Every country has its own sovereign currency. Trade between two countries is rarely conducted with resident currency, rather done with a third currency in most cases. This is practised globally.
If we look at history, we find specific currency-led global transactions in different regimes. During the Greek empire, Drachma worked as global currency for major transactions, Gold Solidus in Roman era, Guilder in 17th century, Spanish-Mexican silver peso in 18th century, Great Britain pound in 19th century and US dollar in 20th century.
A recent article by Jeffrey Frankel published in Project Syndicate ranks global currencies as per present trend, placing the US dollar in the first place, which is followed by euro, yen and pound. Currently, around 47 per cent of global settlements are in US dollar, compared to 31 per cent in euro. Moreover, 88 per cent of foreign exchange trading involves US dollar, almost three times the euro's share (32 per cent). Global central banks hold 62 per cent of their reserves in US dollars, compared to just 20 per cent in euro, he noted.
US dollar also works as king for use in trade and finance. Also, currencies such as Canadian dollar and Australian dollar are in dominating roles. Recently Chinese renminbi is well-placed as transactional currency.
If we in Bangladesh want to buy goods from Thailand in our Taka, Thai suppliers would provide goods against Taka. Taka will be deposited in bank accounts maintained by supplier's bank in Bangladesh. Can they use Taka to make payment for settlement of Thai imports from China? It is rarely possible to execute the transactions. They can, however, use the fund for capital investment in Bangladesh. With permission, these can be used for extending loans to industrial enterprises in Bangladesh. They cannot place the fund in short term money market instruments for quick return. The fund retained in Bangladesh is export payment of their exporters for which they have paid them in local currency which is basically depositors' money needing interest payments.
So fund placed in Bangladesh needs to generate income. The investment type window like portfolio investment in listed securities in Bangladesh may bring positive game, which needs to be repatriated. Without repatriation, the fund may be used for purchase of goods from Bangladesh by Thai importers. The process is workable provided import is matched with export.
If that really happen, the process is nothing but settlement for exchange of goods for goods. Mismatch between demand and supply does not support the programme unless local currency is readily convertible into desired currency, with short-term placement facility.
To avoid the mismatch between demand and supply, we depend on so-called international currencies, which may be termed as king currencies. US dollar, one of them, is in the leading position with status of the king; others may be as semi-king currencies. It is, even, called settlement currency. US dollar in regional trade works also as settlement currency under clearing union mechanism. Other than US dollar, currencies like Eurozone euro, Great Britain pound, Japanese yen work as semi-king currencies.
FROM BRETTON WOODS SYSTEM TO FLOATING EXCHANGE RATE REGIME: How does a currency get king status internationally in respect of other currencies? Does it show economic might or political power? Till the 1970s of last century, the Bretton Woods currency regime prevailed. Under the regime, US dollar was pegged with gold. All currencies of the globe were pegged to US dollar. In 1971, the US government declared closure of the regime and thus the fixed exchange rate regime came to an end. Afterwards, gold is not available against the funds held in US dollar-denominated assets. The end of Bretton Woods system gave birth to floating exchange rate regime. Floating exchange rate regime results in currency manipulation. Currency war starts to remain in so-called external competitive position.
During the Bretton Woods currency regime, US dollar was used as international currency for global transactions. After its end, this currency should have not led transactions of the world. But the present status is as like as that of the Bretton Woods regime. Internationalisation of a particular currency depends on various factors, cited by economists.
If sound macroeconomic foundation is the criterion for international status of a currency, why is the US dollar still the king currency? Many argue internationalisation of a currency depends primarily on strategic role and political power of a country concerned. Till date, fossil fuel is strategic goods, controlled by oil cartels. This is sold in US dollar. Wall Street strategically arranges such selling by way of political influence to fuel producers, especially OPEC (Organisation of the Petroleum Exporting Countries) nations.
Many governments in oil-producing countries faced tough situations like regime change due to oil sales in currencies other than US dollar. Even today many countries are in sanctions imposed by developed nations for the same reasons, plunging them into problems in conducting trade settlement in US dollar.
Retention of currency hegemony needs some nursing continuously so that the king can settle major global needs arising from transactions. Deviation from major shares by countries shakes its hegemony, resulting in imposition of economic sanctions to non-abiding countries. Consequently, those countries face problems in global transactions. Countries obedient to the king may also face problems in carrying out transactions with the sanctioned countries. For example, country X is under restrictions from king country. Country Y is doing trade with X. But after imposition of restrictions in executing transactions through the king currency, Y is facing problems in trading with X for basic items. X is in surplus position with Y since it exports more compared to imports.
Hence without acceptable currency, payment settlement for exchange of goods against goods is rarely possible. The situation leads to problems in trade. If there were international currencies issued by global payment association as proposed by Keynes in 1944, country X would not face settlement problems with Y.
Money helps to operate a system under which people don't need to do all type of works to maintain lives. Money also makes people empowered. Countries issuing king currencies become king countries. But before issuing such currencies, they need different works to do without limiting to financial transactional nitty-gritty like deep financial markets. These are the exercises that influence others to follow binding rules.
Fossil fuel is still strategic goods. We need to buy fuel through king currency. For making fuel payment we need king currency, so we sell goods and services abroad in king currency. All transactions except a few like transactions for import by external loans are executed in currencies other than king currency. But this type of transactions is very few.
Political restrictions to nonbinding countries by king countries result in transactions in regional currencies. But ultimate settlement is required to be carried out in king currency or semi-king currencies. Trade is basically executed at first leg by goods to goods. But imbalance needs to be adjusted by king currency or semi-king currencies.
We cannot avoid king currency or semi-king currencies since it is not possible to trade only with goods. Some countries face problems in conducting trade due to imposition of restrictions. Many countries, including restricted ones, face problems. Non-restricted countries cannot change sourcing origins overnight. So, there is a need for policy intervention to overcome the situation. General policy solution at the first stage is to use banks at minimal level, by which transactions through letters of credit and bank-to-bank documents need to be avoided.
Firms with recognition as trade dealers may be encouraged to source importers/exporters at home and abroad. Import payments may be arranged to be settled to exporters abroad by counterpart trade dealers, which will be adjusted by exports. Imbalance, if any, shall be settled by arrangement of imports to payable countries from other countries. Regulatory authorities need to allow trade dealers executable timeline to settle the balances.
