What is a World Currency?

Published by Thomas Herold in Economics

'World Currency' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A world currency refers to the idea of there being a single monetary unit that is accepted the world over by all nations, businesses, and peoples. As of 2017 (and probably for the foreseeable future), there is no true world currency. There have been many ideas put forward for a single currency over the last few decades. Among these are the International Monetary Fund’s SDR Special Drawing Rights and the world’s most popular crypto-currency Bitcoin. Yet despite these creative ideas which do show promise for the medium to longer term future, the only contender for title holder of world currency today is the United States dollar.

The U.S. dollar became the dominant reserve currency of the world, the closest thing to a world currency, following the Second World War. This transpired for two reasons. At the end of World War II, most of the economies of the European continental nations, including Great Britain’s, were largely devastated. The U.S. economy was the only one left standing intact and as such was the largest in the world at that point. The second reason was that the U.S. had by then amassed the largest gold stocks in the world. This was an era where gold still backed global currencies and proved which currencies were the strongest.

For several decades, the U.S. remained the largest unchallenged economy, and so dollars naturally backed by gold were treated as good as gold. This was still the case even after the U.S. abandoned the gold standard in favor of printing limitless quantities of dollars to finance the growth of the world economy ostensibly. The break with the gold standard did substantially weaken the dollar’s position. As a result of this, President Richard Nixon-orchestrated event from 1972, several other world currency challengers gradually arose to threaten the dollar’s global dominance.

These were the euro and the Japanese yen. Thanks to their steady development, they have become regional settlement currencies used in European spheres and increasingly in Asian trade, respectively. It is true the American dollar is still the biggest reserve currency in the globe. Yet it has significantly depreciated (versus gold especially) in the last forty-five years since the country chose to abandon the Breton Woods Agreement at the same time as the euro and yen have grown. In fact it is no accident that the three largest economies or economic blocks also boast the three most powerful currencies which dominate the three spheres of the world economy (Americas, Europe, and Asia).

The world currency situation has further shifted away from exclusive settlement in U.S. dollars because of the growth and multiplication of Forex cross currency pairs. New currency pairs such as AUD/JPY (Australian dollars versus Japanese yen) make it possible for direct currency trade and settlement without American dollars having to be
involved.

With 185 currencies in the world today, there is no doubt that the dollar remains the most heavily utilized across the globe. As for the other 184 national currencies, the majority of these are only employed within their own national boundaries. While it is true that any of these could in theory take over the role of world currency from the dollar, it is also unlikely that any of them will for some time.

There are several reasons why this is the case. The main one is that the U.S. dollar remains the most powerful world currency. It is not just the domineering size of the U.S. economy as compared to its rivals. Fully more than a third of all the world’s economic output derives from nations which either use the dollar or have pegged their own national currencies to the value of the dollar. This results from not only the seven countries which have adopted the U.S. dollar, but another 89 nations that maintain their own national currencies within a tight trading range against the value of the dollar.

Another statistic that underpins the dollar is the fact that over 85 percent of all Forex trading and transactions are connected with the American dollar. Add to this the fact that 39 percent of all debt in the world is dollar currency-issued, and it becomes clear why so many foreign banks require huge amounts of dollars to conduct business operations. This is true even in their own home markets overseas.

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The term 'World Currency' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.