Time for euro to replace dollar as the de-facto world reserve currency
Posted by: chehak on: July 15, 2008
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!!
8 Responses to "Time for euro to replace dollar as the de-facto world reserve currency"
1 | Ninad M
True facts.
But I think the US is being underrated by the many self-proclaimed economists. There is a huge
gang of people making baseless predictions thinking they ‘know’ the economic situation!!
And by the way the change over to Euro as the de-facto currency doesn’t make much of a difference as it’s
only a trade currency. E.g. if tomorrow Japanese Yen is made de-facto, Japan would gain nothing out of it. Coz
when you buy or sell a currency, the currency involved gains nothing.
2 | 'motley'
A wonderful insight into how dollar came to dominate the world, and how USA bullies the OPEC, EU and every other body to have things their way.
However I disagree that Euro can be a replacement for dollar, just because they are printed by EU, not a ‘big bad bully’ like America.
3 | Aittreya
1. Euro does not have politcal mandate. Sovereign guarantee even if forecast of default is there with usd but not with euro. Let us remember 2005 when euro/usd traced back to 1.16 from dec 2004 high of 1.37
2.If there is default, every nation will have to bear the brunt for holding usd- Nothing will happen to US - Instead of third world aid it will be us aid. The surplus generated by all nations will vanish. Dooms day is not that we should bother as rumours plays in markets than realities.
4 | JEAN-MICHEL
…..”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….”
Do you mean by this that It is the goal of the invasion of IRAK by the US ? I don’t think so .
5 | Chirag
Hi jean-michel
These might be one of those many reasons why US invaded iraq…….no one really knows anything - all we can do is guess!
6 | Gumnaam
If the reason for Iraqi invasion was to prop-up the Dollar, the plan has obviously failed. The US did not need to use Iraqi invasion to send a warning to other oil exporting countries like Saudi Arabia and other Gulf states. The US can easily threaten these defenseless countries without the use of military power.
Some commentators have also said that the establishment of oil trading exchange by Iran which plans to trade oil in currencies other than the Dollar is the real reason why US will attack Iran. In my view this analysis is also incorrect because the US realizes that an attack on Iran will send oil prices sky high which will threaten the US and world economy with a depression.
7 | Chirag Jain
Hi Gumnaam
When you say that US can threaten them with military power, maybe an Iraqi Invasion would be to issue a warning to saudi arabia and gulf states.
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