The Global Greenback

In Ho Chi Minh City, the proprietor of a nightclub demands a $4 cover charge--in U.S. currency, please. In S ao Paulo, the Sunday classified ads quote dollar prices for everything from a broom factory (for just $25,000 down) to "beautiful blondes and brunettes" at $100 for a few hours of bliss. Want a shiny new Zhiguli sedan? In Moscow, you can drive one home for $5,000 in American cash.

The new world economic order is upon us--and it's awash in greenbacks (chart, page 44). Never before have so many foreigners used dollars for so many purposes, from stabilizing economies to selling soap. "In the last three years, we've had an unprecedented increase in dollars, and the lion's share appears to be going abroad," says Federal Reserve Board currency expert Richard D. Porter. The Fed estimates that nearly two-thirds of the $300 billion of U.S. currency in circulation has gone abroad. That's up 14% in just two years, and triple the amount in use overseas a decade ago.

The skyrocketing demand for dollars is being generated by the search for economic stability that extends from ex-communist economies to the inflation-wracked nations of South America. Even Fidel Castro recently legalized the use of dollars, the ultimate symbol of Yanqui imperialism, in a desperate bid to prop up the crumbling Cuban economy.

The growing use of the dollar is a testament to confidence in the U.S. despite the greenback's 40% fall against other major currencies since 1985. In effect, most of the world is betting that the U.S. will preserve the value of its currency against further depreciation by keeping inflation in check. One U.S. bank is shipping ever-growing piles of greenbacks to Argentina, Russia, China, Indonesia, the former Yugoslavian republics, and the Persian Gulf, where construction workers are paid in dollars. "It's a surprise how little comes back," says a bank executive.

HIDDEN SAVINGS. The dollars flowing into Latin America are helping tame hyperinflation. In April, 1991, as part of a stringent anti-inflation policy, Argentina pegged its currency at parity with the dollar. It now prints no more pesos than it can back up with dollars, gold, or other convertible reserves. Since the new policy began, Argentina's annual inflation rate has plummeted from 84% to 12%. Brazil, where an inflation rate of 1% a day has made the cruzeiro nearly worthless, is considering a similar move.

Although black-market dollar purchases are technically illegal, middle-class Brazilians keep stashes of dollars in U.S. banks or hidden at home. The exchange rate--now around 70,000 cruzeiros to the dollar--is splashed across the pages of daily newspapers. In Bolivia, meanwhile, where half of all bank accounts are denominated in dollars, the greenback is a shadow currency. Bolivians mentally price everything in dollars, then reconvert into bolivianos.

Exactly how did all those dollars get abroad? U.S. officials aren't sure, since there's virtually no tracking of currency leaving America. Only cash transfers of $10,000 or more need be reported. Officials assume that dollars are sent home by U.S. relatives, spent by American tourists, and acquired by businesses selling raw materials and other goods for cash. And, of course, there's illicit money laundering. "It's so easy, it's pathetic," complains a House investigator. "Put a wad of hundred-dollar bills in an overnight pouch, and it's done. Nobody looks."

BENCHMARK. Using dollars to stabilize an economy is not a new idea. Panama and Liberia long ago made the dollar their official currencies, while Hong Kong and Honduras have pegged their money to the dollar. What is new is how eagerly countries that once were bitter ideological foes of the U.S. are grabbing up the greenback.

For these former communist systems, the availability of dollars provides a benchmark of value. In the main shopping districts of Beijing and Shanghai, Chinese consumers trade their renminbi for dollars piled under tables. In Vietnam, despite tight trade sanctions, U.S. currency floating around since American troops left and remittances from family members in the U.S. have allowed the Vietnamese to build a dollar economy. Some $600 million in dollars is believed to be in circulation.

With hyperinflation pushing the exchange rate of the Vietnamese dong above 10,000 to the dollar, greenbacks are essential for buying cars, computers, and other expensive goods. It would take a wheelbarrow of dong to buy the same items. "Without dollars, there would be no way for us to settle big transactions," says Huynh Buu Son, deputy director-general of the Saigon Bank for Industry & Trade. When foreigners rent villas in Hanoi, they are asked to put down three years' rent in advance--in dollars.

No one knows how many dollars are in circulation in Russia, but estimates range up to $20 billion. The ruble had stabilized recently at about 1,000 to the dollar. But when Russia's central bank, on July 24, called in all rubles printed before 1993, that set off a stampede for American cash. "We're not selling any more dollars," exclaimed a woman counting bills at a Moscow currency stand. "It's been a madhouse."

Indeed, with many Russians paid partly in greenbacks, they can now take advantage of kiosks bedecked with large stocks of Snickers and Mars candy bars, Marlboro cigarettes, Jim Beam bourbon, and Coke and Sprite. Says one Western diplomat: "The dollar is unbeatable."

DOLLAR DIET. The dollar reigns supreme in emerging markets because it's still the only currency instantly recognized around the globe. True, in the industrial world, the dollar has been steadily losing ground to the German mark and Japanese yen, and it now comprises only half of official foreign exchange reserves.

But partly for historical reasons, former Soviet economies are reluctant to embrace the German currency, and Japan's central bank doesn't encourage expanding the yen as an international transaction currency. That helps explain why since the fall of communism in 1989, developing countries have raised their dollar reserves from 58% to more than 65% of their total holdings.

There's not much immediate risk to the U.S. in satisfying the world's need for dollars. Cash accounts for less than 9% of the U.S. money supply. And since the Fed is no longer targeting money growth anyway, officials aren't concerned about the inflationary impact of the greenback surge.

To the contrary, the dollar's international spread increases pressure on the U.S. to pursue price stability at home. Fed officials acknowledge that part of the responsibility of having the preeminent world currency is preserving its value. By allowing the emerging world to embark on a dollar diet, Washington may also have more incentive to show a little discipline at home.

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