Floating Exchange Rates Devalue Dollars

"The main role of money is to be a trusted anchor for pricing. People's holding of cash as a "store of value" has always been insignificant. As to a medium of exchange: it fulfills this function properly only when people trust its stability. When the dollar plunges in terms of other currencies by 40% to 60% within few years, and when street vendors in emerging countries refuse dollar bills or accept it at deep discounts, as now happens, it becomes less of a medium of exchange. True, the dollar remains the reserve currency of choice because other countries mismanage their currency too. But relying on the mistakes of strangers is not a good policy. People want to understand that a promise to be paid 5% on U. S. Treasury represents 5% in their own currency too-- rather than, suddenly, minus 10%. When this happens, everyone speaks the same standard monetary language."

Reuven Brenner, Financial Post, 10/01/08

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