The erosion of dollar and reserve currency

The erosion of dollar and reserve currency

For ages the empires took efforts to make sure that their currency was considered the international reserve currency. That means a stable and reliable one that keeps its purchasing power. That makes such currency attractive for keeping savings and finalizing international transactions.

For the issuing country, having an international reserve currency is not just a matter of prestige. Such state could finance its budget spending by printing out banknotes – the so-called flotation renting. People all over the world treated the printed pieces of paper like it was gold and were eager to exchange them for goods and services. Great Britain and the USA were the beneficiaries of this system. The former, up until the end of the First World War, and the latter’s currency ruled the international economy for the next one hundred years.

There was a darker side to having the international reserve currency. Not only the fair people kept savings using it – the criminals as well. The overall opinion was that criminal activity is only a small fraction of transactions and that the flotation renting compensates it.

Nowadays the situation is astoundingly different. USA seems to be forgetting that for decades, it has been financing the country by increasing debt and printing out dollars. Successive governments are doing what they can to discourage the global community from using the dollar. The cash transactions of up to $10 000 are controlled. $10 000 is a small amount, often insufficient to buy a good used car. Introducing a banknote of a higher face value than $100 is not an option. Keep in mind the inflation – when the $100 banknote was introduced, one could purchase five ounces of gold with it. That means the $100 banknote had the purchasing power of today’s $6 000!

Other Western countries do not want to take on the role of issuing the reserve currency. This role is considered to lead to a great increase of capital from all over the world, which would cause a great increase in the value of reserve currency. That, in turn, would increase the prices of domestic industry products on international markets. This is why, for many years, Switzerland was doing all it could to avoid such scenario by, for example, binding franc with euro. This is, however, a mistaken view. The money flowing, for example, to Switzerland, can be easily spend buying huge amounts of gold all over the world. In this way, the growth of reserve currency value can be avoided.

The erosion of dollar and a lack of a succeeding currency is a huge change for Russia and China. Both of these countries are getting ready for this role by gathering gold supplies – every reserve currency should be backed by precious metals. Russia is particularly interested in being a safe haven for inflowing capital. Before 1914, Russia was considered an empire equal to the US. The rouble was considered a safe currency. Who knows, maybe these times will come back.