Strictly Monetary Part IV: Why Being America is Awesome

In Financial, Strictly Monetary: A Series on February 6, 2011 at 10:43 AM

This is a short piece to describe why being the world’s reserve currency is awesome. It is a one-of-a-kind system that has done things that had never been done before. This piece will lead us into the history of how America got here in the first place, as well as the extremely controversial workings of the Federal Reserve.

All those Benjimins, Jeffersons, Jacksons, Sawbucks, Hamiltons, and five-spots weren’t always regarded as the world’s reserve currency. Earlier than 1914, the British Pound was held more widely by central banks around the world as a reserve. The culmination of an industrial revolution and two world wars later, America had supplanted Great Britain as the leader of the free world and global trade. China and India have emerged as the new economic leaders of the world, but America isn’t ready to hand over the reins of the reserve currency just yet.

The benefits of being at the core of the world’s money supply are tremendous. In Part III we covered how emerging economies need to stockpile the US Dollar in their central banks to facilitate trade internationally and grow. But as this Economist article points out (same indispensable article cited previously), this provides an unfair advantage to America:

These huge reserves offend economic logic, since they mean poor countries, which should have abundant investment opportunities of their own, are lending cheaply to richer ones, mainly America. Such lending helped precipitate the financial crisis by pushing down America’s long-term interest rates. Today, with Americans saving rather than spending, they represent additional thrift at a time when the world needs more demand.

Something hitting the media a lot more these days is the fact that America may be create inflation globally with the massive amounts of money it has printed. It is a defensive reaction to the political game of money. If countries around the world are hoarding US Treasury Bills to push their exchange rate low against the Dollar, all in an effort to boost the production in their own economies, then America can retaliate by printing more of its own money.

By printing money, each American dollar is worth less and America can push its own exchange rate lower to boost exports. Other nations believe that America has a responsibility to restrict the printing of its currency as we are now operating in a global economy and the world needs reliability from its reserves. However, America must take care of itself first, which means its current monetary policy has very little to do with the interests of the global community, and more to do with ensuring the United States has enough money circulating in its own economy to distance itself from the recent recession.

The strange results of the current monetary system don’t stop there. If emerging economies grow at a faster rate than America, they need the US to print money. In general, without America’s cooperation on this, the world’s economy would have trouble growing. It isn’t enough that people are producing and consuming more. We need more money to represent the additional wealth.

While money is simply a medium, a measure, a standard and a store for the things we want to purchase and sell, if there isn’t enough of it circulating, it becomes difficult to express our financial desires through commerce.

Ultimately, America has never been able to please the various interests of different nations around the world, both developed and emerging. However, those nations have become increasingly pushy with their demands as America no longer sits on the throne as the world’s largest economy but remains in full control of the world’s money supply. Next, we’ll explore history to see how an extremely unique American economy came to be so powerful in the first place, as it may indicate what the future has in store.

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