Russia, Ukraine, and the State of the Dollar

Flag of Ukraine over the Lviv Theater, creative commons image by Andrew J.Kurbiko 

Originally posted on Tuesday, March 25th, 2014

As matters in Ukraine created tension between the West and Russia, a figure on Vladimir Putin’s periphery suggested that Russia might retaliate, so to speak, against American pressure by abandoning the dollar as a reserve currency.

The preposterous nature of such a threat promptly was pointed out by the UK Telegraph‘s Jeremy Warner:

I’ve written before about the inevitability of decline for the dollar as the world’s major reserve currency, but this process is on a very long fuse and basically depends on China eventually displacing the US as the world’s largest economy.

That’s not going to happen any time soon. In the meantime, the dollar remains overwhelmingly the currency of choice for international transactions, and is the middle currency in virtually all transactions. For instance, if you were looking to buy Singapore dollars with Russian roubles, you would typically first buy US dollars with your roubles and then swap them into Singapore dollars. The US dollar is also the pricing currency for virtually all commodity transactions, including crucially, oil. Repeated attempts to set up alternative pricing arrangements have all come to nothing.

Then finally, more than 60 per cent of the world’s central bank foreign currency reserves are held in dollars. The euro, the next biggest reserve currency, comes nowhere close. This is not about to change. In other words, Russian threats are as vacuous as Western ones. Hey ho.

Russia, from time to time fairly recently, has protested the sustained mismanagement of the dollar by the United States.  Yet the dollar remains the dominant reserve currency in the world and the United States retains its monetary hegemony.

How much better, though, for benefit of the United States, Europe, Russia, China, and all nations, to retire the “exorbitant privilege” (as once termed by France’s then Finance Minister Valery Giscard d’Estaing) of reserve currency status of the dollar and, instead, use an entirely neutral transnational reserve asset, gold, by which all currencies would be defined and made convertible.

How to do so meticulously is set forth in the Lehrman Institute’s founder and chairman Lewis E. Lehrman’s definitive The True Gold Standard.  The classical gold standard would pave the road to equitable prosperity.