On today’s show we are talking about the world reserve currency. The USD became the world reserve currency in the wake of the Second World War with the international treaty signed in the mountains of New Hampshire called the Bretton Woods accord.
This three week conference had 730 delegates from the 44 allied nations in 1944. It established the rules for international movement of money.
At the time, the US had by far the largest gold reserves of any other nation, and it made sense that the US dollar was the most trusted of all the currencies in the world.
By 1971, the US was printing more money than they had gold to back the currency. Richard Nixon went on national TV to announce that he was temporarily suspending the gold backing of the USD to protect the economic stability of the world financial system.
The response to this move was the OPEC oil embargo where the OPEC member nations decided that they didn’t want to be paid in Monopoly money and they were accustomed to being paid in gold.
Eventually, Henry Kissinger struck a deal with Saudi Arabia that if OPEC agreed to trade exclusively in USD, then the US would forever protect the political, military and personal safety of the Saudi Royal Family. That agreement meant that the USD position as the world reserve currency would be secured for at least another 50 years.
It meant that if Italy buys oil from Nigeria, that transaction would be in USD, even if the US was not party to the transaction.
In order for a currency to be accepted as a reserve currency, it has to be globally accepted by almost all of the world’s major players.
Fast forward to the year 2022. Russia has invaded the Ukraine. Russia is now the subject of economic sanctions and the nation has been cut off from the world financial system. But clearly Russia will continue to ship oil, natural gas and wheat and other commodities around the world to whom ever will buy it. But now, it’s pretty clear that those transactions will probably not be denominated in USD.
Which countries are going to be the most likely purchasers of Russian oil?
Yes, that oil will probably sell at a discount to the rest of the market. But someone will eventually buy that oil. We can expect China, India, Pakistan, and a number of African countries will be buyers.
Hang on a second. When you put Russia, India, China, Pakistan together, trading in oil, outside the USD, you have nearly half the world population now buying oil using something other than USD.
At that point, the USD will have lost its standing as the world reserve currency.
Host: Victor Menasce