This Insight is the sixth in the serial publication of the new, Revisited edition of my book, The Golden Revolution (John Wiley and Sons, 2012). (The first instalment can be found here.) The book is being published by Goldmoney and will also appear as a special series of Goldmoney Insights over the coming months. This instalment comprises the fifth chapter of Section I.
View the Entire Research Piece as a PDF here.
The “Reserve Currency Curse” amd the International Aspects of Cantillion Effects
‘The fact that many countries as a matter of principle accept dollars to offset the US balance-of-payments deficits leads to a situation wherein the United States is heavily in debt without having to pay. Indeed, what the United States owes to foreign countries it pays – at least in part – with dollars that it can simply issue if it chooses to. It does so instead of paying fully with gold, whose value is real, which one owns only because one has earned it, and which cannot be transferred to other countries without any danger or any sacrifice. This unilateral facility that is available to the United States contributes to the gradual disappearance of the idea that the dollar is an impartial and international trade medium, whereas it is in fact a credit instrument reserved for one state only.’
FRENCH PRESIDENT CHARLES DE GAULLE, FEBRUARY 1965
Having shown that monetary Cantillon effects can have a material impact on economic inequality within an economy, it remains to consider how these effects can also spill over internationally. As the issuer of the primary global reserve currency, the US Federal Reserve may be the source of significant international Cantillon effects. Indeed, I believe that these effects are in certain respects easier to identify than those observed domestically. There have also been some major studies supporting this view. First, let us consider the important role played by a reserve currency in the international monetary system.
What, exactly, is a reserve currency? It is one that is used to pay for imports from abroad and is then subsequently held in ‘reserve’ by the exporting country, as it does not have legal tender status outside of its country of issuance. In the simple case of two countries trading with one another, with one being a net importer and one a net exporter, over time these currency ‘reserves’ will accumulate in the net-exporting country. In practice, as reserves accumulate, they are initially held as bank deposits but are subsequently invested in some way, for example, in government bonds issued by the importing country or perhaps purchases of corporate securities. In this way, the currency reserves earn some interest and possibly realize some capital gains, rather than just sit as paper scrip in a vault.
This post was published at GoldMoney on July 04, 2017.