Can the world have only one globally dominant currency at one point in time, or can there be more than one? – is the main theme examined in How Global Currencies Work. The authors provide a reassessment of the ‘traditional view’ in which a single leading currency invariably dominates at any point in time. They argue that several globally important national currencies can coexist, and they can play consequential roles in the world economy at the same point in time.


Why are the questions tackled by the book so critical? A single global currency gives an unparalleled privilege to the issuing power – the benefits of issuing the world’s reserve currency. The single most important question today is whether the global monetary supremacy of the dollar can remain unchallenged in the future, and whether it is expectable that other currencies such as the euro or the renminbi will replace it in this role. Can multiple international currencies play consequential international roles simultaneously in the global world economy?

‘The authors provide an extensive analysis of history of global currencies, and answer these questions based on their monetary history, making their case concerning the present implications’ said Dániel Palotai, Executive Director of the Central Bank of Hungary (MNB) in his presentation of How Global Currencies Work at the book launch held in the House of Wisdom. The presentation was followed by a roundtable discussion, in which Dr. György Szapáry, Chief Advisor of the President of MNB and Kristóf Lehmann, Head of Department of MNB discussed the main conclusions of the book.

The authors Barry Eichengreen, Arnaud Mehl and Livia Chitu look at the origin of foreign exchange reserves, tracing back the evolution of the widespread foreign-exchange reserves accumulation by national central banks to the 19th century. In the earlier period the first financial markets were concentrated around a few cities and banking houses. These trusted and well-informed banking houses were able to discount and pay bills of exchange at any location, while at the same time these bills of exchange provided an investment opportunity on the secondary market.

As regards the history of the dollar the authors recall that by 1870 the economic power of United States of America had already outweighed that of Great-Britain. The world’s largest economy gradually evolved into the largest country by foreign trade as well. Yet for a long time the dollar failed to rise to a significant international role – the foreign trade of the United States was conducted through London in the British pound sterling.

World War I, the period when American traders had no choice but to seek funding from their homeland banks, had a favourable effect on the international status of the dollar. By this time the Federal Reserve System had been created and actively worked towards and strongly supported foreign exchange markets. The authors demonstrate that already by the mid-1920s the dollar had challenged sterling as a reserve currency.

The foundations of the international monetary system were laid down at the Genoa Conference. Among the propositions formulated at the conference was the need for the independence of central banks from governments and for the return of central banks to the gold standard. Due to the fact that around 40 percent of the world’s monetary gold reserves was held by the United States, New York became one of the central deposits, with London remaining the other as a matter of tradition. Thus the period saw the coexistence of dollar and sterling as two equally dominant currencies.

By the second half of the 20th century the monetary system of the world was characterised by the dominance of the dollar. This period saw rapid changes in the monetary technology, monetary regulation and financial policies. The authors discuss in detail the shrinking of the role of the sterling and examine the rise and fall of the yen. Their analysis of the history of the euro reminds the reader that the main motivation for the creation of the euro as a currency was the need for the deepening of a single European market, improving the transparency of the prices, reducing the transaction costs, and removing the volatility in national currencies.

In their book the authors dedicate much attention to discovering the possibilities related to the Chinese renminbi. They use that historical wisdom to show that the renminbi’s rapid rise to power is equally possible, just as it happened with the dollar after the outbreak of WWI. They do not exclude the Japanese way either – the possibility that the rapid initial growth could be interrupted by something. They also show the third possibility, which suggests that slowly but surely China is proceeding with the internationalisation of the renminbi. An implicit recommendation of the authors would be a more democratic decision making to ensure the deepening of the renminbi financial markets in order to facilitate a more rapid advancement.

The observations based on the monetary history outlined in the book point to the conclusion that the time may come when several national currencies can simultaneously serve global currency. This, however may have a stabilising and destabilising effect at the same time. On a positive note more currencies may provide liquidity, which may lead to more diversification, and less dependence on one given currency. On the other hand the possibility of a shift entails the risks of an all too swift change. The authors draw the final conclusion that currently no one can tell which of the two scenarios will come true, the answer is in the hands of the decision makers and citizens.


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