Jockeying for Position

Jockeying for Position Finance & Development, December 2017, Vol. 54, No. 4

Barry Eichengreen, Arnaud Mehl, and Livia Chiţu

How Global Currencies Work: Past, Present, and Future

Princeton University Press, Princeton, NJ, 2017, 272 pp., $39.50

The status of a key currency—one used in international trade and bond issuance and held in official reserves—is more contestable and fluid than most think. So argue Barry Eichengreen, Arnaud Mehl, and Livia Chiţu in a readable and timely book. Their argument generalizes previous research by Eichengreen and Marc Flandreau showing that the dollar caught up with the pound sterling in the 1920s, only to fall behind again in the 1930s.

The book begins with a history of 19th century foreign exchange reserves before describing the founding of the Federal Reserve—or “Fed,” as the US central bank is usually called—and the interwar sterling-dollar rivalry. It then analyzes the key roles major currencies can play: trade financing and denominating bonds during the 20th century interwar period and serving as official foreign reserves after World War II. Currency chronicles follow: the retreat of the United Kingdom’s pound sterling, the Japanese yen’s rise and fall, the euro playing second fiddle, and the prospects for the Chinese renminbi.

The authors take issue with theorists who say that network effects (a currency, like a language, is handier the more people use it) and inertia (in this case, incumbency of a given currency) lead to a winner-take-all race. Instead, national policies to develop markets made a difference, they say. Through large-scale purchases, the Fed promoted dollar IOUs to finance US exports and imports, thereby reducing US dependence on sterling IOUs. They should note, however, that the Federal Reserve Act of 1913 spared such IOUs costly reserve requirements that, in effect, amounted to a 0.5 percent tax. Eurodollars (dollar deposits at banks outside the United States and beyond the Fed’s requirements) enjoyed a similar competitive edge later in the 1950s.

In analyzing currency choices for foreign exchange reserves, the authors face a methodological question: how to measure a...