With a barrel of oil near $100 and the dollar falling 16 percent against other currencies, Americans need to understand what's behind the falling dollar and what the consequences will be for them.
by Melvin Rhodes
You wouldn't know the dollar was falling and oil was about to reach $100 a barrel from a recent morning's news program on ABC. There, the "big news" was that Neil Diamond's famous song "Sweet Caroline" was inspired by Caroline Kennedy, daughter of the late President Kennedy.
My local newspaper, the Lansing State Journal, did not enlighten me either. But thanks to the Financial Times, I am aware of the ongoing international financial crisis aggravated by the millions of people defaulting on their mortgages and the consequent fall in the value of the U.S. dollar.
For me, November was very much a case of déjà vu.
It took me back 40 years to when I worked in a British bank. On the third Saturday night of the month television programs were interrupted to tell the nation that the British currency, the pound sterling, was to be devalued by 14.2 percent. In comparison, the American dollar dropped in value by 16 percent in just a few weeks in November.
Forty years ago, currencies had a fixed value, only fluctuating one or two cents either way. Shortly after the devaluation of the British pound, and partly because of it, fluctuating currencies became the norm, with values changing daily. In reality, they can and often do change every second.
A British news item from 40 years ago may not seem all that important today, but there are lessons from it that resonate in today's world news headlines. To understand this fully, we need to go back in time a little further.
A lesson from history
One hundred years ago, the British pound sterling was the international trading (or reserve) currency. A reserve currency must be stable. That's the only way other countries can depend on it when doing business.
Prior to World War I, if, say, China wanted to buy goods from France or Germany, the payment would have been determined in pounds sterling, not in any of the other nations' currencies. Only the pound could be relied upon to maintain its value from the time of purchase until the time payment was received.
