By Sara Ledwith
LONDON Jan 30 It seems counterintuitive but
cash-hoarding criminals can be depended upon to uphold the
international monetary order, or so a new book maintains.
The vast quantity of $100 bills in hard currency held by
drug dealers outside the United States is a key to America's
global dominance, according to economist John Williamson.
The criminals' currency of choice is both a vote of
confidence - because they choose dollars over euros, yen or
Swiss francs - and an interest-free loan to the United States.
It's a point Williamson and others bring home in "The Power
of Currencies and Currencies of Power", a collection of essays
edited by former Reuters global economics correspondent Alan
Wheatley that shows how the world's currencies work to reinforce
the geopolitical pecking order.
Crime is not the only key. Anyone assuming China's renminbi
is poised to snatch the dollar's pre-eminent position may find
the book a practical guide on how China could become top dog.
Around 60 percent of all dollar bills circulate outside the
United States, Wheatley says. In the same way as American
Express profits whenever people hold its travellers' cheques,
the United States makes money when foreigners hold dollars on
which no interest is paid.
By that token, in 2003 Saddam Hussein indirectly paid for
the cost of his own invasion by the United States. The more than
100 aluminium boxes filled with $700 million in cash that
invading U.S. forces found in his palace had been paid for with
the proceeds of Iraqi oil exports.
Wheatley discussed the book with Reuters:
Q: When you were editing the book, what did you find most
A: Not being a student of economic history, it was an
eye-opener to be able to pinpoint so many examples down the ages
of how the power of a country's currency in particular - not its
all-round military and political strength - has been decisive.
One reason France lost the Peninsula War (1808-1814) to
Britain and its allies is that Wellington's armies could pay for
supplies with Bank of England notes. Napoleon's credit wasn't as
good and so he had to rely on gold.
A more recent example is how the U.S. paved the way for the
invasion of Afghanistan by buying the allegiance of local
warlords with wads of $100 bills. It's this capacity to mobilise
resources in an emergency that defines a major reserve currency
such as the dollar.
Q: What implications might that have for foreign exchange
A: Many FX strategists are advising reserve managers to
diversify - the Australian and Canadian dollars have been big
beneficiaries in recent years - and that seems sensible. As
economic power shifts from West to East, you'd expect the
dollar's dominance to be eroded gradually.
An interesting chapter looks at whether the need for FX
stability in global supply chains will lead to the emergence of
some currencies as regional champions.
But the book also reckons that some of the speculation about
the RMB (renminbi) catching up to the dollar as a reserve
currency within a decade or so is fanciful. For a start, there's
just so much inertia built into the system. And the trust and
credibility that underpin a reserve currency's function as a
store of value - and that's critical - takes decades to develop.
Q: And in geopolitical terms?
A: The lessons of history are clear. The currencies of big
countries take on a greater international role as their
economies grow. And countries like to use that power. I mean
power in its broad sense. It could be using the currency to
coerce another country - the U.S. forced Britain to retreat from
Suez in 1956 by threatening to trigger a sterling crisis - or it
could be exercising influence more subtly.
Now, imagine if China gradually conducts more trade with oil
and commodity producers in RMB. That would give China more
leverage over those countries - if, say, they got into financial
trouble one day, and had a choice between turning to China for
help or to the IMF. Like it or not, the IMF is often seen as a
U.S. proxy. So you can see the potential for geopolitical
strains to build up as a result of currency developments. A way
will have to be found of accommodating China's rise. That's as
true in monetary matters as it is in the military and diplomatic
Q: The book makes clear how the U.S. used not just the
dollar, but also its control of the global financial
infrastructure, to maximise the impact of sanctions against
Iran. Is that something it could still do today?
A: In fact the book argues that the very reason sanctions
against Iran have been so effective is thanks to the dollar.
Because all dollar payments ultimately are cleared through New
York, any bank found to be trading with Iran could be threatened
with losing their U.S. licence - a death threat to most banks.
I see these sanctions as the 21st-century equivalent of
Iran was forced to negotiate not because warships were
pointing their gun barrels in its direction but because of the
dollar. And yes, absolutely, any other country under
international sanctions could come under the same pressure.
Q: What most useful insights do you think the book gives
into China's strategy on the global stage?
A: China reckons the present international monetary system
is past its sell-by date. So China needed to start carving out
an international role for the RMB if it wanted more say in how
the system should involve. And they've been phenomenally
After just four years something like 15 percent of China's
trade is already settled in RMB. But if the RMB is to become a
serious reserve currency, central banks have to be able to move
their money in and out of China as they please and invest it in
large volumes in Chinese bonds. That means letting market forces
- more or less - determine exchange rate and interest rates.
The Chinese know that, but I just don't see how the
Communist Party will be willing to give up that much control
over the economy because that is what underpins its monopoly of
Q: Anything that you think the book left out?
A: I would have liked to explore more deeply what would
happen if China persuaded Middle East and African oil producers
to take payment for their oil in RMB rather than dollars.
"The Power of Currencies and Currencies of Power", edited by
Alan Wheatley, is published by the International Institute for
(Reporting by Sara Ledwith; Editing by Michael Roddy and Tom