On Sept. 7, 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 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 U.S. 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 it was created by the World Bank and the International Monetary Fund, following which most nations fixed their exchange rate to the U.S. dollar.
Luis Salas Rodriguez, Director of the Center for Studies of Political Economy at Venezuela’s Bolivarian University noted, “Bretton Woods established the ruling economic system which from then on revolved around the U.S. economy. So although the Soviet Union was the military victor of the Second World II, the political and economic victor was the United States.”
In fact, during those years, the United States became the world’s strongest economy. It suffered no wartime destruction and had a powerful manufacturing industry allowing it to enrich itself selling armaments and lending money to combatants. U.S. industrial production doubled in 1945 from levels between 1935 and 1939.
Juan Carlos Valdez, a lawyer specializing in tax and finance law, said, “The United States exploited its advantage in the geopolitics of that moment and imposed the U.S. 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. Salas Rodriguez explained, “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 U.S. dollar, the euro, the British pound sterling and the Japanese yen. But on Oct. 1, 2016, China’s yuan (also known as the renminbi) was approved.
Valdez added, “The Yuan entered the basket with a privileged position because it became the third strongest currency after the U.S. dollar and the euro, ahead of the pound sterling and the Japanese yen. In fact, 33 percent of U.S. transactions are in yuan. How can this be explained? The main U.S. creditor is China. In addition, there are major U.S. businesses in China. In Europe, as well, 37 percent of their transactions are in yuan. 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.
Some 154 countries in the world have non-convertible currencies. Only 11 are fully convertible. They are the U.S. dollar, the euro, the Japanese yen, the British 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 government is betting on the yuan, the ruble, the rupee and the euro to be able to break the "dictatorship of the U.S. 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. Valdez noted, “China buys 40 percent of our oil, the U.S. approximately 20 percent, India another 20 percent, Cuba and the rest of the Caribbean 10 percent and 10 percent is bought by other Latin American countries. What would happen if we ask them to pay us in yuan? 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 yuan? If so, what happens to the U.S.? Because its main industry is not armaments but emitting dollars. If one could change the power of the U.S. dollar, the U.S. house of cards would collapse.”
However, the measure’s main detractors claim it is absurd to implement a basket of currencies when the U.S. pays for its oil in dollars.
Valdez responded, “That’s false too. The U.S. 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. Salas Rodriguez pointed out, “The fact that the world’s economic system revolves around the U.S. dollar implies some difficulties. For example, if another country refuses to accept any other currency than the U.S. 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 bolivar 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 argued, “Of course, because by diversifying our currencies we reduce our dependency on the U.S. 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 U.S. 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 U.S. accept that without demur?
Valdez said, “There is an argument, by no means out to lunch, that Muammar Gaddafi 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 Gaddafi was not the only one with that idea. Salas Rodriguez recalled, “Venezuela had already suggested this. Chavez 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 Chavez argued for the creation of a “petro” currency backed by oil reserves during the Second Latin America-Arab Countries Summit in 2009.
Chavez explained “Some people downplay these ideas, others think they are infantile, utopian, dreams of the wee hours. But these are proposals for a new world because currently, the world is a victim of the U.S. dollar empire. The U.S. has bought up half the world with bits of green paper having no economic substance. I am excited about the idea of an international currency, a petro-currency supported by the great oil reserves some countries have.”
Valdez added, “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?
First published in Epale on Oct. 9, 2017.