What's the Value of a National Currency?

In the last week, the statement reported here by the governor of China's Central Bank called for the establishment of an alternative currency for international transactions. Predictably, many have sen this call for the replacement of the dollar as necessarily portending a poor outlook of the prospects f the economy of the US. Frankly stated, I think that given its size, it would not only be difficult to replace the US$ as a major currency but that the world ought to be more careful about why.

To start with, students of economics are encouraged to view any currency as a commodity and this then leads to the realization that the there's nothing special about a national currency in and of itself. For an economy as large as that of the US, I surmise that the creation of an alternative could not easily be created without some measure of the expectation of US participation, China's enthusiasm for a new currency notwithstanding. Viewed as a commodity, the value of any currency would emerge from the demand for it in the international markets.

Secondly, as stated in an interview of Desmond Lachman in the American, governments can sustainably influence the value of currencies by maintaining good economic fundamentals and keeping an attractive investment field. In that sense therefore, what is called a strong currency is in itself the result and not the cause of a vibrant economy. Added to this would be a stable financial industry and low levels of inflation. To think that a strong currency is an end in itself is a political statement that has little basis in economic thinking. As reported by the statement in the daily Telegraph, Timothy Geithner should be more concerned with hastening the recovery of the US economy. The absence of clear alternative suggests that the willful creation of a strong alternative to the US$ is perhaps harder than is imagined.

Ethiopia's Central Bank Finds Fool's Gold

I think that the cynicism that libertarians have for government is confirmed almost every day whenever revelations of unbelievable corruption and incompetence is revealed. A story reported here and here about the discovery that a proportion of the bullions of gold in the National Bank of Ethiopia were fake would be funny if it were not tragic. Gold reserves and bullion in every central bank is considered the very basis upon which fiat money is issued with confidence.

Because all the facts are not out yet, I must be circumspect but this tells any curious student two main things. First, corruption and incompetence in the public sector can be quite baffling and the third is that considering that Ethiopian currency, the Birr is one of the stronger ones in the east African region, then the currency market is all about faith and perception. The gold standard is really dead! Consider that all this happens when the price of gold is rising.