. The world's need for dollars has allowed the
.
Reserve currencies are typically issued by developed, stable countries. The currency most commonly held as a foreign exchange reserve is the U.S. dollar, which, according to the
International Monetary Fund (IMF), comprised nearly 62% of allocated reserves as of late
2012. Other currencies held in reserve include the euro, Japanese yen, Swiss franc and pound sterling. The dollar, while still the most widely held reserve currency, has seen
increased competition from the euro. The
euro has grown from slightly less than an
18% share of allocated reserves, when it was introduced into the financial markets in
1999, to
24% at the end of
2011.
The
IMF reports both allocated reserves, meaning that a country has identified the currencies held in reserve,
and total foreign exchange holdings. The
overall percentage of total holdings that are
allocated reserves has
fallen steadily over the years, from
74% in 1995 to
55% in 2011. Much of this shift can be explained by changing foreign exchange holdings in
emerging and developing countries. In
1995,
advanced economies held around
67% of
total foreign exchange reserves, with
82% of these being
allocated reserves. By
2011, the picture had been flipped on its head:
emerging and developing countries held
67% of total reserves, with
less than 39% allocated. Emerging countries now hold roughly
$6.8 trillion in reserve currency.
Between 1995 and 2011, the amount of currency held in reserve increased by over 730%, from around $1.4 trillion to
$10.2 trillion.
The currencies of China (the world's 2nd largest economy), Brazil (6th), Russia (9th) and India (10th) -
the BRIC countries - are
not considered reserve, which is why these countries have been more vocal proponents of the creation of a reserve currency unattached to any one country.
Historically, reserve currencies have come and gone. International currencies in the past have (excluding those discussed below) included the Greek
drachma, coined in the fifth century B.C., the Roman
denari, the Byzantine
solidus and Arab
dinar of the middle-ages and the
French franc.
The Venetian
ducat and the Florentine
florin became the gold-based currency of choice between Europe and the Arab world from the
13th to 16th centuries, since gold was easier than silver to mint in standard sizes and transport over long distances. It was the Spanish-American
silver dollar, however, which created the first true global reserve currency recognized in Europe, Asia and the Americas from the
16th to 19th centuries due to abundant silver supplies from
Spanish America.
While the
Dutch guilder was a reserve currency of somewhat lesser scope, used between Europe and the territories of the
Dutch colonial empire from the
17th to
18th centuries, it was also a
silver standard currency fed with the output of Spanish-American mines flowing through the
Spanish Netherlands. The Dutch, through the
Amsterdam Wisselbank (the
Bank of Amsterdam), were also the first to establish a reserve currency whose monetary unit was stabilized using practices familiar to modern
central banking (as opposed to the
Spanish dollar stabilized through American mine output and Spanish fiat) and which can be considered as the precursor to modern-day
monetary policy.
It was therefore the Dutch which served as the model for
bank money and reserve currencies stabilized by central banks, with the
establishment of Bank of England in 1694 and the
Bank of France in the
19th century. The British
pound sterling, in particular, was poised to dislodge the Spanish-American dollar's hegemony as the rest of the world transitioned to the
gold standard in the
last quarter of the 19th century. At that point, the UK was the primary exporter of manufactured goods and services, and
over 60% of world trade was invoiced in
pounds sterling. British banks were also expanding overseas; London was the world centre for
insurance and
commodity markets and British capital was the leading source of foreign investment around the world; sterling soon became the standard currency used for international commercial transactions.
Attempts were made in the
interwar period to
restore the gold standard. The
British Gold Standard Act reintroduced the
gold bullion standard in 1925, followed by many other countries. This led to
relative stability, followed by
deflation, but because the onset of the
Great Depression and other factors,
global trade greatly declined and the
gold standard fell.
Speculative attacks on the pound forced
Britain entirely off the gold standard in 1931. The United Kingdom's
pound sterling was the primary reserve currency until the UK almost bankrupted itself fighting
WW1 and
WW2 resulting in the Pound losing its status as the world's most important reserve currency. In the 1950s 55% of global reserves were still held in sterling; but the share was 10% lower within 20 years. As of 30 September 2019, the pound sterling represented the
fourth largest proportion (by USD equivalent value) of foreign currency reserves.
The establishment of the U.S.
Federal Reserve System in 1913 and the economic vacuum following the World Wars facilitated the emergence of the United States as an economic superpower.
In the
late 1960s and
early 1970s, the system suffered setbacks ostensibly due to problems pointed out by the
Triffin dilemma—the
conflict of economic interests that arises
between short-term domestic objectives and l
ong-term international objectives when a
national currency also serves as a world reserve currency. The
Triffin dilemma or
Triffin paradox was identified in the
1960s by
Belgian-
American economist
Robert Triffin, who pointed out that
the country whose currency, being the
global reserve currency, foreign nations wish to hold, must be willing to
supply the world with an extra supply of its currency to fulfill world demand for these
foreign exchange reserves, thus leading to a
trade deficit.
The use of a
national currency, such as the
U.S. dollar, as global reserve currency leads to
tension between its national and global monetary policy. This is reflected in
fundamental imbalances in the balance of payments, specifically the
current account, as
some goals require an
outflow of dollars from the United States, while
others require an overall inflow.
After WW2, the international financial system was governed by a
formal agreement, the
Bretton Woods System. Under this system, the
United States dollar (USD) was
placed deliberately as the
anchor of the system, with the
US government guaranteeing other
central banks that they could sell their
US dollar reserves at a
fixed rate for gold.
Specifically, the Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the
Bretton Woods system.
John Maynard Keynes had
anticipated this difficulty and had
advocated the use of a global reserve currency called 'Bancor'. The bancor was a
supranational currency that
John Maynard Keynes and
E. F. Schumacher conceptualised in the years
1940–1942 and which the
United Kingdom proposed to introduce after
WW2. The name was inspired by the French banque or ('bank gold'). This newly created supranational currency would then be
used in international trade as a
unit of account within a proposed
multilateral clearing system—the
International Clearing Union (which would also need to be founded).
Currently, the
IMF's SDRs are the
closest thing to the
proposed Bancor but they
have not been adopted widely enough to replace the dollar as the global reserve currency.
Economists debate whether a single reserve currency will always dominate the global economy. Many have recently argued that one currency will
almost always dominate due to
network externalities (sometimes called "the
network effect"), especially in the field of
invoicing trade and
denominating foreign debt securities, meaning that there are
strong incentives to conform to the choice that
dominates the marketplace. The argument is that, in the absence of sufficiently large shocks, a currency that dominates the marketplace will not lose much ground to challengers.
However, some economists, such as
Barry Eichengreen, argue that this is
not as true when it comes to the denomination of official reserves because the network externalities are not strong. As long as the currency's market is sufficiently liquid, the benefits of
reserve diversification are strong, as it
insures against large capital losses. The implication is that the world may well soon
begin to move away from a financial system dominated uniquely by the US dollar. In the
first half of the 20th century, multiple currencies did share the status as primary reserve currencies. Although the
British Sterling was the largest currency, both the
French franc and the
German mark shared large portions of the market until WW1, after which the mark was replaced by the
dollar. Since WW2, the dollar has dominated official reserves, but this is likely a reflection of the
unusual domination of the American economy during this period, as well as
official discouragement of reserve status from the potential rivals,
Germany and
Japan.
The
top reserve currency is generally
selected by the banking community for the
strength and stability of the economy in which it is used. Thus, as a currency becomes less stable, or its economy becomes less dominant, bankers may over time
abandon it for a currency issued by a larger or more stable economy. This can take a relatively long time, as recognition is important in determining a reserve currency. For example, it took many years after the United States overtook the United Kingdom as the world's largest economy before the dollar overtook the pound sterling as the dominant global reserve currency. In
1944, when the
US dollar was chosen as the world reference currency at Bretton Woods, it was only the
second currency in global reserves.
The
G7 (G8) also frequently issues public statements as to
exchange rates. In the past due to the
Plaza Accord, its predecessor bodies could
directly manipulate rates to reverse large trade deficits.
A report released by the
United Nations Conference on Trade and Development in
2010, called for abandoning the U.S. dollar as the single major reserve currency. The report states that the
new reserve system should not be based on a single currency or even multiple national currencies but instead permit the emission of international liquidity to create a more stable global financial system.
Countries such as
Russia and the
People's Republic of China, central banks, and economic analysts and groups, such as the
Gulf Cooperation Council, have expressed a desire to see an independent new currency replace the dollar as the reserve currency. However, it is recognized that the US dollar remains the strongest reserve currency.
On
10 July 2009, Russian President Medvedev proposed a new '
World currency' at the G8 meeting in London as an alternative reserve currency to replace the dollar.
At the
beginning of the 21st century, gold and crude oil were still priced in dollars, which helps export inflation and has brought complaints about
OPEC's policies of
managing oil quotas to maintain dollar price stability.
Some have proposed the use of the
International Monetary Fund's (IMF) special drawing rights (SDRs) as a reserve. China has proposed using SDRs, calculated daily from a basket of U.S. dollar, euro, Japanese yen and British pounds, for international payments.
On
3 September 2009, the
United Nations Conference on Trade and Development (UNCTAD) issued a
report calling for a new reserve currency based on the SDR, managed by a
new global reserve bank. The
IMF released a report in
February 2011, stating that using SDRs "could help stabilize the global financial system."
Commodity currency .
Exorbitant privilege .
Floating currency .
Foreign exchange reserves .
Cryptocurrency .
Fiat currency .
Hard currency .
Krugerrand .
Seigniorage .
Special drawing rights .
Triffin dilemma .
World currency .
