In the world’s first trade ever, goods were traded for other goods based on what people required and what they owned on that specific day. This was and still is called a “barter” economy. As many transactions took place on a daily basis, the challenge was to know the exact or close to exact worth of a certain commodity. For example, is 1 cow worth 5 chickens? Or is one cow worth 3 sheep? Or perhaps both are true? And here I have only mentioned three out of thousands of commodities that can be two sides of a possible trade. As a partial solution; silver and gold were introduced as currencies that can be better determinants of the value of a commodity. Those currencies were discarded later, not just because they are rare resources, but because using them wasn’t practical as civilizations evolved. Since inflation normally increases, it will cost more to buy a product which means carrying heavy weights of those currencies. Accordingly, paper currencies were born.
Gold was replaced by the US dollar which was backed by the gold at first. Those gold bars were stored in Fort Knox and were increased as more US dollars were printed and floated around in the world economy. Hence, the US Dollar was in a way considered modern gold, though more practical. As a result of that, the US dollar became widely accepted and you could carry it with you almost everywhere. In the matter of fact, and even though the US economy is not as reliable as it used to be, people still carry the US dollar when they travel based on that same initial belief. As time passed, countries realized that they won’t only be depending on the US to provide them with the currency, but that they will also be affected by its financial policies. So whenever they decide to increase or decrease their interest rates, for instance; it will have to be synchronized with the US Treasury. Besides that, local stock markets will be greatly impacted by whatever happens in the US stock markets.
For reasons besides national sovereignty, different countries adopted different approaches to gain what I would refer to as partial economic and financial independence. To illustrate, there were two main approaches. The first was to have no local currency and to use the US dollar as the local one as well as the internationally accepted one. In such a case, any change in the US financial policies will affect those countries almost equally. However, it can be argued that the impact would be greater as those are smaller economies compared to that of the US. The second approach is to peg the local currency to the US dollar, which in commonly used words means that the exchange rates between those local currencies and the US dollar are stable compared to others. Moreover, upward and downward movements are limited based on the values at which the local currencies were initially assessed for exchange rates to be determined.
There is always a white knight to save the day for the US and its economy like the case was, twice, with Citi Group. Yet, countries still accept the dollar and trust it. And when you think about the Euro and its unknown fate, who other than Uncle Sam can you trust anyways? There will always be problems associated with either one of the above mentioned approaches, though these differ in magnitude and effect. When the financial crisis hit the GCC, some countries decided to stay pegged to the US dollar while others decided to have their currencies pegged to a basket of currencies. Once the crisis has completely settled in, that proved to not be as effective as they thought it would be. Since such differences in financial policies exist; it makes one wonder how would they come to an agreement regarding one GCC currency. For as far as we are concerned, I believe we are pegged to the US dollar until death do us part.