International Currency (Part 1)

Today USD is considered as an international currency. However this was not always the case.

Older International currency
1. Denarius (silver coins issued by the Roman Empire) First stuck in 211 BC was in trade till 275 AD. The coin weighed 4.5 gms in silver. The legions of Rome provide stability and its widespread empire provided liquidity/acceptability to these coins. Its influence went beyond the borders of the Roman Empire and even today many Islamic country use the word Dinar for their currency.

2. Ducat: it weighed about 3.5gms of gold and was issued by Venice in 1140 AD. Till the time Venice was the center of trade, Ducat remained the measure of gold and wealth. Even in Merchant of Venice (Shakespeare), the loan was given in Ducats. Mediterranean has always been the center of exchange of goods between Asia, Africa and Europe. Since Venetian Galleys ruled the water there the currency was widely accepted.

3. Soon after the discovery of the New Worlds and the Passage to Asia via Cape of Good Hope Italy’s influence in the world trade declined. The center of international trade and finance shifted to Spain and then Finally to England (because of its widespread colonies). Pound Sterling hence became the currency of choice. All other currency were pegged against Gold or this currency.

4. Dollar: Dollar’s rise to supremacy was not smooth. Early dollars were issued by the merchant bank (and not the US Government) Hence it was not uncommon for an individual owning 10-15 different issues of dollars each valid in different states. Even after the Civil War when US government started issuing dollar, the currency initially failed. Till 1932 there were 2 dollar the Green paper (fiat money) and the Gold Coin. The exchange price of the two were determined on the basis of gold prices. It was only after the World War 1, when the European government owed US huge sums of money that Dollar Supremacy was established. The Fact that Fort Knox had at one time almost half the known bullion in the world further strengthened US Dollar’s position as the international currency of choice.

 

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4 thoughts on “International Currency (Part 1)

  1. Pingback: Problems of a Universal Currency: Globos (part 2) « ENagar

  2. I am posting this comment because I ended up reading your second post on universal currency. Pardon my ignorance about economics, but I was wondering – won’t a global currency usage cause undue inflation? With countries having different currencies, the prices are in check, because the government wouldn’t want their currency to lose value in the international market, right? If every country had the same currency, then prices would keep increasing forever… or not? What am I missing?
    (Of course, we can leave Zimbabwe out of this picture because that country’s economy needs to be formatted and reinstalled).

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  3. if you get time, do read this post
    https://enagar.com/2008/02/23/spain-too-much-wealth-is-a-problem/#comments

    it has less of economics and more of history….

    inflation is the depletion of the storage power of money over time.
    the main causes of inflation are:
    1. demand supply mismatch
    2. money supply
    3. expectations of the people (all long term contracts have some inflation expectations build into them)

    now the 3rd which contributes to 90% of the inflation under normal circumstances, should not be effected due to global currency.
    the first point will also be less prominent because currency creates trade barriers (read the second part of the post). which increases the chances of creating local supply demand imbalance…
    trade happens because u could source cheaper. hence essentially removal of trade barriers will facilitate in bringing the prices of goods and services down.

    now the second point… all countries try to enforce a fiscal discipline. EU has put caps on the fiscal deficits that its members can have and also on the amount of currency they can print. Since a high fiscal deficit in USA will now effect China… the system (if efficiently administered) will introduce tighter monetary policies and hence reduce inflation.

    BTW there is no such thing as high inflation being bad or low inflation being good…. what is important is that inflation should be constant…. and at par with the expectations of the Central bank and the population at large.

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  4. Pingback: Bitcoins will fail | eNagar

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