Criminality and Money Laundering a Vital Aspect of Currency Success

I’ve just seen a post by Matthew Yglesias at Slate, ‘Fistful of Dollars’.  It starts with a look at how the United States imports a lot of goods, and exports a lot of dollars in exchange.  The export of dollars helps the United States  because that is how Americans can have stuff, and confidence in the dollar is what enables Americans to buy that stuff (and borrow at low interest rates though I don’t think Yglesias makes that point directly.

What really interested me is how he brings in the role of money laundering and criminality as pillars of the the reserve status of major currencies. Why are dollars so much in demand, so that they will be accepted though out the world in exchange for goods and services at rates favourable to those with dollars to spend?  A major reason is that the dollar is very convenient for those who cannot rely on banking services. These may be honest citizens who need to be able to store and carry large values around without entrusting them to dubious or hard to find financial institutions.  However, it is often criminals (including terrorists, war lords, and gangsters, though Yglesias does not put it in such dramatic terms) who need to carry large amounts of cash, or exchange dubious products for some internationally recognised form of carrying value.  The dollar fits in very well.  It’s status as the leading reserve currency is a self-reinforcing benefit from that point of view.  The 100 dollar bill is particularly useful for high value criminal transactions (Yglesias refers to it as a Benjamin Franklin, because his portrait appears on that bill).  

What Yglesias also points out is that the Euro includes a 500 denomination, much higher value than a 100 dollar bill, so much more useful to criminal entrepreneurs!  Like the 100 dollar bill, it appears to be mostly used  by criminals.  So notorious is the 500 Euro note that it is apparently banned in British exchange bureaux, according to Yglesias.  So much for British liberalism in financial services.  In the USA, supposed home of free enterprise, it is not possible to buy dollars without showing a passport!  No doubt the authorities take a particular interest in those purchasing Ben Franklins.  

That reminds me of the Bitcoin project, which is a purely electronic currency using peer to peer computer networks and generated by software which limits the amount in use.  This has generated online discussion, but a very marginal place in financial transactions.  It does however have a foothold.  It’s advocates regard freedom from government oversight in its creations and in its transactions as a major advantage, which is to say that it facilities operating at the margins of legality.  I have even seen advocates arguing that it is bound to become a major currency because drug dealers and the like will find it convenient.  United States politicians have already demanded investigation of its criminal potential. 

So how to create a reserve currency.  Make sure it includes large denomination notes suitable for money laundering and criminal exchanges.  On this note, money deposited by drug gangs may have helped stabilise the world banking system during the recent unpleasantness.  I can’t trace the source of that claim right now, but it was a serious source.  By this criterion, if the Euro survives its own present complications, it is well placed to take over from the dollar as the world’s leading reserve currency.  The last I heard, the bit coin project is falling back, but maybe there is hope for it yet, if the leading criminal entrepreneurs hire IT admins into peer to peer computer networking anyway.  

Finally, this is just a small example of how known but not officially acknowledged means of creating non-legal and downright illegal wealth, play a role in economic and financial policy, and all public policy.  

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