Monday, January 21, 2008

Banana Dollar

The term "banana dollar" owes its origin to the ten-dollar bank note issued during the Japanese occupation of Malaya between February 1942 and September 1945. The obverse side of the note had a picture of bananas hanging from a palm tree. (One and five-dollar notes only displayed coconuts.)

The pre-occupation Malaya dollar was a standard currency board bank note in which each locally-issued note was backed by an equivalent value in sterling, set at M$1 = 2s. 4d. sterling, held in London by the Board of Commissioners of Currency Malaya. Japan chose to issue money in the currency of its occupied territories: Occupation money in the Philippines, Netherlands Indies, Burma, and the British Islands in the Pacific was designated, respectively, in pesos and centavos, guilders and cents, rupees, and pounds and shillings .

As Japan’s defeat became imminent, the banana dollar fell precipitously in value. Banana money thus came to signify a rapidly depreciating currency.

This historical footnote bring us to the U.S. dollar. Good as gold for much of its history, the U.S. dollar began to fluctuate in value after 1971 when President Richard Nixon closed the "gold window," the promise to exchange an ounce of gold for thirty-five dollars in U.S. currency. Since then the value of the U.S. dollar has fluctuated.

From January 1, 2001, to January 18, 2008, the dollar lost 54% of its value against the euro, 30% against sterling, and 32% against the Swiss franc. It has remained relatively stable against the yen, which reflects Japan’s weak economic performance during these years. The principal cause of the dollar’s decline is large U.S. current account deficits, $800 billion in 2007 alone. In order to correct this large deficit, the dollar must fall against foreign currencies to cheapen the price of U.S. exports, thereby increasing foreign demand for U.S. products, and raise the price of imports, thereby lowering U.S. demand for foreign goods. Due to the high cost of imported oil, about $500 billion a year, the falling dollar has made little headway in reducing the trade deficit. Foreign central banks and other holders of dollars have been losing trust in the U.S. dollar, gradually diversifying into other hard currencies. Russia’s large earnings from natural resource exports and China’s large trade surpluses have pushed the ruble up 23% since 2002 and yuan up 12% since July 2005. They stand to join the ranks of hard currencies in the not-too-distant future. How embarrassing for American tourists to learn that tickets to visit the Taj Mahal and other museums in India can no longer be paid in dollars, but only in rupees!

The expected decision of the Federal Reserve Board to cut interest rates at its next and perhaps following meetings, reducing returns on dollar-denominated bonds and other financial assets along with raising the specter of inflation, could make dollars even less attractive.

The dollar has gone from good as gold to a lower and lower valued piece of paper. Is it only a matter of time till a freshly designed Federal Reserve Bank note has a picture of bananas on it?

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