Among the unexpected issues dramatized by the global economic crisis is the nature of money itself. The machinations of currency valuation are pretty much a black hole for most of us, so I recently sought out an expert to help explain what’s going on.

Dr. Benn Steil is the director of international economics at the Council on Foreign Relations, the blue-chip think tank that some have called the unofficial seat of the American establishment, and co-author of Money, Markets and Sovereignty.

“Eras of economic protectionism have historically coincided with monetary nationalism,” is his thesis, “while eras of liberal trade have been accompanied by a universal monetary standard. But today, an unprecedentedly liberal global trade regime operates side by side with the most extreme doctrine of monetary nationalism ever contrived-a situation bound to trigger periodic crises.”

Translation: ‘globalization’ has established trade at levels never before recorded, but this is occurring in the absence of broadly based universal currency standards. Indeed, to the contrary the leading trade partners-the U.S., China, the euro zone-all retain monetary autonomy subject to their particular priorities and politics.   

This, says Steil, is at best an historical anomaly-at worst, a harbinger of destructive trade wars fought through dueling currencies.

“The de facto currency of trade for the past decades has been the dollar,” explained Steil in our conversation. “No other currency has the same widespread reach and circulation. As long as the rest of the world remains confident that the value of the dollar is stable and going to remain so, the system works well.” So what’s the problem? “That confidence is now at risk. There’s legitimate fear that the dollar is a less reliable repository of value because of long-standing, growing deficits suddenly compounded by the billions being committed to bail-outs and economic stimulus.”

To underscore his point, China recently made public its concern about the long-term viability of the dollar (which, in light of the trillions they hold, is not just idle speculation). A sober World Bank-type, with whom I discussed this situation, informed me that various central banks, which typically kept 90 percent of their reserves in dollars, have been quietly downscaling to 80 percent.

The trouble this portends, according to Steil, is that there is no real alternative to the dollar as a repository of value sufficient to transact trade at the sustainable levels the global economy requires. “You could imagine an international credit system predicated on gold,” Steil suggested. But even if institutions (private banks?) and processes (digital transactions?) could be developed, the volume of trade that a gold-based currency might underwrite would be relatively inelastic, limited by the physical amount of bullion extracted from the ground. 

Recovery of the global economy depends on ‘confidence’ in the dollar. But at the same time, national economies desperately need stimulation (read: massive currency dilution), none more critically than the U.S. Thus, the dismaying double-bind confronting policy makers: stimulate by making the dollar worth less, which in turn erodes confidence in its credibility as the global standard, which in turn hampers trade, and so on and so forth.

So where does this leave us in April 2009? Desperately in need of a (multinational) stimulus approach that is (and here’s the excursion into unexplored historical territory) able to optimize the need for immediate action with longer term consequences on the viability of the dollar.





Neil Shister, Editorial Director

shistern@worldtrademag.com