Tuesday, July 15, 2008

Time for euro to replace dollar as the de-facto world reserve currency

The de-facto world reserve currency refers to a currency in which the majority of international transactions take place.
Since the time after the Second World War, the de facto world currency has been the United States dollar. During that war, the U.S. provided support, medical help and ammunitions to its allies, demanding gold payments in exchange. By then, the Bretton Woods agreement was established by which banks of issue were required to redeem their currency in gold bullion or in U.S. Dollar- which in turn were redeemable in gold bullion at the rate of $35/troy ounce (1 troy ounce = 31.1034768 g). After the war ended in 1945, bulk of the world’s gold was lying in the U.S. vaults. Henceforth, the dollar became the undisputed global reserve currency. Some countries like Ecuador, El Salvador, and Panama have gone a step further and eliminated their own currency in favour of U.S. Dollar.

The United States took advantage of this fact and printed dollars in huge quantity. It exported large chunks of dollars, paying for commodities, tax cuts, wars abroad, spies and politicians world over. This measure could not affect the inflation back home. It got it all for free!! Outside U.S., 2/3rd of most of the reserves of the other countries is in U.S. dollars. In 1971, when some countries tried to sell their dollars in return for gold, U.S. defaulted on its payment and the Bretton Woods Agreement was smashed. To regain the trust of the world in the paper dollar, U.S. bullied OPEC to sell oil in dollars only. Now the countries had to keep the dollars to buy the much-needed oil. Oil replaced gold as the foundation to stop dollar from sinking.

But, in late 1999, Euro was established and months later, Iraq announced that thereafter it would sell oil in euros only. Then, the U.S. for obvious reasons invaded it. In 2004, Iran proposed the setting up of an oil bourse to sell oil in euros only. India and China have also supported this decision. It makes sense for Europe and Japan too, to buy and sell oil in euros as the euro is far more stable than the debt-ridden dollar.

The world would now have to start stalking up euros and sell back dollars. But the U.S. can’t accept even 1/10th of the world’s dollars as its economy would crash. What would happen to U.S. then? A re-run of Germany post 1929?

What do you have to say? Express yourself here!!

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