Currency Matters- Just Ask The Turks

By Rob McCreary

In the US we rarely think about currency because ours is the reserve currency of the world. Oil is priced in US Dollars. Many loans to emerging countries are denominated in dollars to hedge against currency devaluations. For a long time the Chinese Yuan was pegged to the dollar.

Bretton Woods Established The Dollar

Dollar dominance is mostly the doing of an obscure government employee, Harry Dexter White, who was an Associate Secretary of Treasury. In 1944 Mr. White understood the US position as the world’s banker and largest creditor after World War II. Most of the allies owed us money. Mr. White proposed a new financial order where currencies were pegged to gold. Given we controlled most of the gold and had a stable financial system, the USD (pegged to gold reserves) became the benchmark against which all other currencies traded. No other nation could provide that stability and the UK and Europe, Japan and Germany had no choice but to accept the dollar as the reserve currency after World War II. Only the Russians refused to sign the Bretton Woods accord.

Thirty years later in 1972 the US abandoned the gold standard for currencies and since then the USD has not been backed by actual gold reserves. Nonetheless no other currency or basket of currencies has challenged the USD’s position as the world’s most stable currency.

Turkey Reminds Us About Reserve Currencies

Turkey’s financial implosion reminds us of what it means to have the US Dollar as the reserve currency.  The repayment of more than 35% of Turkey’s debt is denominated in more stable foreign currencies, principally US dollars. In January 2018 it took 200 million Turkish lira to fund repayment of a $50 million dollar denominated note. Today, due to the strong US dollar and the weakening lira, it takes 350 millionLira. The price of a reckless monetary policy is almost a doubling on the cost of funds for 35% of Turkey’s outstanding debt.

Here are four charts from the August 13 edition of The Wall Street Journal (article by Christopher Whittall) that illustrate the Turkish dilemma. Pay special attention to Turkey’s reliance on oil imports and how a weak lira has raised the price of diesel fuel:






While I have written several articles lately about the US debt problem, I am certainly happy that US debt is denominated in US Dollars. We always have the option of becoming Argentina and rendering all that debt worthless by inflating our way out of debtor’s prison. Turkey does not have that option. It will be interesting to see how they handle all their foreign creditors who want repayment in a currency other than Turkish lira.

Rob McCrearyCurrency Matters- Just Ask The Turks


  1. john sinnenberg

    I actually often think about the dollar particularly the ‘exorbitant privilege’ of being the world’s reserve currency. Trade balance surplus countries hold their dollar reserves (mostly) via investments in US Treasury Securities. I believe the implicit tradeoff with our western world democracies is that we use our military to police world order and they buy Treasuries to finance our deficits. The current administration’s policy actions (NATO, trade, tariffs etc) will encourage participants in the global economy to move towards another solution. It will take a decade or two but that solution may eventually be SDRs comprised of a basket including the euro, yen and possibly the rmb. Any move away from the dollar as the reserve currency will drive up the interest expense relating to funding the US Government’s long term deficits as other countries no longer need to hold as many Treasuries. jrs

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