Author’s Name: Mr. Hakikat
Author’s Detail: Ph.D. Scholar, DCRUST, Murthal, Haryana, India.
Address: H. No. 527A/31, Street No. 7, Ashok Vihar, Sonepat, Haryana, Pin – 131001.
Contact No.: 08053700923
Email Id: hakikatkadyan@gmail.com
Manuscript Type: Research Paper.
This study is done to seek the answer of question that why a particular currency such as US Dollar dominates in world as international currency. To understand the answer of that question, first the characteristics of international currency are discussed and analyzed that how US Dollar fulfill all these essential characteristics of international currency. Next question which is tried to solve in this paper is that which important factors a country should have to internationalize its currency. Next it is discussed that after internationalize its currency, which costs & benefits as well as positive & negative externalities a country would face. As there is continuous debate about the future of US Dollar, it has been tried to find out whether US Dollar can be replaced by another international currency in near future. To find the answer of all above questions, theoretical or conceptual approach is followed. After analyzing the literature and understanding the current position of US Dollar as international currency, it has been concluded that there is less chance that US Dollar can be completely replaced by another international currency in near future. But as the influence of Euro has increased in European region, Euro can replace the US Dollar in this region. Same way, Chinese Renminbi can become the powerful international currency in Asian region in future. So, in future we can see the multi international currency world, where a currency will dominate in a particular region only.
Keywords: International currency, US Dollar, Euro, Chinese Renminbi, Currency trade blocks.
As we daily see in newspaper, Exchange rate of Indian Rupee and US Dollar is generally given. Same way most of the international Standardized goods such as oil, gas etc. are invoiced in Dollar. Even on online shopping sites, many goods and services like books, cosmetic items, international tour package, air tickets etc. are priced in Dollar. The reason of happening of that is because Dollar is world’s most dominating currency and performs the role of international currency. International currency has some certain characteristics which differentiate it from other currencies. As explained by Blinder (1996), money has three main functions: Medium of exchange, Store of value, & Unit of account. An international currency performs these functions on international level. But Chinn & Frankel (2007) explained that international currency has different functions for official and private purposes. For official purposes (by government), international currency is used to invest official saving of nation, for intervention in exchange market, & for pegging local currency to international currency. Private uses (by trader and general public) of international currency are as follows: substitution of local currency or Dollarization, use for trade and other transactions (such as remittance), & invoicing of goods and services. International currency’s characteristics are discussed in detail in fourth section.
A currency of particular nation can dominate in world as international currency if it fulfills at least certain conditions as explained by different scholars: Nation should have large economy and should have large share in world trade (Ranjan & Prakash,2010). Mundell (1999) explained that people’s faith should be there for international currency. Already established international currency may have first mover advantages (Marc Aubion, 2012). People’s belief will certainly high, in a currency which is already established as international currency; this provides first mover advantage to that currency. Papaioannou & Portes (2008) explained that openness of economy and financial market, political power of country, and less volatility of currency are also important factors for making a currency as international currency. Factors which are helpful in making a currency as international currency are discussed in detail in fifth section.
Currently, United State’s Dollar (USD) is dominating in world as international currency. But this is not the first currency, which have become the international currency. In previous era, different currencies have dominated the world in different time periods. A brief history of previous dominating currencies is discussed here. Dwyer & Lothian (2002) explained that first currency which was used beyond its nation’s local boundaries was silver Drachma. Silver Drachma (Greece) was first coined in fifth century B.C. After that so many currencies were used beyond their own nations’ limits. Some of the main international currencies are as follows: Aureus (gold coin of Rome in 1st century), Denarius (silver coin of Rome in 2nd century), Solidus (gold coin of Rome in 4th century), Dinar (Silver coin of Syrian Dynasty in 12th century), & Florin (gold coin of Italy in 12th century) etc. Dwyer & Lothian (2002) analyzed that all international currencies of past history have some common characteristics as follows: Unitary of value in form of gold, Intrinsic stability in form of weight and fineness, & high economic power of issuing nations of those currencies. In 17th century Dutch Guilder become the main international currency. Bank of Amsterdam, which issue Dutch Guilder becomes the financial hub (Blinder, 1996). As explained by Dwyer & Lothian (2002), Dutch Guilder’s development made the huge changes. Before Guilder, there were thousands of currencies, but Guilder becomes the currency of unit of account and transactions. There were two form of Guilder: Guilder Banco which was used as unit of account and Guilder coin which was used for transactions. In 18th century Guilder’s influence was reduced and Pound sterling becomes the main international currency. Now trade and economic power were shifted to London and Paris (Blinder, 1996). England and other nearby European countries were the centre of world economy in 18th century and this continues until 19th century. After 1st world war, United State of America arisen as dominating economy and Dollar becomes the main international currency. As explained by Eichengreen(2014), in 1899 64% of foreign reserve were held in Sterling, & it reduced up to 48% in 1913. In 1920s, foreign reserve in Dollar and Sterling becomes almost equal. After 2nd world war, US Dollar finally won the race for international currency against Pound Sterling. Chinn & Frankel (2008) explained that fall of Pound Starling as international currency was due to big economic and political changes in economy of England. The main changes were that England lost its dominating military power, many colonies were become free, & reduced trade power etc. After Bretton Woods Conference in 1945, International Monetary Fund (IMF) was established. IMF established a fixed parity system, under which all countries fixed their currency’s value in comparison to US Dollar. US Dollar’s value was fixed against gold as 35 Dollar per troy ounce of gold. The fixed parity system continues up to mid 1970s. But because of difficulties of maintaining fixed parity system, IMF abandoned the fixed parity system (V. Sharan, 1992).
Since second war, US Dollar is the main international currency. But since then few financial crisis, especially after 2008 has create new debate that whether US Dollar will be able or should be continue as world’s most dominating international currency. As Emily Merki (2015) argued that US economy is affecting due to Dollar’s role of international currency. Current account deficit is continuously increasing. Same way Cohen (2009) explained that US current account deficit and financial crisis of 2008, has reduced confidence of people in US Dollar. So those countries (Russia, China etc.) which have large financial reserve holding in Dollar are worried about the affect if Dollar fails in future. So the main question is which currency can replace the Dollar as international currency. As explained by Eichgreen (2014) and Cohen (2009), that Japanese Yen showed some sign of rising currency in 1970s and 1980s, but after that its chance of becoming international currency is continuously falling. Another currency which seems to give competition to US Dollar is Euro. After the rise of Euro around in year 2000, and its adoption by many European countries show that it can become international currency. Chinn and Frankel (2008) examined that Euro can become the international currency and by pass the US Dollar, exactly the same way as US Dollar done with Pound Sterling. Same way Papaioannou & Portes (2008) explained that European Union has all necessary conditions which can make a currency international, so there is high chance that Euro will become an international currency. There are also some arguments that whether Chinese Renminbi can become international currency in future. As Eichengreen (2014) explained that past view is wrong which explains that it is difficult to replace already established currency due to first mover advantage. New view explains that more than one currency can become international currency at a time. So there is chance that Renminbi can become international currency with Dollar. But Marc Aubion (2012) explained that there is less possibility that Chinese Renminbi can replace the US Dollar & Euro as international currency. Same way (Ranjan & Prakash,2010) examined that Chinese Renminbi can become dominating currency only in Asia. At world level it cannot replace US Dollar.
In first section of this research paper, a brief introduction about international currency is given. Just a brief history of international currency is also discussed in this section. In second section, literature review on international currency, its characteristics, & nation’s necessary factors to internationalize its currency, is explained. In third section, main objectives of this study are explained in simple terms. In fourth section, main characteristics of international currency are discussed. In fifth section, nation’s those factors are discussed, which are helpful to make its currency international. In sixth section, costs and benefits of international currency are discussed. In seventh section, conclusion of the study is given.
Alan Blinder (1996) has explained that international currency has main four functions: 1. It is used as reserve currency by central banks of other countries. 2. It is used as currency for normal transactions in other countries. 3. It is used for invoicing and payment of international trade. 4. It is highly used in international finance market. He has pointed that US Dollar is currently performing these functions and no currency seems to replace the Dollar in near future. Chinn and Frankel (2007) analyzed that international currency performs three money functions (unit of account, store of value, & medium of exchange) for official or government and for private purposes (for particular persons). So, international currency has total six functions. Robert Mundell (1999) has given seven important aspects which explain the international currency: 1. It is used on large scale. 2. It requires a stable monetary policy. 3. There should not be any control or economy should be open. 4. The nation should have economic and political power. 5. Past international currencies were backed by gold or silver. 6. People should have faith in currency. 7. Low interest rate. He predicted that world would again turn to fixed exchange rate.
Emily Merki (2015) argued that US Dollar cannot perform as international currency for long time because of its current account deficit and financial crisis. Further no other country’s currency seems to become international currency. So, suggestion is that a common international currency should be developed and other currencies should have fixed exchange rate with this currency. Further, World Trade Organization (WTO) should regulate it, because it has more strict regulation than International Monetary Fund (IMF). Cohen (2009) has pointed that US Dollar cannot dominate the world in future; in fact future is unfavorable to US Dollar and favorable to new rising economies such as China and India. Eichengreen (2014) argued that US Dollar will not be able to take advantage of first mover advantage as explained by old view. New view explains that more than one currency can become international currency simultaneously. In 2009, foreign reserve holding in Euro was highest, but since then it is continuously reducing. So it is more likely that Chinese Renminbi and US Dollar both performs the role of international currency together.
Benjamin Cohen (2012) describes the benefits and costs of having an international currency. Both benefits and costs are non negligible. So, it depends on the nation whether that nation want to take costs with the benefits. Otherwise a nation can use its currency for only particular function of international currency such as only for trade and invoicing. Ranjan & Prakash (2010) has also discussed the cost and benefits of international currency. They also discussed the conditions which are necessary to make a currency international such as openness of economy and trade, high Growth Domestic Product (GDP), people’s confidence in currency. On the basis of these conditions, they concluded that Chinese Renminbi cannot become international currency in near future, but it can play a big role in Asian region. Kenneth Rogoff (2001) suggested that no single currency can perform role of international currency in future because of complexity of economies. Developing of new common currency for international currency is not helpful because there is no clear cut rule of how to govern this currency. So, the main three or four currencies such as US Dollar, Euro, Yen etc. can perform as international currency.
The main aim of this paper is to understand the reason why a particular currency dominates in world as international currency. The circumstances in which, an international currency can be replaced by the other currency. The main objectives of this study are given below in more simplified form:
International currency’s characteristics are the functions which it has to perform at international level and these functions make this currency different from other currencies. Level of internationalization of a currency is measured as how many monetary functions it performs at international level. Characteristics of international currency are as follows:
After understanding the characteristics of an international currency, the next important thing to know is the factors which are helpful to internationalization of a currency. These factors are related to the country, which contributes for making the country’s currency as dominating currency at international level. Important factors are given below:
International currency have both benefits and costs, because of that it is not easy decision for a country to decide whether try to make it currency international or not. There are so many positive and negative externalities for a country that run an international currency. The benefits of international currency are as follows:
The main costs of having an international currency are given below:
This study is done to understand the concept of international currency and to understand why a particular currency dominates in international transactions of world. International currency is a currency which is used by different people for different purposes in international transactions. Individual person uses this international currency for invoicing their export and import, payment for commercial transactions or such as remittance, and sometimes even in local transactions foreign international currency is used. Extreme situation of using international currency in local transactions is Dollarization. In this case, people of a particular nation, start using international currency in place of their local currency and almost replace the local currency with international currency even in local market. On the other hand, governments and central banks also use international currency as reserve currency for their investment capital, for pegging their currencies with international currency and also using international currency for intervention in exchange market. Currently US Dollar is used on large scale as international currency for different purposes by both individuals and officials (governments & central banks).
If a country wants the internationalization of its currency, then there are some conditions which it has to be fulfilled. First and most import conditions of a nation for internationalize its currency is that it should be dominating economy of the world and should have large proportion in worlds’ trade. In the past, world’s all international currencies have come from the powerful economic countries. Political power is also important with economic power. Country should have strong and stable macroeconomic policy, so that fluctuation will be less in the economy. Because of strong and stable policy, exchange rate fluctuation will be less for the currency, & people’s faith will increase in that currency. If people from all over the world, start believing in economy and currency of a country, then its currency can be established as dominating international currency. Further country should have efficient and uncontrolled financial market, so that it can deal with the economic fluctuations. Country also has to open its economy and currency for outside world, so that outsider can use that country’s currency in transactions.
The main benefit of international currency to the citizen of that country is that they have low transaction cost and low exchange rate risk. As the most of the international transactions are done in international currency, & this international currency is the local currency of citizen of that country, they will not face exchange rate risk. They also have not to pay transaction cost of converting one currency to another. The benefits of international currency to the nation are benefit of seigniorage and the reputation & power it gets because of international currency. The first cost of the international currency to the nation is that currency may have large fluctuation due to the effect of outsider’s activities, because international currency is held by outsider from all over the world. Second cost is that because of over demand of currency, its value may rise against other currency, & this can negatively affect the trade. Third cost is that because of international currency, nation has to make it policy after measuring its affect on international financial market.
The next important thing to understand is that if Dollar can be replaced by other currency for performing the role of international currency. The debate has started that whether the Euro or Chinese Renminbi can replace the dollar. From the literature and data statistics, it can be concluded that still US Dollar dominates in every aspect of international currency. As Christian Thimann (2009), after analyzing the all aspects of global currency, has given 88.8 points to US Dollar and 38.7 points to Euro. All other currencies scored much less than this. So, it can be concluded that US Dollar still dominates the world as international currency. But the influence of Euro in European countries and Chinese Renminbi in Asian region is continuously increasing. So it is more likely that US Dollar will remain the world most powerful currency. But in Europe region, Euro is more likely to be intensively used in place of US Dollar in future. In Asian region, as the China’s trade relation will increase with Asian countries, there is chance that Chinese Renminbi will become the dominate currency in Asia, and influence of US Dollar will reduce in Asia. In extreme case, the world may be divided in different groups (Dollar area, Euro area, Renminbi area etc.) on currency basis. This can happen because currently nations are trying to increase the local region trade by making regional trade groups, in place of increasing international trade on world level.
Aubion, Marc (2012). Use of Currencies in International Trade: Any Changes in the Picture?. World Trade Organization, Staff Working Paper ERSD-2012-10.
Bliner, Alan S. (1996). Role of the Dollar as an International Currency. Eastern Economic Journal, Vol. 22, No. 2, PP. 127-136.
Campanella, Miriam (2014). The Internationalization of the Renminbi and the Rise of a Multipollar Currency System. ECIPE Working Paper No. 1/2014.
Chinn, Menzie D. & Frankel, Jeffrey A. (2007). Will the Euro Eventually Surpass the Dollar as International Reserve Currency?. The University of Chicago Press, 2007, pp. 285-323.
Chinn, Menzie D. & Frankel, Jeffrey A. (2008). The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency. NBER Working Paper No. 13909, April 2008.
Cohen, Benjamin J. (2009). The Future of Reserve Currencies. International Monetary Fund, Finance & Development, September 2009, PP. 26-29.
Cohen, Benjamin J. (2012). The Benefits and Costs of an International Currency: Getting the Calculus Right. Open Economies Review, Vol. 23, No. 1, PP. 13-31.
Doyle, Brian M. (2000). Here, Dollars, Dollars…Estimating Currency Demand and Worldwide Currency Substitution. Federal Reserve Bank of US, International Finance Discussion Papers No. 657, January 2000.
Dwyer Jr., Gerald P. & Lothian, James R. (2002). International Money and Common Currencies in Historical Perspective. Federal Reserve Bank of Atlanta, May 2002.
Eichengreen, Barry (2014). International Currencies Past, Present and Future: Two Views from Economic History. Bank of Korea Working Paper No.2014-31.
Goldberg, Linda & Tille, Cedric (2006). The International Role of the Dollar and Trade Balance Adjustment. Group of Thirty, Occasional Paper No. 71.
Krugman, Paul R. (1984). The International Role of the Dollar: Theory and Prospect. John F. O. Bilson and Richard C. Marston, eds., Exchange Rate Theory and Practice, University of Chicago Press, pp. 261-278.
Merki, Emily (2015). Why the Dollar Should no Longer be the World Reserve Currency: Solving Global Account Imbalances through Structural Reform. Georgetown Journal of International Law, Vol. 46, PP. 1245-1273.
Mundell, Robert (1999). The Euro: How Important?. Cato Journal, Vol. 18, No. 3, PP. 441-444.
Papaioannou, Elias & Portes, Richard (2008). Costs and benefits of running an international currency. European Commission, Economic Paper No. 348, November 2008.
Ranjan, Rajiv & Prakash, Anand (2010). Internationalisation of Currency: The Case of the Indian Rupee and Chinese Renminbi. RBI Staff Studies No. 3/2010.
Rogoff, Kenneth (2001). Why Not a Global Currency?. American Economic Association Papers and Proceedings, Vol. 91, No. 2, PP. 243-247.
Schulmeister, Stephen (2000). Globalization without Global Money: The Double Role of the Dollar as National Currency and World Currency. Journal of Post Keynesian Economics, Vol. 22, No. 3, PP. 365-395.
Sharan, Vyuptakesh (2012). Developments in International Monetary System. International Financial Management, 6th Edition, PHI Learning Pvt. Ltd., New Delhi, PP. 42-66.
Thimann, Christian (2009), Global Roles of Currencies. European Central Bank, Working Paper Series No. 1031, March 2009.
www.bis.org (Bank for international settlement, Triennial Survey Data, 2013).
