital currency can realize the mapping of numbers and power and gain financial control in this era.” This has also been sought after by a group of encrypted digital currency believers, but is the reality really that simple? ?
Perhaps a simple case can refute the above view: In 2018, the Venezuelan government issued a digital currency called petro, and each petro has 1 barrel of Venezuelan crude oil as physical collateral. This has achieved the mapping of “numbers and power”, but has the Venezuelan government gained an opportunity to seize financial control? No, there has even been a massive dumping of petrocoins by local residents.
Venezuelan petro currency symbol, picture source: interpretation of petro currency white paper
A country’s sovereign currency can dominate the international financial order, not just because the currency carrier changes. Just as the U.S. dollar can become the world’s currency, the U.S. dollar credit is behind it. It is the powerful comprehensive strength of the United States, which occupies an important or dominant position in the fields of international economy, politics, military, and technology. As long as the credit of the US government remains and the overall strength remains strong, the US dollar’s status as the world’s dominant currency will not be shaken.
So, what changes will digital currency bring to the global financial order? From the current point of view, currency digitization will become an important participant in the third anchor search of the global monetary system.
What is a “currency anchor”? Our common “anchor” is connected to the ship with an iron chain and thrown to the bottom to make the ship stable on the water. In the global currency system, we need such a “monetary anchor”. By nailing the anchor, Ensure the stability of currency value, and realize the reduction of transaction costs in trade and financial transactions between a country and the world.
According to the current academic analysis based on the evolution of the international monetary system, the global monetary system experiences a small anchor-seeking cycle approximately every 40 years and a major anchor-seeking cycle every 80 years. Each time the currency anchor collapses, it has triggered severe economic turmoil and a serious political crisis around the world. After the anchor is sought, there will be an economic prosperity cycle of about 10-20 years. If we count from the collapse of the gold standard after World War II, we have now reached the third currency swap period.
The establishment and collapse of the gold standard (1870-1929)
Since the middle of the 19th century, major economies such as Britain, the United States, and Germany began to implement the gold standard system, and the international gold standard was formally established. Under the gold standard, gold is the anchor of all national currencies, and the exchange rate between currencies is determined by the ratio of the gold content of the currencies. The existence of the golden anchor limits the fluctuation of the international exchange rate to a limited range, and realizes the stability of the exchange rate and the automatic adjustment of the balance of payments. Therefore, during the period 1870-1914, the world economy showed a high degree of exchange rate stability, low inflation and stable economic growth.
This period was also the “golden age” and “industrial age” of the American economy, and the modern America began to rise. During this period, the U.S. economy showed amazing growth: in the mid-1880s, the U.S. gross national product was 11 billion U.S. dollars, and by the end of the First World War it had reached 84 billion U.S. dollars, an eightfold increase. In terms of industry, by the beginning of the 20th century, the total output of the US manufacturing industry exceeded the total of the three countries of Britain, Germany and France. So far, the United States has become the world’s largest industrial country and the richest country.
In 1869, the Pacific Railway across the North American continent was completed. It was rated as one of the seven major industrial miracles in the world since the Industrial Revolution by the British BBC. It has made great contributions to the economic development of the United States. Source: World Digital Library, https:/ /www.wdl.org/zh/sets/us-history/timeline/#35
In 1893, the Chicago World Expo was held to celebrate the 400th anniversary of Columbus’s discovery of the New World. The total number of visitors reached 27.5 million. The venue was selected on the shores of Lake Michigan, covering the largest area in the history of the World Expo at that time. Source: World Digital Library, https:/ /www.wdl.org/en/sets/us-history/timeline/#40
However, when the First World War broke out, international trade was hit hard, and the gold standard began to collapse. After the end of the First World War, the European economy was severely damaged. The old capitalist countries such as Britain and France changed from pre-war creditor countries to post-war debtor countries, while the United States made a fortune in the war and became the largest creditor of European countries. Under this circumstance, the original gold coin standard system is difficult to restore, and countries have to adopt the gold exchange standard system to save the use of gold. Under the gold exchange standard system, bank notes circulating in the country cannot be exchanged for gold, but foreign currencies can only be exchanged for gold.
But the good times did not last long. The Great Global Economic Recession of 1929 and the subsequent World War II brought devastating blows to the economies of all countries around the world. All countries stopped in response to the depletion of gold reserves and speculative currency shocks. In order to exchange gold, the exchange rate of the domestic currency is allowed to float freely. So far, the world’s major economies have abandoned the gold standard.
The first anchor search: the recovery of the global economy after the war and the establishment of the Bretton Woods system (1929-1971)
After the end of World War II, the United States became the most powerful country in the world, with its GDP accounting for 50% of the world’s total and its gold reserves accounting for 63% of the world’s total. Europe, on the other side of the United States, was devastated by war and was heavily indebted. In order to rebuild the international financial order, 44 allied countries around the world held a meeting in Bretton Woods, New Hampshire, the United States to make arrangements for the exchange of currencies, the adjustment of international payments, and the composition of international reserve assets. “Forest System” was formally established.
The scene of the Bretton Woods Conference in 1944, photo source: Getty Images
Under the Bretton Woods system, the U.S. dollar is pegged to gold, and countries are pegged to the U.S. dollar. The U.S. dollar has become the dominant world currency. So far, the US dollar has become the “nominal anchor” in the global monetary system, and has promoted the recovery and prosperity of the global economy and trade for a long time after the war. In 1950, the global export value was 62 billion U.S. dollars. By the time Bretton Woods broke up, it had reached 580 billion U.S. dollars, with a compound annual growth rate of 15.5%. The U.S. stock market also ushered in a post-war boom. The index rose from 17.5 in 1950 to 116.03 in 1973, with a compound annual growth rate of 8.6%.
With the assistance of the US “Marshall Plan” (Europe) and “Dodge Project” (Japan), the economies of Europe (represented by Germany) and East Asia and Japan recovered rapidly. In the 1960s and 1970s, they maintained an average annual compound of 10 With a rapid economic growth of more than %, it has become a global economic power and a major exporter.
Data source: Cabinet Office of Japan
Data source: Eurostat
The establishment of the Bretton Woods system has played a positive role in global economic growth and asset price stability during a special historical period, but there are serious shortcomings: under the Bretton Woods system, the U.S. dollar, as the world currency, needs to be continuously issued to meet The needs of the world economy and trade require the United States to maintain a long-term trade deficit; however, as the currency anchor of the global monetary system, the U.S. dollar must maintain a stable currency value. This requires a reduction in the supply of U.S. dollars, which requires the United States to maintain a trade surplus, otherwise foreign countries Holding U.S. dollars more than the United States’ gold reserves will shake investors’ confidence in the free convertibility of U.S. dollars into gold. This is the famous “Triffin Dilemma.”
The fact is also true. With the economic recovery after the war, international trade rebounded rapidly. While the United States was exporting US dollars, its current account deteriorated rapidly, and the US foreign debt began to exceed its gold reserves. This shook investors’ confidence in the smooth exchange of US dollars for gold, and accelerated the run on US gold by various countries. According to statistics, in 1950 after the end of World War II, the United States still had 20,279 tons of gold, accounting for nearly 2/3 of the global gold reserves; by 1970, the United States had only 9839 tons of gold left, and its gold reserves fell by 51%.
In addition, due to the free flow of international capital after the war, the fixed exchange rate system is often attacked by currency speculation by international speculators. In May 1971, a large-scale speculative activity against the US dollar broke out. A large amount of speculative capital sold the US dollar and rushed to buy gold and European currencies. This upsurge of currency speculation intensified people’s expectations for the depreciation of the US dollar. Faced with pressure from central banks and speculators to run gold, the then US President Nixon was forced to announce the closure of the gold exchange window and the termination of the obligation to accept gold from foreign central banks. The US dollar and gold were decoupled. In the following two years, the United Kingdom, Switzerland, Japan and other major OECD countries successively announced the implementation of floating exchange rates or joint floating. The international financial system entered the era of floating exchange rates. This marked the end of the Bretton Woods system and the start of the global monetary system. New cycle.
On August 15, 1971, Nixon announced in front of the television that the gold window was closed and the gold acceptance obligation was terminated. This incident is called the “Nixon Shock.” Image source: WSJ
The second anchor search: the era of stagflation and the establishment of the Jamaican system (1972-2008)
After the disintegration of the Bretton Woods system in the 1970s, in order to maintain the status of the U.S. dollar as the world currency, the U.S. government reached an agreement with major oil-producing countries such as Saudi Arabia to use U.S. dollars for pricing and settlement in the oil market. In return, the U.S. will provide military services. Protect and sell military weapons to Saudi Arabia.
Although the U.S. dollar has maintained its status as a world currency through oil trading, the loss of its gold anchor has caused major global currencies to fall into violent volatility, which has had a serious impact on the global economy and asset prices—due to the continued devaluation of the currency, Global commodity prices are soaring, and the oil crisis is superimposed. The Western capitalist camp led by the United States has fallen into the quagmire of “stagflation” throughout the 1970s.
The so-called “stagflation (stagflation)”, that is, stagnant inflation, refers to the economic phenomenon of economic stagnation, unemployment and inflation at the same time continue to rise. In traditional Keynesian economics, according to the “Phillips” curve, inflation and economic recession cannot coexist, but “Keynesianism” has failed in the face of reality.
Data source: Wind
In 1971, after the Knicks announced the decoupling of the U.S. dollar and gold, they also announced “new economic policies” such as wage and price control and intervention in labor negotiations. However, from 1972 to 1973, prices still rose by 3.2% under controlled conditions, and the unemployment rate remained above 5%. On the contrary, the forced control of prices has caused prices to run out of control, and even caused a serious shortage of supplies. The dissatisfied American people even launched a nationwide boycott of meat. In 1974, on the eve of President Nixon’s resignation due to the “Watergate Incident,” the real GDP growth rate of the US economy was -0.5%, prices rose by 12%, and the unemployment rate was as high as 9%. Both Gerald Ford and Jimmy Carter, who took over as the presidency of the United States, were unable to deal with the domestic high inflation and unemployment rate. They hurriedly stepped down after serving as president. It can be said that the problem of stagflation that has not been solved is straightforward. Or indirectly affected the US presidential elections in 1976 and 1980.
During the “oil crisis” in the United States in the 1970s, cars lined up in front of gas stations. Image source: https://www.douban.com/photos/photo/2020634175/
As the famous American economist Friedman said, “Inflation is a monetary phenomenon at any time and anywhere.” In order to solve the problem of high inflation, Friedman advocates the implementation of a “single rule”, that is, according to the expected economic growth rate. Formulate a monetary policy to keep the currency growth rate consistent with the expected economic growth rate. This rule was subsequently further developed by economists such as Mundell and evolved into a “targeted inflation system.”
Known as the “Greatest Fed Chairman” —Paul Walker
Paul Volcker, the new Fed chairman who came to power in August 1979, was a supporter of the “single rule”, but he took a more pragmatic approach: he pegged interest rates and monetary aggregates at the same time, and implemented a strong suppression of high inflation. The policy began in 1980 to tighten the money supply in just five months, and the federal funds rate rose from 9.5% to 20% during successive interest rate hikes. In the end, the deflationary monetary policy achieved results, and in July 1983 the inflation level in the United States fell back to 2.5%.
However, the solution to the inflation problem has only achieved the internal stability of the value of the U.S. dollar; to succeed in the “anchor search”, the external value of the currency must be stabilized-exchange rate stability. To solve this problem, the trade deficit that has plagued the United States for many years must be resolved.
In an open economy, external currency devaluation and internal inflation are two sides of the same coin. While Walker solved the domestic inflation problem, the high-interest-rate monetary policy led to the appreciation of the U.S. dollar. The strong U.S. dollar caused the U.S. current account to deteriorate rapidly and the trade deficit became increasingly serious.
In order to maintain the dominant position of the U.S. dollar in international currencies, the U.S. dollar cannot easily depreciate. So how to maintain the stability of the US dollar in the foreign exchange market while improving the balance of payments in the US? —Forcing other countries, especially countries with major trade surpluses with the United States, to appreciate their currencies.
As we mentioned earlier, Japan and Germany recovered rapidly after World War II and became major exporters. In the 1980s, they became major surplus countries with the United States. For this reason, the finance ministers of the United States, Japan, Britain, France, and Germany signed the famous “Plaza Agreement” at the Plaza Hotel in New York in 1985, requiring the yen and the mark to appreciate against the US dollar. After the signing of the “Plaza Agreement,” Japan’s exports fell sharply, coupled with the loose domestic monetary policy, which triggered a bubble crisis in the stock market and real estate, and entered the “lost thirty years”. It is still something that cannot be extricated.
Group photo of finance ministers from the United States, Britain, France, Japan and Germany during the 1985 Plaza Accord
Although the United States and Japan and Germany reached the “Plaza Agreement”, under the J curve effect, the US current account experienced a brief deterioration. For this reason, in 1987, the G7 Group signed the “Louvre Agreement”, requiring the G7 Group to strengthen the “intervention and coordination” of the foreign exchange market to ensure the stability of the US dollar.
Data source: Wind
The signing of the “Plaza Agreement” and the “Floating Palace Agreement” improved the balance of payments of the United States and maintained the stability of the U.S. dollar exchange rate. The U.S. dollar achieved stable inflation internally and the exchange rate externally, and maintained basic stability throughout the 1990s. stable. At this point, the Jamaican system was formally formed, and the global monetary system found a new anchor.
Under this system, the currencies of major countries in the world are all decoupled from gold, and floating exchange rates are used. The U.S. dollar is still the dominant currency in the international monetary system and forms a currency basket with currencies such as the euro and the yen, becoming many developing countries and emerging markets. The country’s currency anchor; in order to maintain the stability of the value of the currency, major European and American economies have implemented a monetary “inflation target system.” During this period, the global economy maintained a relatively low level of inflation, the information technology industry also began to rise, and the economy showed a relatively high growth rate—even in the 1990s, the economic growth rate of an established developed country like the United States was as high as 5 %, the world has entered the “new economy” era.
Data source: Wind
The third anchor search: the reconstruction of the international monetary system in the post-crisis era
Although after the second anchor search, the global economy has ushered in a golden age, the real problem has not been solved. Even if the United States can use power to force the currency appreciation of Japan and Germany, it cannot completely solve the US trade balance. Balance problem. Because the international monetary system dominated by the U.S. dollar has a fundamental flaw: the U.S. dollar, as both a sovereign currency and a world currency, will plunge the global economy into a state of extreme imbalance:
The United States uses cheap U.S. dollars to buy goods from developing countries, and developing countries use these U.S. dollars to buy U.S. Treasury bonds, thereby forming a return of U.S. dollars; however, as long as the Fed starts the printing press to release water, developing countries will face shrinking foreign exchange assets risks of. Correspondingly, the developed countries represented by the United States are also facing serious challenges: due to the high quality and low price of products in developing countries, the domestic manufacturing industry in the United States has been hit, and a large number of American workers have become unemployed. The famous “rust zone” has appeared. The financial services industry represented by Wall Street has made a lot of money in the process of globalization.
It is the serious shortcomings of today’s global monetary system that have caused the imbalance of the global economy and the inequality of distribution, which has triggered the current “anti-globalization” and the rise of populism — Trump’s rise to power and the right-wing forces in Europe The rise of China is not accidental, it is mixed with profound economic reasons.
The U.S. trade deficit in the 1980s is nothing compared to the present, data source: Wind
In 2008, the US subprime mortgage crisis broke out and then spread into a global financial crisis. In response to the crisis, the Fed began to cut interest rates, and then injected a large amount of liquidity into the market through quantitative easing. The original international monetary system was also hit. The US’s transfer of the crisis to the world through the US dollar was affected by countries around the world, especially emerging countries. Questions from market countries and calls for the reconstruction of the international monetary system are also growing, and the global monetary system has begun its third anchor search.
So in the third anchor search of the global monetary system, can digital currencies make some contributions?
An ideal currency anchor, its fundamental function is to reduce the potential ability of a country and the world’s trade and financial transactions in transaction costs, and the choice of a standard currency anchor generally depends on two important factors:
(1) The stability of the currency anchor itself. The stability here is not only to stabilize the exchange rate externally, but also to meet the expectations of internally stable inflation;
(2) It can be used as the main currency for pricing, reserve and settlement in international trade. For gold, due to its own attributes, it is easy to meet this requirement; for credit currency, two conditions must be met: one is that domestic trade occupies an important share of global trade, and the other is efficient and safe cross-border payment settlement. Infrastructure to provide global movement of the national currency.
In fact, if we carefully review the international monetary system since modern times, we can discover the importance of the above two factors in determining the currency anchor: During the gold standard period, due to the existence of the “Hume mechanism”, a country’s prices and international returns can be automatically Achieve balance; under the Bretton Woods system, the value of the US dollar can remain stable due to the peg of the US dollar to gold, while the US has imported a large amount of US dollars into Europe and East Asia through the “Marshall Plan” and the “Dodge Project”, successfully turning the US dollar into The world’s major pricing, settlement and reserve currencies; under the Jamaican system, the “Plaza Agreement” and the “Louvre Agreement” have solved the problem of the stability of the US dollar’s foreign exchange rate. The implementation of the “targeted inflation system” has achieved domestic prices in the United States. The stability of the US dollar, the establishment of SWIFT and CHIPS systems, has maintained the status of the US dollar as a world currency.
From the above analysis, it can be seen that in the third anchor search process of digital currency, it may play an important role in the following two aspects:
(1) Realize the stability of currency value
It is difficult for the independence of monetary policy not to be disturbed by external factors. Even a strong Fed chairman like Paul Walker, who used a tough stance to combat high inflation during his tenure, has also received a lot of criticism: President Carter has publicly criticized Walker’s The policy was “rigid.” President Reagan hinted that Walker would not be re-elected, some lawmakers forced him to resign, news publications ridiculed him, and even a group of farmers drove tractors to the Federal Reserve to protest…; even today, we can see As U.S. stocks plummeted, President Trump “threatened” the Fed on Twitter. And digital currency provides a new possibility for future monetary policy: its “code is law” and “code is law” ideas can be applied to monetary policy. The central bank of a country can create legal digital currency for To prevent political interference and abuse of monetary policy, the “inflation target system” is written into the digital currency issuance mechanism, which not only avoids the devaluation of credit currency, but also maintains the need for normal economic growth.
(2) Construction of cross-border payment and settlement infrastructure
The reason why the U.S. dollar can be called the main settlement currency of global trade is that in addition to the U.S. dollar being widely used for pricing in international trade, it also lies in the U.S. dollar’s convenient clearing and settlement system: CHIPS and SWIFT, where SWIFT is a global message exchange network rather than a payment The system mainly establishes connections for various payment systems around the world; CHIPS is a payment system specifically used for cross-border payment settlement in US dollars. However, the current international cross-border payment system is too complicated and inefficient. For example, a current wire transfer usually takes 2-5 working days to arrive, and the handling fee usually charges one thousandth of the remittance amount. In addition, a telecommunications fee of 150 yuan is added; the blockchain technology at the bottom of the digital currency has obvious advantages in cross-border payments: it can not only increase the speed of cross-border transfers, but also reduce the handling fees for remittances. For example, the current blockchain cross-border remittance service launched by an Internet company takes only 3 seconds for the entire remittance, and the handling fee is lower. Although the current blockchain technology is not yet able to achieve large-scale clearing and settlement, we can expect to use blockchain technology to realize the reconstruction of cross-border payment systems in the future.
Affected by the new crown epidemic in 2020, countries around the world have launched a new round of monetary easing. The proliferation of global liquidity has caused the global monetary system to face many challenges. From the perspective of historical development, the global monetary system has experienced a small anchor-seeking cycle approximately every forty years, and a major anchor-seeking cycle every 80 years. The time for each anchor search is about 20 years. The third round of anchor search has been since 2008. The year begins, and the next ten years will be the ten years of rapid development of financial technology represented by digital currency. We should seize the historical opportunity and use the advantages of digital currency to promote the completion of the third anchor search of the international monetary system.
 Huang Haizhou, “The Third Anchor Search for the Global Monetary System”, International Economic Review, 2016
 Ba Shusongyang now leads “The Choice and Exit of Currency Anchor: A Reexamination of Optimal Currency Rules”, International Economic Review, 2011