Hard Currency, Soft Currency and Dollar Hegemony

In its dealings with first the Chinese and later with the Soviets, one of the first things Vulcan learned was the difference between hard and soft currency. That was true both in the travel expenses and in the process of selling equipment (and later buying equipment and technology.)

Let’s start with the Chinese: this notice appeared in the Society of Petroleum Engineers’ travel advice for the 1982 conference in Beijing:

CURRENCY

Chinese currency is called renminbi (RMB). The basic unit of RMB is the Yuan,
which is worth approximately US $.65. A Yuan is divided into ten Jiao and a
Jiao is divided into 10 Fen. Yuan and Jiao are issued in Notes and Fen in coins.
The import and export of Chinese currency is prohibited, except in the form of
renminbi travelers checks, which are available from the Bank of China in Hong
Kong. No limit is set on the amount of foreign currency which may be brought
into China by travelers; however, such currency must be declared to the
customs inspector upon entry.

Foreign currency (cash or travelers checks) may be exchanged for Chinese
currency at any office of the Bank of China. Bank branches are located in all
the major hotels and in “Friendship Stores”. Travelers are advised to keep the
exchange receipts to show as evidence when converting Chinese currency back
to foreign currency at the time of departure from China. Currency exchange
facilities are available at the airport.

As you can see, the Chinese were very picky about how their currency flowed, because it was (as was the case with virtually any state under Marxist-Leninist principles) a “state controlled currency.” An example of renminbi is found at the top of the page, our logo for the series A Fistful of Yuan: Vulcan in China, 1981-3. This title is humorous because we certainly didn’t want to be paid in RMB but in USD, and the Chinese knew this.

As a side note, when you did exchange your foreign currency, what you were issued is Yuan-denominated “Foreign Exchange Certificates” which you could use in hotels, “Friendship Stores,” (especially for foreigners,) and other tourist places. This was before credit cards became usable in China. You weren’t supposed to use them outside of the restricted areas and you weren’t supposed to get regular RMB as change, but the system was leaky.

Later in the decade we started going to the Soviet Union. The USSR never had the foreign exchange certificates but expected you to account for all of your currency conversions when you left the country. The biggest problem, and this persisted after the Soviet Union went away, was that the rouble was a soft currency (again a legacy of communism) and the Russian economic system, in a state of collapse, was desperate for hard currency. That lack of hard currency was the first barrier in the Russians buying our product, and we ended up acquiring technology and some equipment which would have been valuable in the long run had Vulcan had a long run. That desperation also drove them to do business with people like the Iranians, who did have hard currency from oil revenues.

There are a couple lessons from this brief history. The first is that the Chinese, even in their immediate post-Mao years (Mao had only been dead for five years when we first went there in 1981) were better prepared to earn and spend hard currency than the Soviets/Russians after their collapse. This has been reflected in the subsequent economic performance of both countries. The disparity was evident at the time and hasn’t diminished since.

The second is that one should never forget the difference between “hard” and “soft” currency. The USD has been universally accepted so widely for so long that it’s easy to be complacent about its status. In reality hard and soft currencies are relative terms; some currencies are harder or softer than others. A hard currency must have two characteristics: people must have faith in its value, and it must have free convertibility. USD had both as the yuan and rouble didn’t.

Now the US is in an undeclared war with Russia over the Ukraine, with sanctions following. The US is frustrated because other countries (such as China and India) are unenthusiastic about joining in, and are finding methods to circumvent that, most of which involve using currencies other than the USD. If it is widely perceived that the use of the USD is subject to the whim of the US government, for whatever reason, the USD will “soften,” and countries and businesses will find alternatives.

The softening of the USD will lead to the softening of another advantage the US has: dollar hegemony. Dollar hegemony is another way of stating that the USD is the world’s reserve currency. That hegemony is the main reason why the US hasn’t had to account for its ballooning debt; it simply prints more money and goes on. If those who are at the top in the US put their need for moral justification ahead of the economic welfare of the country, the debt could become more and more of an issue in the economic health of the nation.

The idea of our governing elites is that the sanctions will hinder the Russian war effort, both in economic terms and in terms of their public opinion. The Russian economy was never much to start with; it is hard to conceive of another nation so well endowed with natural resources that has so thoroughly squandered them. The Russians as a people are not as sensitive to adversity as we are. We must be careful not to “cut off our nose to spite our face.” The consequences of that, perhaps not immediately catastrophic, will lead to our decline, and we, like Vulcan, may not have as long of a run as we would like.