International Currencies in the Lens of History

Abstract

What makes for an international currency? What explains the predominant use of one or more national units in cross-border transactions? What explains changes in their popularity in absolute terms and relative to rivals? In the second half of the twentieth century, when the US dollar was the world’s international currency par excellence, these questions appeared to have obvious answers. The United States was far and away the largest economy in the world, and it engaged in the largest volume of international transactions. Doing international business in dollars was logical and attractive insofar as the dollar was stable, and the United States had the largest and most liquid financial markets in the world. Finally, the United States had the capacity to project military and diplomatic power. As a country with a strong military, it was less vulnerable to attack from abroad of a sort that can destabilize its finances and economy and undermine confidence in its currency. Other countries held its currency as reserves as a way of signaling their allegiance – equivalently – of offering hostages. But does this same answer to the question of what makes for an international currency – size, stability, liquidity, and ability to project military power – also explain the rise and fall of international currencies earlier in world history? This chapter reviews almost two millennia of international monetary history and concludes that the answer to this further question is, to a surprising extent, yes.