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Reserve Currencies: Why are they important for an economy? - EcAlt > .23-1-16 Bretton Woods - Why it's Important - EEE > .
A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves (as cash, sovereign debt, treasury bonds, financial securities, and loans). As of 2020, China holds $1.1Tn of US debt. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.
21-11-24 Indian government set to ban cryptocurrencies:
A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a digital ledger (blockchain). NFTs can be associated with easily-reproducible items such as photos, videos, 3D models, audio, and other types of digital files as unique items (analogous to a certificate of authenticity). NFTs use blockchain technology to provide a public proof of ownership. Copies of the original file are not restricted to the owner of the NFT, and can be copied and shared like any file. The lack of interchangeability (fungibility) distinguishes NFTs from blockchain cryptocurrencies, such as Bitcoin.
NFTs have drawn criticism with respect to the energy cost and carbon footprint associated with validating blockchain transactions as well as its frequent use in art scams. Further criticisms challenge the usefulness of establishing proof of ownership in an unregulated market based on digital files that are easy to copy.
Deflation ..
15-1-23 A Japanese Lesson in Deflation for Europe - WSJ > .Reserve currencies are crucial to the stability of any currency. Central banks and institutions use currency reserves to achieve their economic aims. As such, foreign exchange reserves have only grown in importance over time.
Reserve currency status has both benefits (such as lower exchange rate risk and greater buying power) and drawbacks (such as artificially low interest rates that can spur asset bubbles). How? Higher demand for a reserve currency creates lower borrowing costs through depressed bond yields (most reserves are of government bonds). Issuing countries are also able to borrow in their home currencies and are less worried about propping up their currencies to avoid default. Low borrowing costs stemming from issuing a reserve currency may prompt loose spending by both the public and private sectors, which may result in asset bubbles and ballooning government debt.
The U.S. was able to spend freely on stimuli partly because excess Chinese savings were parked in the dollar. This occurrence is not novel; Robert Triffin (of Triffin Dilemma fame) identified this shortcoming while the gold standard was still in place. Failure to control the outflow of currency places weak financial institutions at risk, and criminals love dollars.
The U.S. was able to spend freely on stimuli partly because excess Chinese savings were parked in the dollar. This occurrence is not novel; Robert Triffin (of Triffin Dilemma fame) identified this shortcoming while the gold standard was still in place. Failure to control the outflow of currency places weak financial institutions at risk, and criminals love dollars.
The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century. However, by the end of the 20th century, the United States dollar had become the world's dominant reserve currency. The world's need for dollars has allowed the United States government to borrow at lower costs, giving the United States an advantage in excess of $100 billion per year.
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 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.
Following the 2020 economic recession, the IMF opined about the emergence of "A New Bretton Woods Moment" which could imply the need for a new global reserve currency system. (see: § Calls for an alternative 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 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 long-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).
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 long-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.
Additionally, in 1971 Nixon suspended the convertibility of the USD to gold, thus creating a fully fiat global reserve currency system.
In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the reserve currency status of the US dollar as a contributing factor to global savings and investment imbalances that led to the crisis. As such, the Triffin Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency role exacerbates the U.S. current account deficit due to heightened demand for dollars.
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.
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 .
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.
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."
Exorbitant privilege .
Floating currency .
Foreign exchange reserves .
Cryptocurrency .
Fiat currency .
Hard currency .
Krugerrand .
Seigniorage .
Special drawing rights .
Triffin dilemma .
World currency .
NFTs have drawn criticism with respect to the energy cost and carbon footprint associated with validating blockchain transactions as well as its frequent use in art scams. Further criticisms challenge the usefulness of establishing proof of ownership in an unregulated market based on digital files that are easy to copy.
