Looking Beyond the Dollar
Money has always been an important part of life. Ever since man was introduced to occupation, there was a need to buy and sell. In the very early days there was obviously no common medium of transaction and valuation was essentially through exchange or barter. Soon man realized the need of a common instrument in transactions and introduced Commodity Money. Commodity money is basically money whose value is derived from what it is made up of. Gold, Silver and Copper coins issued by the Mughals are one example of this. In today’s day and age, owing to the large fluctuations in the value of commodities such currency is extremely difficult to maintain, produce and circulate and creates an overdependence on the availability of the commodity to meet short and long term needs. The next step in the evolution was issuing notes and coins that were guaranteed by a certain amount of gold or other precious metal. Such a practice was extremely useful and efficiently for atleast a few hundred years. As long as the government could procure enough gold to meet the short and long-term money supply in the economy a gold backed currency was ideal. Unfortunately this concept collapsed and brought with it one of the most severe depressions the world has ever seen.
The Great Depression was caused due to extreme disparity and concentration of wealth but this is generally the hallmark of small recessions too. Arguably, the Depression was created due to mismanagement rather than by the situation. The depression kicked in due to the failure of the entire banking system. This was lead by the collapse of one of the largest public banks- The Bank of the United States. The failure of any public bank creates great panic in depositors and creates a sudden rush for withdrawal. Unfortunately, at the time the gold backed currency system created a lending limit of the Federal Reserve. The failure to bail out The Bank of the United States created a domino effect and the eventual collapse of a massive proportion of deposits and investments. The failure of the financial system, the backbone of any economy would inevitably lead to an overall collapse of an already languishing economy.
The great depression taught us a lot and one big change it brought was the introduction of Fiat Currencies. Fiat Currencies are not backed by any physical commodity but basically valued by its usefulness. The government basically accepts taxes in the currency and therefore the health of the economy and the corresponding taxation create the demand for the currency. The valuation of such a currency is hence determined by the efficacy of tax collection and the demand for the currency. A relatively high economic growth and a minimal or nil deficit would always cause the appreciation of a currency. Hence the concept is sound and helps in flexible valuation of currency so the Central Bank can control the money supply in the economy.
There is however a slight downside to it. Considering the inverse relationship between the price of globally traded commodities and the currency in which it is traded, we must understand that if there is a standard currency used for trading, the fiscal and monetary policy controlling currency has a profound impact on global prices. In the present case, the American dollar is the globally accepted currency with most of the commodity trade being Dollar denominated.
Now the question is when the monetary and fiscal policy of a country determines to a great extent the valuation of the currency, we probably need to relook the priorities of the American Federal Reserve. The Federal Reserve is clearly aimed at overlooking inflation for the sake of growth. The recent spike in commodity prices can be greatly attributed to the rather steep devaluation of the US currency due to their fiscal and monetary policies. A record deficit and rather cheap availability of credit has seen the USD taking a dive and commodity prices sky rocketing. Although the United States is the biggest economy in the world, the overdependence on the USD for trading in the international market leads to prices becoming highly sensitive to the American environment. The selfishness seen in the American policies pushes us to look at other currencies that would be more suitable and sensitive to the international needs such that a right balance is struck between inflation and growth. Alternatives include the Euro or the Japanese Yen. The overall health of the American economy also seems to be a big question mark with the American economy seeing a severe financial crisis every now and then. Consumption paced by credit seems to cause issues and bubbles in the American economy and the selfishly prioritized policies seem to be good enough reasons to move away from the dollar. A change from a dollar backed currency would in effect shield us partly from American policies and should be an intelligent move as long as the new currency adopted is governed in a more responsible manner. This wouldn’t be the first time such a change has happened. With the devaluation of the dollar hitting exports hard in India, some of the big names are shifting to Euro billing. This sets a precedent although in a very small way and in a way urges us to move away from the dollar to a better regulated currency. In the future such a step would probably have to be taken at some point of time. It is extremely unlikely that the entire world would ever agree to be united under a single currency however it isn’t hard to imagine a day when the dollar wouldn’t remain the favorite currency of the world.
-Akhil Sharma
