Canadian Dollar as an International Unit of Account

In Macroeconomic Principles and Money and Banking courses we teach that money has three uses: a medium of exchange, a store of value, and a unit of account. The first two are reasonable easy to explain. The third is a little more difficult. What is truly confusing is when other countries start using your currency as a unit of account, but not as either a medium of exchange, or a store of value.

Such is the case when a foreign nation or institution issues debt in Canadian dollars as the World Bank did in 2007. (click here for the press release). The government of Israel also has outstanding debt issued in Canadian dollars (click here for quotes). The most common reason for doing this is risk reduction. Buyers of bonds prefer less volatility in the currency of issue. For a country that has volatile currency, they can assume the risk by issuing a more stable currency. The benefit is a lower interest rate to the issuer. An illustration may help.

Suppose that Percy wishes to pursue his lifelong ambition of purchasing a pineapple ranch in his native Ghana. The offered price is 1.5 million Ghanaian cedi. To finance the purchase of his ranch, Percy calls on his Swiss friend, Heinz, and asks for a loan of 1.5 million cedi. Heinz is willing to lend Percy 1.02 million francs. Over coffee, they agree on a loan of 1 million Canadian dollars and the documents are prepared. Heinz converts his 1.02 million francs to 1 million Canadian dollars and then delivers them electronically to Percy who then converts them into 1.5 million cedi. Both parties are happy.

But what about Canadians? Since Heinz is buying the same number of Canadian dollars that Percy is selling, there should be no effect on the Canadian dollar exchange rate. Likewise, since the Bank of Canada isn’t issuing any new dollars, there is no effect on the Canadian money supply. Canada is not affected. Heinz is lending 1.02 million francs, Percy is borrowing 1.5 million cedi and they have agreed to use the Canadian dollar as the unit of account. The same argument holds true when Percy makes interest and principal payments to Heinz. Again, Canadians are not affected.

Money, as a unit of account, has no effect on the real economy. Assets can be denominated in any currency on earth, or for Star Trek fans, even gold pressed latinum, so long as both parties can agree.