|Last September 7th, one month after the installation of the National Constituent Assembly Venezuela’s President Nicolas Maduro announced a series of economic measures framed within the government’s Constituent Plan for Peace and Prosperity.
So far, almost none of these measures has diminished the daily difficulties affecting our personal lives. But some of them have created great hopes or, at least, some interest, among them the possible creation of a basket of currencies.
The Venezuelan President has said, “We are going to implement a new international payments system by creating a basket of currencies to free us from the dollar via freely convertible foreign currencies (the Yuan, the Euro, the Yen and the Rupee) so that we liberate ourselves from the US dollar, an oppressive currency.”
Is that as easy as it sounds?
The root of the matter
To understand how deeply the dollar has subjugated international trade and finance we need to return to July 1944 when rules were established for global trade and finance relations by means of the “Bretton Woods Agreements”.
These agreements came about during the United Nations monetary and finance conference in the hotel complex of Bretton Woods, in New Hampshire in the United States where the creation was agreed of the World Bank and the International Monetary Fund, following which most nations fixed their exchange rate to the US dollar.
Luis Salas Rodríguez, Director of the Center of Studies of Political Economy at Venezuela’s Bolivarian University notes, “Bretton Woods established the ruling economic system which from then on revolved around the US economy. So although the Soviet Union was the military victor of the Second World War, the political and economic victor was the United States.”
In fact, during those years, the United States became the world’s strongest economy. The United States suffered no wartime destruction and had a powerful manufacturing industry allowing it to enrich itself selling armaments and lending money to combatants. US industrial production in 1945 was more than double production between 1935 and 1939.
Juan Carlos Valdez, a lawyer specializing in tax and finance law, says, “The United States exploited its advantage in the geopolitics of that moment and imposed the US dollar as the world’s main currency. That put it in a privileged position in relation to the other countries in the world because they achieved economic hegemony and with it the chance of applying extortion to countries and even to entire continents.”
The United States thus had the whole world as a market for its exports and unrestricted access to vital raw materials. However, over time a “basket of reserve currencies” was created adding some variations to the global monetary game.
This basket is composed of currencies that are universally accepted and chosen by central banks for holding countries’ national savings.
These currencies are selected by the executive committee of the IMF. In fact, the IMF carries out its operations via a kind of in-house currency known as “special drawing rights” whose value is itself determined by the selected foreign currencies.
But not any currency wins this status. Luis Salas Rodriguez explains, “For a currency to be incorporated it has to comply with many requirements, but fundamentally it has to be the currency of a strong economy with a high level of exports, enabling it to be accepted in other countries.”
Until a short while ago the basket of reserve currencies contained the US dollar, the Euro, the Pound Sterling and the Japanese Yen. But on October 1st 2016 approval was given to include in the basket China’s Yuan (also known as the Renminbi).
Juan Carlos Valdez adds, “The Yuan entered the basket with a privileged position because it became the third strongest currency after the US dollar and the Euro, ahead of the Pound Sterling and the Japanese Yen. In fact 33% of US transactions are in Yuans. What explains this? The main US creditor is China. Also there are major US businesses in China. In Europe, too, 37% of their transactions are in Yuans. The Yuan can change the global correlation of forces. Today, China is clearly the world’s leading economy.”
The most well known
However, there are other so called “fully convertible” currencies which do not form part of the basket of international reserve currencies but are still accepted for commercial transactions around the world.
154 countries in the world have non-convertible currencies. Only 11 are fully convertible. They are the US dollar, the Euro, the Japanese Yen, the Pound Sterling, China’s Yuan, the Australian dollar, the Canadian dollar, the New Zealand dollar, the Swedish Krona, the Danish Krone and the Norwegian Krone.
Other “partially convertible” currencies, like Russia’s Ruble or India’s Rupee are accepted in some regions of the world.
The Venezuelan governments is betting on the Yuan, the Ruble, the Rupee and the Euro to be able to break the “dictatorship of the US dollar”.
Is it realistic to think that a small south American country can win such a battle? Will any of its neighbors join the initiative?
Some say the measure is feasible. Juan Carlos Valdez notes, “China buys 40% of our oil, the US approximately 20%, India another 20% Cuba and the rest of the Caribbean 10% and 10% is bought by other Latin American countries. What would happen if we ask them to pay us in Yuans? a currency accepted globally with solid backing because China is the world’s main holder of gold. Could we encourage others to pay transactions in Yuans? If so, what happens to the US? Because its main industry is not armaments but emitting dollars. If one could change the power of the US dollar, the US house of cards would collapse.”
However, the measure’s main detractors claim it is absurd to implement a basket of currencies when the US pays for its oil in dollars.
Juan Carlos Valdez responds, “That’s false too. The US buys less and less oil from us. In 2015, North America bought about 900,000 barrels a day from us. In 2016 they bought just 702,000 barrels a day and that trade is dropping substantially more and more as part of the economic war.”
Between the old and the new
However, all is not roses. Luis Salas Rodriguez points out, “The fact that the world’s economic system revolves around the US dollar implies some difficulties. For example, if another country refuses to accept any other currency than the US dollar then we’d have to convert that other currency into dollars and pay commission or an exchange rate difference. Also it is difficult to establish equivalences like the rate of Venezuela’s Bolívar against the Ruble or the Rupee since they are valued against the dollar as a unit of account.”
So is it even worth trying? Salas Rodriguez argues, “Of course, because by diversifying our currencies we reduce our dependency on the US dollar, just as we did when we diversified the customers for our oil. In any case, everything suggests that, sooner rather than later, another currency, most likely the Yuan, will displace the US dollar at least partially if not fully and it’s best to be prepared for that future outcome.”
And is there nothing to lose? Will the US accept that without demur?
Juan Carlos Valdez recalls, “There is an argument, by no means out to lunch, that Muammar al Gaddhafi was murdered for trying to create a currency called the “gold Dinar” for transactions between African countries, which would have severely weakened the dollar and the Euro.”
…and someone else too
But Gaddhafi was not the only one with that idea. Luis Salas Rodriguez remembers, “Venezuela had already suggested this. Chávez himself argued the need to diversify currencies, which is what lead to the Sucre (Unified Regional Payments System) which began provisionally but since then unfortunately has stagnated.”
Apart from the Sucre, Hugo Chávez, argued, during the Second Latin America-Arab Countries Summit in 2009, for creating a “petro” currency backed by oil reserves.
Chávez explained “Some people down play these ideas, others think they are infantile, utopian, a dream out of the small hours. But these are proposals for a new world, because currently the world is a victim of the US dollar empire. The US has bought up half the world with bits of green paper having no economic substance. I am excited abut the idea of an international currency, a petro-currency supported by the great oil reserves some countries have.”
Juan Carlos Valdez adds, “In fact, we have what all the world’s countries need to keep going, oil. Oil sustains countries, as Henry Kissinger noted. Venezuela’s certified oil, and there is a lot of it still without certification, amounts to more than what the world has consumed over the last 100 years. We have plenty of options.”
Will we be able to make a bit more progress this time?
Originally published in Epale
Spanish language URL
Translated to English by Tortilla con Sal