Forex Foray

For your next dinner party, an interesting parlor game is to ask the question, “What is the strongest currency in the world?”  The answer will stump many, and most likely, will surprise all.  

My son and I talked about this recently.  We were at our Credit Union and he asked about gold in their vaults – they have none – which lead to gold backing the United States Dollar (USD) – there is none.

I quoted the old joke, “There is not enough gold in Fort Knox…” and explained the Nixon Shock, when on the hot summer night of 15 August 1971, Richard Nixon – by Executive Order – suspended the convertibility of US dollars into gold.  With a stroke of his pen, Nixon unilaterally ended the post World War II Bretton Woods monetary system.  

In Latin “fiat” means “let it be done,” an authoritative decree and in monetary terms the USD is a “fiat” currency; there is no underlying asset base because it is secured only by “the promise to pay.”   In an era of rising national debt and hyper-partisan politics, that promise to pay can seem frightfully uncertain.  

“Isn’t the USD the strongest currency” my son sagely asked?  I explained that the USD is the world’s reserve currency, and so the strength of all currencies is in comparison to it.  Some currencies are weaker (less value) while others are stronger.  

As most people would, my son reasoned the strongest currency must be either in Europe or Asia, “Asia produces so much.”  Economic output logically focuses on the “Group of 7” leading industrialized nations: Canada, France, Germany, Italy, Japan, the United Kingdom and the USA.  Our bias inherently is G7-centric.  

We continued to talk, and he said, “No, it must be in the Middle East!  They have so much oil.”  He was onto something, and I told him, in fact, the Kuwaiti Dinar is the strongest currency in the world.  The next three strongest currencies are also from the Middle East: Bahraini dinar, Omani rial and the Jordanian dinar.  All are net exporters of oil, with a strong inflow of foreign currencies and stable governments.  

A few years ago we drove north to Montreal, Canada.  Before the trip my son and I went to a currency exchange to buy Canadian Dollars.  He paid $1.00 USD to purchase about $1.25 Canadian Dollars.  In other words, when he bought a Lego set in Canada it cost less than it would back at home; his money went further.  A valuable lesson, and we had many fine meals on the cheap.  

The lesson here is that the value of money is relative, not fixed. Long ago money was backed by gold, now it is fiat, while oil is becoming a dominant base of value. All oil sales are settled in United States Dollars – known as “petrodollars” – but China and Saudi Arabia have begun to settle in Chinese Yuan. The USD now is declining. The global movement seems away from fiat to asset-backed currencies. The omnipotence of oil backed currency would seem to make the transition to clean energy more difficult by an order of magnitude.

In the age when gold was the standard, there were arguments for both Gold and Silver to serve as the underlying basis.  William Jennings Bryan’s historic speech advocating bimetallism, delivered in 1896 in Chicago, ranks among the finest examples of oratory in world history.  

The gold proponents were the monied class on the East Coast.  The silver constituency were the workers, the masses, the common man.  Bryan reasoned:

“The man who is employed for wages is as much a business man as his employer; the attorney in a country town…the merchant at the cross-roads store…the farmer who goes forth in the morning and toils all day,.. the miners who go down a thousand feet into the earth…are as much business men as the few financial magnates who, in a back room, corner the money of the world. We come to speak of this broader class of business men.”

He then addressed the gold proponents, and argued against supply-side economics:

“There are two ideas of government. There are those who believe that, if you will only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests upon them.”

He rhetorically cut down the gold position, advocating the bimetal monetary basis to support the common man, and then in crescendo, rose to his time-honored conclusion:

“Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: “You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.” 

Dead silence filled the Chicago Coliseum.  Bryan feared he had missed his mark, until pandemonium broke out and he was raised onto the shoulders of delegates.  “Bedlam broke loose, delirium reigned supreme” the Washington Post reported.

Gold, silver, fiat, or oil…in a world of constant change, the lesson for my son is that integrity need be his bank account, his word his bond, character alone counts. By that true standard he will do well regardless of the rising or falling tides of money and banking.    

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In our home school chemistry class, solid progress had been made, my son has made his mark.