Much Ado About Something
The Tyranny of Foreign Exchange Rates
For a long time, I have studied and observed the dynamics determining the foreign exchange rates of the currencies of African nations with keen interest. At the surface level, it appears that these dynamics are controlled by pure international economic forces, activities, and the monetary policies put in place by both the local and central financial institutions of every African country. The role of the International Monetary Fund (IMF) as the nucleus institution influencing worldwide Forex rates need not be overemphasized. Also, the World Bank (IBRD) is an actor, although playing a minor role, on this world stage of Forex.
But the pervading questions which had bothered me for decades are these: Why must the local currencies of a handful of western countries be the exclusive legal tender for carrying on international trade? Why is it imperative for all the economies of the world to measure their own values by currencies tied to foreign economies? I know that there is a ready argument that the international currencies used today are backed by gold. Nevertheless, I am convinced that there is something fundamentally wrong with this arrangement.
In ancient times, trade by barter was the norm. It was a system which allowed each party in an economic transaction to decide on what is considered as a suitable exchange rate between one commodity/service and another. Negotiations ultimately fixed the exchange rate of one commodity/service that would be expressed in terms of the other. It was a fair system which allowed parties to trade according to their independent measure of values and fix relativity, i.e. rates, accordingly.
The modern system of fixing Forex rates is done in financial clearing houses which are controlled by syndicated few financial institutions. To fix a country’s foreign exchange rate, these institutions use technical indices like Consumer Price Index (CPI), Producer Price Index (PPI), Balance of Trade, Employment Reports, Investor Confidence, Political Stability, Geopolitical Events like Wars, Elections, Diplomatic Relations, Historical Performance and Trends, et cetera. Most of these are just statistical data on paper that are often drawn on bases of perception, trend, speculation, hypotheses, and theories that do not represent the current real values of goods and services moving up and down in the international market.
The worst part is that the few countries whose currencies are used as international currencies to determine and fix foreign exchange rates play God and have favourites. The moment a country (usually African) is out of favour with any of these countries, its currency dives into deep devaluation born of some sudden imaginary economic downturn.
The result of this spurious practice that I have just explained is that the income earned by one man for a day’s labour in a country in Europe or the Americas will be the same amount earned by another man for a month’s labour in Africa! : all in the name of foreign exchange! This is ridiculous and unacceptable!
The differentials in incomes that I mentioned here can be dissolved if (and only if) the so-called IMF or World Bank will have its own independent currency which will become the common measure of value for every currency in the World. There is nothing fair about measuring the value of the currencies of all nations by the value placed on the local currencies of select countries in the world. It is all too easy for the governments of those select countries to go to their backyards and print any sum of monies by which all other currencies in the world would be measured. This present practice merely makes the world into a huge farm, conjuring pictures of George Orwell’s “Animal Farm”, where Napoleon changes the law of equality and states boldly that “All animals are equal; but some animals are more equal than others”. All nations in the world, especially African nations, should reject it.
I reject it!
Toyin Abiodun
