Abstract
It is axiomatic that as the world’s leading economic power dominates international trade and payments, its currency will be used as most countries’ means of payment, their principal foreign exchange reserves and the main units of account. The implications are considerable: The world’s leading economic power has the ability (and obligation) to stabilise the international monetary system when the risks to economic stability are at their greatest.
In the nineteenth century and early part of the twentieth century, dominance was shared by the French franc, the German mark and the British pound sterling. Following ‘big bang’ internationalisation and adoption of the dollar between 1914 and 1924, it was shared by the US dollar and sterling and, since World War II, the US dollar has monopolised international currency.
While economic leadership and monetary dominance go together, this may not always be the case, leading to the ‘Triffin dilemma’, the conflict arising from short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. At the end of the twentieth century, the United States accounted for a declining share of an expanding global economy resulting in a diminishing capacity to provide the necessary level of safe and liquid assets. This led the US Federal Reserve, in the view of Eichengreen et al., ‘to substitute subprime-mortgage-linked securities, whose stability and liquidity turned out to be less than met the eye’ (p. 12).
That is the ‘traditional view’. The ‘new view’, according to Eichengreen et al., is that because of increased international trade and technological advances, it is now easy to switch currencies and the costs of doing so are low. It is unnecessary for economic and monetary stability to depend on a relatively mature, slowly growing economy in the United States. The Chinese renminbi overtook the euro in 2013 as the second most widely used currency in global trade finance although in 2014, it accounted for just 2 per cent of global payments (Chapter 10).
Although a historical analysis relating to the world’s main currencies over the last two centuries may primarily be of interest to macroeconomic economists and monetary history, this book is particularly well written, in which the authors (in their words) present ‘theory verbally rather than laying it out in gory detail in order to make the analysis accessible to the widest possible audience’ (p. 15), not least because many of the chapters are based on their earlier academic articles. So, if a more rigorous examination of the models is required, readers may refer to these.
Features of the book are the story of the failure of the Japanese yen (Chapter 9) and a discussion of the prospects for the 21st century and its version of the ‘Triffin dilemma’ in terms of the global economy’s liquidity needs, countercyclical and emergency lending (Chapters 10 and 11). I was particularly interested in the irony of the role of the US dollar in and following the 2007–2008 financial crisis and would have liked to read more.