Strange as it may seem, new currencies are not necessarily an infrequent event. Some are created out of necessity, others from financial innovations. However, whether new or old, none have been found to be impervious to the myriad financial disasters and panics, although there are two I can think of that have had a greater permanence than most. The most obvious survivor has been gold, whose ability never to tarnish seems to have retained an enduring hold over the grasping greed of the typical human over the centuries. The other, salt, has fallen out of trading favour more recently but is still equally important in other ways. The Romans, when running out of clipped, debased and devalued denarii and sesterces would pay their good legionnaires in salt (from which we get the term salary). This of course is now less popular as a tradable commodity but still in regular demand – however, even salt has been debased with some awful low sodium salt which apparently is better for you.  I bet that wouldn’t have cut the mustard with many Roman soldiers.

Our most well known recent currency has been the Euro, which has been a remarkable invention. Although not the first attempt at a pan-European currency, as others have been tried before and failed, it has actually found a place as being the most successful pan-European currency since the Roman Empire collapsed.  What I found most remarkable was the ability with which certain countries were willing so easily to give up the pride and prestige of their own currency for the greater common good.

The proud trading histories of the French Franc and the Dutch Guilder would be two; the Deutschmark however was a relatively new invention after the war and the demise of Mr Hitler’s Reich marks. This new currency, though, was imbued with the strength of the German economy and the discipline of its central bank, the Bundesbank. The Germans were being asked to trade in the controlled strength and reliability of their own currency for a bet on a European financial camel – quite a gamble for them given the recent memories of the economic chaos of the depression during the Weimar Republic – and quite a gamble for the Germans to potentially find their currency being impacted by the less disciplined behaviour of their fellow members of the new currency.

Other European currencies, though, will not be missed – after all, what was the point of the Belgian Franc and what was the purpose of Italian Lira coinage, apart from clogging parking meters?

In fact since its adoption in 1995 and with banknotes appearing in 2002, the Euro has grown in reputation as a globally respected currency and now can be seen as a greater reserve currency than Sterling.

However, pressure is mounting on the currency as the Germans fume at the draining effects of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) impacting on both the strength and the credibility of the currency.

Other reasons for changing currencies include financial catastrophe. This is often on the basis that if those countries can launch a new brand then they can leave the old problems behind. There have been examples of which, with the right discipline, this has worked. Brazil and Argentina both changed their currencies after their sovereign debt crises. Brazil swapped the Cruzeiro for the Real while Argentina traded the Peso for the Austral. As yet no one has come up with a better name for the somewhat unfortunately named El Salvadorean Colon.

With the global recession and the accompanying banking disaster, the US $ has come under greater pressure and its role as the master of the global currencies is now being questioned. After all, with the Chinese having some $2 trillion of reserves much of which will be in that currency, it is quite understandable that they would wish to spread their risks elsewhere and diversify away. Most recently China has carried out a currency swap with Argentina but, more importantly, the Chinese have agreed with the Brazilians that they will use each other’s currencies for trade with each other rather than the US$. Now whilst this is by no means terminal for the Dollar, it may lead to other large international traders trying to find other ways of avoiding US exposure – this can only add to that currency’s concerns.

All this adds strength to the arguments put forward by Mr Zhou Xiaochuan, governor of the Chinese Central bank, that we should all be considering a new international currency, possibly in the form of the IMF SDRs (Special Drawing Rights) which are made up of a basket of currencies, to move away from the global Dollar reliance.

All interesting ideas, but as yet I don’t think the “greenback” will be losing its appeal for the time being. I suspect it will at least remain the currency of choice for the Columbian cocaine cartels.

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Are all banks running up huge losses and write offs? Well certainly not when you look at The Bank of England. It apparently has earned its biggest profits in its 315 year history of some £995 million. This is apparently five times larger than its figure from the previous year and relates almost entirely from its huge purchases of securities which benefitted as interest rates fell. Well maybe they will extend into credit cards next year?

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And finally…..news from the open minded and internationally aware schools in West Haven, Utah. The principal of a Utah middle school has been asked to apologise for forcing a kilt-wearing student to change his clothes.

A school district spokesman had been asked to extend an apology to 14-year-old student Gavin McFarland. Gavin says he wore the kilt twice in the past two weeks to Rocky Mountain Junior High as a prop for an art project.

The spokesman told the boy that the outfit could be misconstrued as cross-dressing, and added that the district now recognises the kilt as an expression of the boy’s Scottish heritage and that the kilt was not inappropriate.

A newspaper report went on to say that apparently Kilts are traditional Scottish apparel generally worn by men for formal or special occasions.

There goes my cross-dressing holiday in Utah then.

Have a good week.

Justin A. Urquhart Stewart

Director

Seven Investment Management Limited