Every economy has its own legal tender.
Trading between home country and host country is rarely conducted with local currency, rather with third currency. This is practiced globally.
If we look at histories, we find specific currency led global transactions in different regimes.
During the Greek empire, Drachma worked as global currency for major transactions, Gold Solidus in the Roman era, Guilder in the seventeenth century, Spanish-Mexican silver peso in the eighteenth century, Great Britain pound in the nineteenth century and the twentieth century US dollar.
Present currency ranking shows that the US dollar is in first place, followed by euro, yen and pound.
Around 47% of global settlements currently are in US dollars, compared to 31% in euro.
Furthermore, 88% of foreign-exchange trading involves US dollar, almost three times of euro’s share.
Global central banks hold 59% of their reserves in US dollar, compared to 21% in euro.
The US dollar also works as king for use in trade and finance.
In addition to these currencies, Canadian dollar and Australian dollar are in dominating roles.
Recently the Chinese yuan (renminbi) is well placed as a transactional currency.
How the system works
As an example, buying goods from Thailand in our local currency is possible provided that Thai suppliers export goods against our currency.
The situation requires Taka to be deposited in bank accounts maintained by Thai banks in Bangladesh.
But it is rarely possible to use Taka for the settlement of Thai imports from China.
They can, however, use the fund for capital investment in Bangladesh, including lending to industrial enterprises in Bangladesh with specific permission from the authorities concerned.
They cannot place the fund in short term money market instruments for quick return.
The fund retained in Bangladesh is export payment of their exporters for which they have paid their exporters in local currency.
Funds placed in Bangladesh need to generate income to pay interest to their depositors.
Windows like portfolio investment in listed securities in Bangladesh may bring gains which are permissible to be repatriated.
Without repatriation, the fund may be used for purchase of goods from Bangladesh by Thai importers.
The process is workable provided import is matched with export.
Mismatch between demand and supply does not support the ‘goods to goods’ settlement program unless local currency is readily convertible into desired currency, with a short term income facility.
Enter king currencies
To avoid the mismatch between demand and supply, we depend on king currencies, as may be termed.
The US dollar, one of them, is in the leading position with the status of king; others may be as deputy king currencies like The European euro, Great Britain pound, Japanese yen and few more.
How does a currency get king status internationally in respect to other currencies? Is it for economic ground or political power?
Till seventies of last century, Bretton Woods currency regime prevailed.
Under the regime, the US dollar was pegged with gold. All other currencies were pegged to the US dollar.
In 1971, the regime was declared closed by the US.
The end of the Bretton Woods system gave birth to a floating exchange rate regime, resulting in currency manipulation from country to country.
Currency war began to remain in a so -called external competitive position.
During Bretton Woods currency regime, the US dollar was used as international currency for global transactions.
Despite its end, the present status is as same as was during Bretton Woods regime.
This is found from the information as noted earlier. Internationalization of a particular currency depends on various factors, cited by economists.
Sound macroeconomic foundation is behind the factors, basically. If so, why a single currency is the king is a question.
It is known from conspiracy theory/news like the Bilderberg conspiracy that internationalization depends on strategic role and political power, rather than economic phenomenon. Still today, fossil fuel is a strategic item, controlled by oil cartels.
This very item is sold in the US dollar set as medium of trade by way of political influences to fuel producers, especially OPEC nations.
Different oil producing countries are found overturned due to fuel sales contracts in different currencies.
Even today many countries facing sanctions are in problems of trade settlement in king currencies.
With the hegemony as king currencies, the countries can move to the service industry.
No work in manufacturing factories is needed by their people.
Most of the people are in white collar job brackets.
They can print money out of nothing to buy goods.
The sellers sell goods in king currencies of the country of export and retain the currencies there as deposits for settlement of their import payments. A good equation prevails.
The kings will buy goods. The price of goods is retained as deposits with them, which is used by them for investment abroad in the form of capital and loan.
Internationalization of currencies with king status facilitates consumption without production.
Retention of currency hegemony
Retention of currency hegemony needs some nursing continuously so that the king can settle major global needs arising from transactions.
Deviation from major shares by countries shakes its hegemony, resulting in imposition of economic sanctions on non-abiding countries.
Consequently, the very countries face problems in global transactions.
Countries obedient to the king may also face problems to conduct transactions with those very sanctioned countries.
To cite the situation through an example, X country is under restrictions from king country. Y country is doing trade with X.
But after imposition of restrictions to execute transactions through king currency, Y is facing problems to trade with X for basic items.
X is in a surplus position with Y since it exports more compared to imports. Hence without acceptable currency, a goods to goods settlement is rarely possible.
The situation leads to problems for trade. If there were international currencies issued by the global payment association as proposed by Keynes in 1944, country X would not face settlement problems with Y.
Money helps to operate a system under which people do not need to do all types of work to maintain their lives.
But money also makes people empowered.
Countries issuing king currencies become king countries. But before issuing such currencies, they need different work to do without limiting to financial transactional nitty gritty like deep financial markets.
These are exercises influencing others to follow binding rules. Fossil fuel selling as noted earlier is an example.
Restrictions to nonbinding countries by king countries result in transactions in regional currencies.
But ultimate settlement requires king currency or deputy king currencies.
Trade is basically executed at first leg by goods to goods. But imbalance needs to be adjusted by king currency or deputy king currencies.
The result of global trade is zero. My country’s export of 100 units becomes 100 units imported from a partner country.
So, the global net effect is zero though global trade volume is 200 units.
Trade between a few countries is rarely balanced by goods.
As a result, the bottom line needs to be settled through different currencies.
Unsettled issues may lead to problems for surplus countries needing imports from other countries.
A solution is needed to solve the situation.
As a simple solution, the deficit may be supported by loans from surplus countries.
But who will take such loans- government or private sectors? It may not work in real life situations.
We cannot avoid king currency or deputy king currencies since it is not possible to trade on goods to goods.
Some countries face problems conducting trade due to imposed restrictions.
Many countries including restricted countries face problems. Non restricted countries cannot change sourcing origins overnight.
There needs to be policy intervention to overcome the situation.
General policy solution at the first stage is to use banks at a minimal level, by which transactions by letters of credit and bank to bank documents flow need to be avoided.
Firms with recognition as trade dealers may be encouraged to source importers/exporters at home and abroad. Import payments may be arranged to be settled to exporters abroad by counterpart trade dealers, which will be adjusted by exports.
Imbalance position, if any, shall be settled by arrangement of imports to payable countries from other countries.
Regulatory authority needs to frame a policy supporting countertrade with modalities to settle the imbalances.
The author works in the development sector and can be reached at mehdirahman82@ gmail.com
