Viswanathan K's Thoughts

How does an international currency get displaced? Does the contender need to do pre-work to take over when the transition point arrives? Way Yuhl looks at how the US dollar took over from the British pound as the international currency. As the colonial superpower, Britain ruled. The pound was the international reserve currency, and British banks handled most global commerce. “Deals that had nothing to do with Britain ran through British institutions.”   The popular belief is that the US dollar replaced the pound due to the second World War, the complete destruction of Europe and Britain, and the beginning of the end of the British empire. True, but that was just the tipping point. In the decades leading to that point, America had been preparing…   From the early 1900’s onwards, America progressively overtook Britain as the world’s largest industrial economy. It produced more steel than Britain and Germany combined. But that alone was never going to be enough to beco...

W hen we visited Maldives a couple of years ago, we realized the US dollar is accepted as legal tender everywhere. Even though the country has its own currency, the Maldivian Rufiyaa. In her book, The Almighty Dollar , Dharshini David says there’s a name for this: “parallel currency”.   One can see why tiny, tourist’y nations like Maldives would accept the dollar (it saves tourists the hassle and costs of conversions). Or why a country like Panama (think of all the fees in the Panama Canal) would do the same. But the dollar is also the parallel currency in countries where the local folks have no faith in their economy and/or government. Like Russia when the USSR collapsed. The same reason applies in several Latin American countries and Cambodia even today . Of course, a parallel currency also makes corruption and black money even more easy: transactions in the parallel currency never show up in the country’s financial systems.   And then there are countries that have ...

Until the end of World War II, a country’s currency was tied to its gold reserves, i.e., a country printed money would stay in sync with how much gold it had. This acted as a check against a country “just printing” away money endlessly. At the end of World War II, Europe (winners and losers) was in shambles with all its infrastructure and industries bombed away. The US, thanks to its geographical separating from all the war zones, came away intact on those fronts.   Thus, the US came to dictate the new rules at the end of World War II, writes Dharshini David in The Almighty Dollar : “It named the dollar as the international reserve currency. That meant it was the official reserve currency of global commerce, the one in which international trade would be settled.” Inevitably then, the dollar became coveted. If all inter-country was to be settled in dollars, well then, every country needed to have dollars in hand. To “simplify” matter, only the US dollar would be tied to gol...

Can/will the US dollar be displaced as the international currency? This is the question that the book, De-dollarization , explores. The biggest grievance many countries have with the dollar hegemony is that it allows the US to impose unilateral sanctions against any country, even militarily powerful countries like Russia and Iran, as my previous blog explained.   The US has even targeted individuals in governments or countries with their sanctions. Unilaterally. Sometimes the people caught in this dragnet are just doing their job – executing their country’s policies. Over time, the extent to which this power has been used and misused has created a large “axis of resentment” .   Before we proceed further, let me clarify something. There is no contender to the US dollar today. The Euro? Too wobbly, as the EU itself looks increasing shaky. Japanese yen? With Japan not growing since the 90’s, one can’t see the global share of the yen increasing. The Swiss franc and Briti...