Money has been part of the human history for a long time, at least 000 years. But what do people use as money? Why does money need to be a trustworthy store of value, an easy medium of exchange and an efficient unit of account in order to be used? In contemporary national economies, governments and central banks are usually able to guarantee the acceptance of the fiat money they issue. Basically, the paper notes are established as valid money by government decree: in every single US$ note, for example, one can read:
“this note is legal tender for all debts, public and private”
Therefore the question is unneeded to be dispute in a domestic context, but problems may arise when we talk about international economic activity. History has seen different national domestic currencies leading the international trade over centuries. In quite recent times the Byzantine gold solidus, then the Venetian ducato and the Florence’s fiorino have been used as the international currency among Europe and the Mediterranean basin. After World War I the pound sterling have been largely ruling world’ s traffics. In the Bretton Woods era the US dollar became preeminent. For 70 years it has been the untouchable international means of payment, store of value and reserve asset. In fact, as a world currency the dollar serves for the pricing and trading of almost all standard commodities, including crude oil, and most international assets/liabilities are held in dollars. Therefore it represents the medium of exchange in supranational private transactions. The double role of the dollar as national and international currency has profound consequences: changes in dollar interest rates and exchange rates have an impact both on the economic relations between the US and other countries an
d on the world economy itself in terms of global trade, relative prices of commodities, speed of inflation and level of real interest rates on international debts. Differently from what usually happen inside national burdens, the issue in this context consists in the absence of a world government to enforce the purpose of international monies.
At this point one should deal with the justifications behind the dominance of a currency instead of another. For decades, America’s economic authority legitimised the supremacy of the dollar. But recently its economic weight in the world is declining. The US accounts 16% of global GDP measured at PPP (purchasing-power parity) and 8% of merchandise trade. Its share of global economic power has been eroded from 23% in 19
50 and China has probably overtaken America already, even if the Asian country’s economy grows more slowly recently, at 5-6% a year. But the world relies on a huge amount of trade and financial contracts that generate more capital flows than ever and the complexity and the continuity required from them makes the world hardly willing to change. Wall Street keeps on ruling the markets globally: it sets the rhythm of global capital flows at the VIX, a measure of volatility on America’s stock markets, and US investment banks’ influence on global markets has reached 50% globally. Even though America does not lead anymore in merchandise trade, commodities production and consumption, transport and manufacturing, yet the country is overlooking a new generation of technology, based on e-commerce, social media and smartphones. The Silicon Valley is the result of the minds generated from an excellent system of education, which still counts on a majority of the world’s top ranked universities.
Many of the world’ s most valuable firms are still Americans. The overall stability of the greenback still feeds people’s confidence. But still the primacy of the dollar now looks unsustainable. It has been said that the economic and the financial power in America are diverging in two different trends, the first one globally loosing power and the second one generating streams of cash flows more then ever. As long as this issue concerns a global currency, it might create some problems for other countries. About 60% of share of world GDP is composed by countries which currency is linked with the dollar at different levels of intensity: the relationships move from currencies relying on a condition of parity, so called currency pegs, with the dollar to others floating in sympathy with it. The Fed is supposed to set its monetary policy to suit America, not taking into account the dollar zone made of countries with dollar deposits and securities all around the world. The US central bank cannot guarantee, as lender of last resort, foreigners’ dollars debts and central banks related to currency pegs need to imitate Fed policy. Global banks are financed in dollars and operate accordingly to America’s conditions. Moreover, deficit countries could be forced to devaluate their currency to cut their imports and boost their exports, reducing the world output. Another problem is represented by the speculation trend fomented by very low interest rates since the financial crisis, setting chaos in the currency markets and encouraging capital flooding into emerging countries. Indeed the global monetary system seems unstable.
The dependence from the dollar and the consequent lack of independent monetary policy, the widespread imbalances and the frenetic capital flows set the world’s monetary system more disposed to crises. Most emerging markets built up huge dollar reserves, which value seems periodically at risk from a falling dollar. Since Fed was forced to provide over $1 trillion of liquidity during the financial crisis, the dollar credit to the rest of the world has become bigger, with Asia hosting a large amount of offshore dollar bank assets. As emerging markets get bigger and their finance structure get more complex, their use of the dollar will increase, fuelled by low American interest rates. Dollar denominated debts may raise more, given the enveloping illusion of currency stability and the rhythm of American financial industry. But the capital flows could run out at some point, making the parity disrespected and increasing the cost of dollar debts. In a world with more autonomous national adjustment mechanisms, some countries would let their currencies fluctuate, avoiding dramatic consequences. If the Fed fails to act as a lender of last resort in a possible dollar liquidity crisis – fortunately it was not the case in 2007 – the collapse abroad will have consequences also on America’s economy. And even if the crisis is not happening, the demand for safe-dollar denominated assets will continue growing incessantly as well as the reserves. Given that the Euro is a currency that endowed too much uncertainty and the Yuan is not considered truly safe by investors, buck’s reign over the global financial and monetary system is not going to be over yet. America should make responsible choices in order to act suitably against dangerous eventualities defining emergency policies jointly with central banks around the world.