When Currency Empires Fall


I spent the first part of my career as a Currency Strategist in the City of London. One of the nice things about being a currency forecaster is that expectations of you are very low. Moderate success is a great surprise. But there are a few things which are more certain than others.

For example, at any one time, there tends to be a single dominant currency in the financial world, not two or more, just one. Some people believe that while the euro may not topple the dollar, it will at least share the spoils of financial hegemony. History suggests not. In the currency markets the spoils go to the victor, alone, they are not shared. Either the euro succeeds internationally, or it does not. (Which, least I anger my Europhile friends, does not make it a failure, just not an international currency widely accepted outside the euro-area. Many countries have credible, stable, currencies that are not international currencies, such as Canada, the UK, Switzerland, Japan and Sweden.)

In the past, it was worth asking what the spoils are to being an international or reserve currency. Some countries deliberately tried to avoid their currency becoming internationalized, such as post-war Germany. The Bundesbank felt that the more deutschemarks were held outside of Germany, the less control they would have over money supply and monetary conditions. European aspirations for the euro to become the world’s reserve currency are more French than German, more dirigist than dirigisme.

Today, the spoils of reserve currency status are more clearly visible than ever before. If your currency is a reserve currency, you can pay for things by writing cheques, which nobody cashes. You can spend more than you earn to a far greater extent than anyone else. This is exactly what the US has done in recent years. National expenditure has exceeded national income by more than 20% over the last five years.



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