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Global Currencies

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I've recently read and reviewed a book from Princeton University Press entitled HOW GLOBAL CURRENCIES WORK, by Barry Eichengreen, Arnaud Mehlm and Livia Chitu.

Two of those authors are affiliated with the European Central Bank.

I won't discuss here the main thesis of the book, which I summarized with my usual panache in my review for AllAboutAlpha.

Instead, I'll take up a subsidiary point: the role of the Japanese yen on the world scene. There was a time when Japan was seen as the rising economic superpower. If through the 1970s and 1980s, a random individual of average intelligence and just slightly above average interest in following the world's financial news had been asked, "Is the US dollar going to remain the world's central currency for a long time yet and, if not, what might be its replacement?" that person's answer might well have been, "no it won't, and the yen will replace it."

But the yen didn't. Nowadays it is obvious the yen won't, and people following that line of thought think of the PRC's renminbi instead.

What happened to the up-and-coming yen? According to one theory, the dollar has a "first mover" or path-dependent advantage, and the yen failed to overcome that advantage.

Path specific theorists like to talk about the QWERTY pattern of keyboards a lot. The argument is this: the keys of early typewriters got stuck easily if the typists were too fast Designers wanted to slow people down, so they adopted a strange random pattern of letters in order to force hunt and peck typing. This design is the QWERTY we know.  The reason for QWERTY no longer exists yet generations of typists learned on the QWERTY, and those who learned it passed it along to the next generation, and so forth. Non-rational though it is, QWERTY will remain with us so long as the costs of staying with it are less than the costs of changing -- and given how far we've come down this "path" of which we are the dependents, that could be a long time yet.

Likewise with the dollar. Nations, companies, and individuals around the world use it as a measure of value. Other currencies and sorts of wealth are measured against it. Many deals are done in dollars because it is the nearest thing to a world currency, and it is considered to be the world currency because so many deals are done in dollars. Since Nixon undermined the Bretton Woods system by closing the gold window, there has been no rational basis for this, but it continues. The US dollar is the QWERTY of currencies.

The Japanese yen was equivalent to one of the alternative keyboard systems that are proposed from time to time. They generally fail. The yen's attempt at dominance likewise failed.

That is a common argument. But Eichengreen et al don't believe it. They see the retreat of the yen from world status as the cause of contingencies in Japan's banking system and politics, matters that could have been otherwise.

More broadly, they do not believe it necessary that only one currency be dominant. Several currencies could share that role. A near future with co-equal status for the dollar, the yuan, and the euro cannot be ruled out on the basis of path dependence or otherwise.

Okay, in that last paragraph I did end up stating the book's thesis, after all.

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