Matthias Morys: The Rise and Fall of World Reserve Currencies since 1870

2017-04-17 IMI

The Minutes of Macro-Finance Salon (No.54) are based on the speech delivered by Matthias Morys. Matthias Morys, Senior Lecturer in Economic History, Department of Economics and Related Studies, University of York 12 April. 2017, Beijing There is little possibility for one currency to take monopoly -US dollar played a hegemonic role during 1960s-1998; later it was challenged by the rising Euro. After the breakout of Eurozone crisis, long-term viability of euro area remains unclear, which makes Renminbi a more serious competitor, given the growing weight of China in terms of GDP and trade and internationalisation strategy of People’s Bank of China since 2009. -The network externalities are not strong enough to ensure monopoly or oligopoly before WWI and duopoly in the interwar period. -Multiple currencies can co-exist with each other. One currency’s rising doesn’t necessarily mean another currency being crowded out. How quickly does overtaking take place? -Seen from history, currency overtaking can take long. US overtook Britain in the 1870s in terms of GDP (Maddison 2009) but USD replaced GBP only in 1960s (Triffin 1960). -In the presence of strong network externalities, it is not easy for one currency to overtake an incumbent dominate currency. -USD overtook GBP within a decade: 1914-1924, yet this might be owed to idiosyncratic factors. Reasons that the US dollar to overtake the British pound within a decade -USD rises from close to 0% in 1913 to > 50% in 1928; the US is the only major economy to stay effectively out of WWI; US does not abandon gold standard in 1914. -UK delays return to gold until 1925 in the face of economic problems and public resistance. UK public discussion shows interconnectedness of 1) return to gold at pre-war exchange rate; 2) status of the City of London as financial capital; 3) status of GBP as reserve currency. -For one currency to dominate the market, the country has to be a strong financial center and a dominating political country. Strategies for a country to promote its own currency -Unrestricted capital account is critical; -Reserve currency and world financial capital tend to go hand in hand; -Pursuit of ‘conservative’ fiscal and monetary policies.

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Matthias Morys: The Rise and Fall of World Reserve Currencies since 1870

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