The US Dollar

The US dollar has become a fixture in the news in the last few years – if for nothing more than businesses complaining about its shortage. But why do our businesses need US dollars when we are an independent country with our own currency, the GY dollar? Most usually they, like most others in the world, need the US dollar to pay for goods they are importing or to engage in investments in foreign capital markets that are preponderantly denominated in US dollars.
The US dollar achieved this pre-eminent status globally following WWII when it displaced the British pound sterling, which had played the role up to then. Initially, the US dollar was backed by its stock of gold at Fort Knox to give confidence to its use at a conversion rate of US$35 to 1 oz of gold. However, in 1971 the US unilaterally untethered its dollar from the gold standard and became in effect the global reserve currency because of the pre-eminent role of the US economy and capital markets. Other countries had to swallow hard and accept it. The US could now simply print pieces of paper, call them “dollars”, and other countries would accept them in exchange for real goods and services.
But what this means is that the US has run a constant deficit in trade – and piled up debts denominated in dollars – to maintain the liquidity of the system. However, with the US now declaring that it intends to reduce its trade deficit – and debts – by imposing massive tariffs on US imports, it is unwittingly decreasing reliance on its currency as the global reserve. Ironically, efforts towards that end had already been assiduously pursued by China and members of BRICS because of their resentment of the power the US can exert through controlling the reserve currency via sanctions, etc.
However, it is unlikely that these efforts will succeed in the short or medium term. The main hurdle is China’s or any other member of BRICS’s unwillingness to forgo their trade surpluses, much less convert them into deficits.
Another factor not appreciated enough is the need for deep and extensive capital markets for a reserve currency. This is because less than 10 per cent of foreign exchange transactions are due to trade; the overwhelming majority are investment flows. And some of these are important for trade to work well, such as commodity and foreign exchange hedging. There are no other capital markets in currencies other than dollars large enough to facilitate the present transactions.
While bilateral trade mechanisms are being used by participating states such as China and Russia etc. to evade dollar-based sanctions, these efforts also cannot replace the US dollar as the world’s reserve currency. Finally, there are the Bretton Woods institutions, such as the IMF and the World Bank, that intermediate global interventions into countries facing economic challenges, which are also US dollar-based, and they will have to be replicated. The performance of the BRICS-funded development bank does not indicate any threat from this quarter.
At the time of the formation of the Bretton Woods institutions, there had been a discussion of an independent institution to issue a world reserve currency (the Bancor) to prevent any single country’s currency from gaining that benefit. It did not gain favour, and the US dollar won by default.
For the foreseeable future then, we in Guyana will be needing US dollars to find our way in the world. With oil providing a fulcrum, we should ensure US dollar shortages are a thing of the past.