International Currencies. Past, Present, and Future

Term Paper, 2014
26 Pages, Grade: 9 out of 10



1. History of International Currencies

2. Purpose of International Currencies

3. Types and Useage

4. Costs and Benefits

5. Alternative Currencies

6. Future of International Currencies

History of International Currencies

- “In our modern myopia, we usually forget that a world of separate national monies was not the primeval economic garden from which we evolved.” (Zevin 1992, 46)

Carlo Cipolla has noted that monetary sovereignty is actually a very recent thing. “As late as the nineteenth century no western state enjoyed a complete monetary sovereignty In previous centuries ... the basic tenet of monetary organization [was] that foreign coins had the same rights as national coins and that they could freely come in and freely circulate without any particular limitation” (1967, 14). Essentially we have been living in the world of international currencies since 5th century B.C. and also have had currency competition in ones territory throughout the Middle ages, until around 19th century, when national states created sole legal tender laws for asserting power over creation and management of money for policy reasons, thus limiting foreign currency competition in its territory.

The first genuinely international currency
- silver drachma of Athens (5th century B.C.E)

The "dollar of the Middle ges“
- Byzantine gold solidus (4th century)

New generation of international currencies
- golden florin of Florence (1252)
- golden ducat (1284)

The first international currency, the silver drachma of Athens, established itself around 5th century B.C.E. According to Benjamin Cohen (1998, 29) it circulated widely and was imitated long after the influence of Athens itself had faded and the Roman Empire came present. The reason was that the denarius was frequently debased and thus considered suspect, while the drachma (Groseclose 1976, 21), by the purity of its standard, kept alive the institutions of commerce and was also used in trade with India.

After the fall of the Roman Empire Byzantine gold solidus became the premier international currency. Dubbed as the "dollar of the Middle Ages" by Robert Lopez (1951). It circulated from Sri Lanka to the Baltic (Groseclose 1976, 49) and according to one 6th century monk "…is accepted anywhere from end to end of the earth. It is admired by all men and in all kingdoms, because no kingdom has a currency that can be compared to it" (Lopez 1951, 209; Cipolla 1967, 16).

The Renaissance ushered in a new era of international currencies. Golden florin of Florence, first issued in 1252, was dominant for nearly a century, until the great European crisis triggered by the Black Death of the 1340s (Cipolla 1989) and was then overtaken by the golden ducat of Venice in international exchange.

Following colonization of the New World

- Spanish-Mexican silver peso (1535)
- Maria Theresa thaler (1751)

The era of territorial money (19th century) - the Westphalian model

- Pound sterling
- US dollar

After the colonization of the New World, the Spanish-Mexican silver peso arose to dominance as nearly all additions to the world's silver supplies came from Spanish America, particularly from Mexico. Pesos circulated widely throughout not only the Western Hemisphere but, by way of the Philippines and Goa, much of the Far East as well. For the English colonists of North America, they were almost the only coin in use and served as an explicit model for the U.S. Congress when creating US dollars (Cohen 1998, 31). Even as late as 1830, pesos accounted for some 22 percent of the value of all coins in use in the United States (Rolnik and Weber 1986, 187).

Maria Theresa thaler is an example of not conventional international currency. It is a trade coin - money only created to pay for imports and not intended for domestic use. Although being quite unusual, it attained broad circulation and could be found in circulation in parts of Africa and the Arab world until the beginning of 20th century (Pond 1941).

Dominant in the 19th century was Britain's pound sterling, which owes its importance to path dependence. Benjamin Cohen (1998, 31):

With the end of the Napoleonic Wars in 1815, foreigners increasingly found themselves earning large incomes in Britain or in countries making payments to Britain; or alternatively making payments to Britain or to countries earning incomes there. It was only natural that commercial debts would come to be cleared through London and denominated in sterling; and as London's capital exports grew, eventually to overshadow all other financial centers, network externalities made the pound more appealing as a longer-term store of value as well. Especially after 1860, even as much of the developed world moved toward consolidation of a global gold standard, sterling gained acceptance nearly everywhere for both transactions and investment purposes.

As A.C.L Day notes (1954, 16), it is a case of network externalities, strength of sterling attracted more strength and more importance, a fact also aided by colonial expansion of the British Empire.

During 1850s US started minting its own currency - dollar. A lot of different currencies circulated in US until 1861, but then the dollar became the country's sole legal tender, later standardized with the creation of the FED in 20th century (Cohen 1998, 34). The reasons why dollar overtook sterling lay mostly in the world-wars period of 20th century, when US was a creditor to Britain and others, accumulating gold reserves in the process and besides US was left relatively untouched from war casualties, helping them to maintain and grow their production capabilities.

Types and Useage

- Currency types by FX rate regimes
- Exchange arrangement with no separate legal tender
- Currency board arrangement
- Conventional pegged arrangement
- Pegged exchange rate within horizontal bands
- Crawling peg
- Crawling band
- Managed floating with no pre-announced path for the exchange rate
- Independently floating

Types and Useage

Currency Distribution in Foreign Exchange Transactions

Abbildung in dieser Leseprobe nicht enthalten

Source: Bank of International Settlement (BIS), Triennial Bank Survey, 2010

Types and Useage

- Mediums of Exchange
- Foreign exchange trading, trade settlement
- Interventions
- Store of value
- Investments
- Reserves
- Unit of account
- Trade invoicing
- Anchor currency

Costs and Benefits of International Currencies

- Benefits for the issuer:
- Lowering transaction costs
- Seigniorage
- Macroeconomic flexibility
- Leverage
- Enhancing reputation
- Disadvantages for the issuer:
- Appreciation of the currency
- Macroeconomic vulnerability
- Policy responsibility

There are a number of benefits for countries - issuers of international currencies. First of all, lowering transaction costs boosts profits in the banking sector because it becomes easier for companies and banks to create liabilities abroad; moreover, there may be additional bank commissions charged for an increased volume of transactions. What is more, businesses can expand abroad and operate in their home currency, thus lowering exchange risk. Secondly, issuance of international money gives countries an advantage of seigniorage from foreign accumulations of cash (given the fact that cash represents 0-interest loan to the issuing country) and from foreign accumulation of financial claims. Another advantage is macroeconomic flexibility: the country has the ability to finance its payments deficits with its own money, so it can easier achieve public spending objectives. One possible advantage for issuers of international currencies is leverage in the meaning of influence on other countries through control of access to financial resources. (Cohen, 2012, pp. 14-16). As Chey demonstrates (Chey 2012, p. 66), enhancing reputation may be considered another overall use of a currency can promote the issuer’s reputation (soft power).

Otherwise, there are risks associated with issuance of an international currency. Firstly, increased foreign demand can cause exchange rate appreciation, what can worsen the position of exporters of goods and services.


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International Currencies. Past, Present, and Future
International Financial Markets
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international, currencies, past, present, future
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Evgeny Nosenko (Author), 2014, International Currencies. Past, Present, and Future, Munich, GRIN Verlag,


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