Trade

 

Money, Money

A mark, a yen, a buck or a pound
A buck or a yen
A buck or a pound.
Is all that makes the world go around
That clinking, clanking sound
Can make the world go 'round

Does a buck still make the world go around, and should it?

If one county produces petroleum but needs grain, and another country produces grain but needs machinery, and still another country produces machinery but needs petroleum, it is possible that a three-country trade agreement could take place.  However just like in sports, multi-party trades are complicated and hard to complete.  Trading is easier if it is conducted using a currency that each party can earn, and then use that currency to complete their own trades.  In 1944 at Bretton Woods that international reserve/trading currency was established to be the US Dollar.  While the Nixon Shock of 1971 abolished the Bretton Woods agreement,  the US Dollar is still the preferred medium for international trade. According to  Society for Worldwide Interbank Financial Telecommunications (SWIFT), the US dollar, a buck, was used in 51.9% of the international currency transactions in 2014. The second, with a 30.5% share of the totals is the Euro, which was not even a currency yet in the song from Cabaret, which was set in pre-WWII Berlin, and which replaced the mark. The British pound was third with a 5.4% share of the total value, followed by Asian currencies, such as the Japanese yen and the Chinese yuan.

As international trade increases, this causes an increase in the demand for US Dollars.  This means that the US trade deficit must increase, or else this international trade could not take place.

This is the Triffin dilemma, named for the Belgian-American economist, Robert Triffin, and has been known since the late 1960s, although the dilemma can be traced to a 1932 lecture by French economist Jacques Rueff. As long as the US Dollar is the international trading and reserve currency, if international trade increases, then the US trade deficit will also increase.  Additionally short term domestic economic objectives, such as controlling inflation, may result in conflicts with long term international objectives. That this was known long ago, does not make it any less true.  After all, the fact that money makes the world go around is also still true.