Barry Eichengreen on How Global Currencies Work

At first glance, the modern history of the global economic system seems to support the long-held view that the leading world power’s currency—the British pound, the U.S. dollar, and perhaps someday the Chinese yuan—invariably dominates international trade and finance. In How Global Currencies Work, three noted economists provide a reassessment of this history and the theories behind the conventional wisdom. Read on to learn more about the two views of global currencies, changes in international monetary leadership, and more.

Your title refers to “two views” of global currencies. Can you explain?
We distinguish the “old view” and the “new view”—you can probably infer from the terminology to which view we personally incline. In the old view, one currency will tend dominate as the vehicle for cross-border transactions at any point in time. In the past it was the British pound; more recently it has been the U.S. dollar; and in the future it may be the Chinese renminbi, these being the currencies of the leading international economies of the nineteenth, twentieth, and twenty first centuries. The argument, grounded largely in theory, is that a single currency has tended to dominate, or will dominate, because it pays for investors and producers when engaging in cross-border transactions; specifically, it pays for them to do cross-border business in the same currency as their partners and competitors. This pattern reflects the convenience value of conformity—it reflects what economists refer to as “network externalities.” In this view, it pays to quote the prices of one’s exports in the same units in which they are quoted by other exporters; this makes it easy for customers to compare prices, enabling a newly competitive producer to break into international markets. It pays to denominate bonds marketed to foreign investors in the same currency as other international bonds, in this case to make it easier for investors to compare yields and maximize the demand for the bonds in question.

In what we call the new view, on the other hand, several national currencies can coexist—they can play consequential international roles at the same point in time. In the modern world, it is argued, network externalities are not all that strong. For one thing, interchangeability costs are low as a result of modern financial technology. The existence of deep and liquid markets allows investors and exporters to do business in a variety of different currencies and switch all but effortlessly between them—to sell one currency for another at negligible cost. The existence of hedging instruments allows those investors to insure themselves against financial risks—specifically, against the risk that prices will move in unexpected ways. Prices denominated in different currencies are easy to compare, since everyone now carries a currency converter in his or her pocket, in the form of a smartphone. These observations point to the conclusion, which is compelling in our view, that several national currencies can simultaneously serve as units of account, means of payment and stores of value for individuals, firms and governments engaged in cross-border transactions.

In our book we provide several kinds of evidence supporting the relevance of the new view, not just today but in the past as well. We suggest that the old view is an inaccurate characterization of not just the current state of affairs but, in fact, of the last century and more of international monetary history.

What exactly motivated you to write this book?
We were worried by the extent to which the old view, which pointed to a battle to the death for international monetary supremacy between the dollar and the renminbi, continues to dominate scholarly analysis and popular discourse. This misapprehension gives rise to concerns that we think are misplaced, and to policy recommendations that we think are misguided. Renminbi internationalization, the technical name for policies intended to foster use of China’s currency in cross-border transactions not just within China itself but among third countries as well, is not in fact an existential threat to the dollar’s international role. To the contrary, it is entirely consistent with continued international use of the greenback, or so our evidence suggests.

In addition, making a convincing case for the new view requires marshaling historical, institutional and statistical material and analyzing the better part of a century. We though this extensive body of evidence cried out for a book-length treatment.

To what revisions of received historical wisdom does your analysis point?
We use that historical, institutional and statistical analysis to show that the old view of single-currency dominance is inaccurate not just for today but also as a description of the situation in the first half of the twentieth century and even in the final decades of the nineteenth. In the 1920s and 1930s, the pound sterling and the dollar both in fact played consequential international roles. Under the pre-World War I gold standard, the same was true of sterling, the French franc and the German mark. Our reassessment of the historical record suggests that the coexistence of multiple international currencies, the state of affairs toward which we are currently moving, is not the exception but in fact the rule. There is nothing unprecedented or anomalous about it.

And, contrary to what is sometimes asserted, we show that there is no necessary association between international currency competition and financial instability. The classical gold standard was a prototypical multiple international and reserve currency system by our reading of the evidence. But, whatever its other defects, the gold standard system was a strikingly stable exchange-rate arrangement.

Finally, we show that, under certain circumstances at least, international monetary and financial leadership can be gained and lost quickly. This is contrary to the conventional wisdom that persistence and inertia are overwhelmingly strong in the monetary domain owing to the prevalence of network effects. It is contrary to the presumption that changes of the guard are relatively rare. It is similarly contrary to the presumption that, once an international currency, always an international currency.

So you argue, contrary to conventional wisdom, that changes in international monetary leadership can occur quickly under certain circumstances.  But what circumstances exactly?
The rising currency has to confront and overcome economic and institutional challenges, while the incumbent has to find it hard to keep up. Consider the case of the U.S. dollar. As late as 1914 the dollar played essentially no international role despite the fact that the U.S. had long since become the single largest economy. This initial position reflected the fact that although the U.S. had many of the economic preconditions in place—not only was it was far and away the largest economy but it was also the the number-one exporter—it lacked the institutional prerequisites. Passage of the Federal Reserve Act in 1913 corrected this deficiency. The founding of the Fed created a lender and liquidity provider of last resort. And the Federal Reserve Act authorized U.S. banks to branch abroad, essentially for the first time. World War I, which disrupted London’s foreign financial relations, meanwhile created an opening, of which the U.S. took full advantage. Over the first post-Fed decade, the greenback quickly rose to international prominence. It came to be widely used internationally, fully matching the role of the incumbent international currency, the British pound sterling, already by the middle of the first post-World War I decade.

The shift to dollar dominance after World War II was equally swift. Again the stage was set by a combination of economic and institutional advances on the side of the rising power and difficulties for the incumbent. The U.S. emerged from World War II significantly strengthened economically, the UK significantly weakened. In terms of institutions, the U.S. responded to the unsettled monetary and financial circumstances of the immediate postwar period with the Marshall Plan and other initiatives extending the country’s international financial reach. The UK meanwhile, was forced to resort to capital controls and stringent financial regulation, which limited sterling’s appeal.

What are the implications of your analysis for the future of the international monetary and financial system?
The implications depend on the policies adopted, prospectively, by the governments and central banks that are the issuers of the potential international currencies. Here we have in mind not just the dollar and the renminbi but also the euro, the Euro Area being the third economy, along with the U.S. and China with the economic scale that is a prerequisite for being able to issue a true international currency. If all three issuers follow sound and stable policies, then there is no reason why their three currencies can’t share the international stage for the foreseeable future—in effect there’s no reason why they can’t share that stage indefinitely. The global economy will be better off with three sources of liquidity, compared to the current status quo where it is all but wholly dependent on one.

In contrast, if one or more of the issuers in question follows erratic policies, investors will flee its currency, since in a world of multiple international and reserve currencies they will have alternatives—they will have somewhere to go. The result could then be sharp changes in exchange rates.  The consequence could be high volatility that would wreak havoc with national and international financial markets. So while a world of multiple international currencies has benefits, it also entails risks. Policy choices—and politics—will determine  whether the risks or benefits dominate in the end.

EichengreenBarry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. His books include Hall of Mirrors, Exorbitant Privilege, Globalizing Capital, and The European Economy since 1945Arnaud Mehl is principal economist at the European Central Bank. Livia Chiţu is an economist at the European Central Bank.

Rachel Schneider & Jonathan Morduch: Why do people make the financial decisions they make?

Deep within the American Dream lies the belief that hard work and steady saving will ensure a comfortable retirement and a Financialbetter life for one’s children. But in a nation experiencing unprecedented prosperity, even for many families who seem to be doing everything right, this ideal is still out of reach. In The Financial Diaries, Jonathan Morduch and Rachel Schneider draw on the groundbreaking U.S. Financial Diaries, which follow the lives of 235 low- and middle-income families as they navigate through a year. Through the Diaries, Morduch and Schneider challenge popular assumptions about how Americans earn, spend, borrow, and save—and they identify the true causes of distress and inequality for many working Americans. Combining hard facts with personal stories, The Financial Diaries presents an unparalleled inside look at the economic stresses of today’s families and offers powerful, fresh ideas for solving them. The authors talk about the book, what was surprising as they conducted their study, and how their findings affect the conversation on inequality in a new Q&A:

Why did you write this book?
We have both spent our careers thinking about households and consumer finance, and our field has reams and reams of descriptive data about what people do—savings rates, the number of overdrafts, the size of their tax refunds. We have lots of financial information but very little of the existing data helped us understand why—why people make the financial decisions they make, and why they get tripped up. So we decided to spend time with a group of families, get to know them very well, and track every dollar they earned, spent, borrowed, and shared over the course of one year. By collecting new and different kinds of information, we were able to understand a lot of the why, and gained a new view of what’s going on in America.

What did you learn about the financial lives of low- and moderate-income families in your year-long study?
We saw that the financial lives of a surprising number of families looks very different from the standard story that most people expect. The first and most prominent thing we saw is how unsteady, how volatile households’ income and expenses were for many. The average family in our study had more than five months a year when income was 25% above or below their average.

That volatility made it hard to budget and save—and it meant that plans were often derailed. How people were doing had less to do with the income they expected to earn in total during the year and more to do with when that income hit paychecks and how predictable that was. Spending emergencies added a layer of complexity. In other words, week-to-week and month-to-month cash flow problems dominated many families’ financial lives. Their main challenges weren’t resisting temptation to overspend in the present, or planning appropriately for the long term but how to make sure they would have enough cash for the needs they knew were coming soon.

The resulting anxiety, frustration, and a sense of financial insecurity affected families that were technically classified as middle class.

How does this tie into the economic anxiety that fueled Trump’s election?
The families we talked to revealed deep anxieties that are part of a broader backdrop for understanding America today. That anxiety is part of what fueled Trump, but it also fueled Bernie Sanders and, to an extent, Hillary Clinton. A broad set of the population feels rightly that the system just isn’t working for them.

For example, we met Becky and Jeremy, a couple with two kids who live in small town Ohio where Trump did well. Jeremy is a mechanic who fixes trucks on commission. Even though he works full-time, the size of his paychecks vary wildly depending on how many trucks come in each day. This volatility in their household income means that while they’re part of the middle class when you look at their annual income, they dipped below the poverty line six months out of the year.

One day we met with Becky, who was deciding whether or not to make their monthly mortgage payment a couple of weeks early. She had enough money on hand, but she was wavering between paying it now so she could rest easy knowing it was taken care of, or holding onto the money because she didn’t know what was going to happen in the next couple weeks, and was afraid she might need the money for something else even more urgent. She was making decisions like this almost every day, which created not only anxiety but a sense of frustration about always feeling on the edge.

Ultimately, Jeremy decided to switch to a lower-paying job with a bigger commute doing the exact same work – but now he’s paid on salary. They opted for stability over mobility. Becky and Jeremy helped us see how the economic anxiety people feel is not only about having enough money, but about the structure of their economic lives and the risk, volatility, and insecurity that have become commonplace in our economy.

One of the most interesting insights from your book is that while these families are struggling, they’re also working really hard and coming up with creative ways to cope. Can you share an example?
Janice, a casino worker in Mississippi, told us about a system she created with multiple bank accounts. She has one bank account close to her she uses for bill paying. But she also has a credit union account where she has part of her paycheck automatically deposited. This bank is an hour away, has inconvenient hours, and when they sent her an ATM card, she cut it in half. She designed a level of inconvenience for that account on purpose, in order to make it harder to spend that money. She told us she will drive the hour to that faraway bank when she has a “really, really need”—an emergency or cost that is big enough that she’ll overcome the barriers she put up on purpose. One month, she went down there because her grandson needed school supplies, which was a “really, really need” for her. The rest of the time, it’s too far away to touch. And that’s exactly how she designed it.

We found so many other examples like this one, where people are trying to create the right mix of structure and flexibility in their financial lives. There’s a tension between the structure that helps you resist temptation and save, and the flexibility you need when life conspires against you. But we don’t have financial products, services, and ideas that are designed around this need and the actual challenges that families are facing. This is why Janice has all these different banks she uses for different purposes—to get that mix of structure and flexibility that traditional financial services do not provide.

How does this tie into the conversation we’ve been having about inequality over the last decade or so?
Income and wealth inequality are real. But those two inequalities of income and assets are hiding this other really important inequality, which is about stability. What we learned in talking to families is that they’re not thinking about income and wealth inequality on a day-to-day basis—they’re worrying about whether they have enough money today, tomorrow, and next week. The problem is akin to what happens in businesses. They might be profitable on their income statement, but they ran out of cash and couldn’t make payroll next week.

This same scenario is happening with the families we met. We saw situations where someone has enough income or is saving over time, but nonetheless, they can’t make ends meet right now. That instability is the hidden inequality that’s missing from our conversation about wealth and income inequality.

How much of this comes down to personal responsibility? Experts like Suze Orman and Dave Ramsey argue you can live on a shoestring if you’re just disciplined. Doesn’t that apply to these families?
The cornerstone of traditional personal finance advice from people like Orman and Ramsey is budgeting and discipline. But you can’t really do that without predictability and control.

We met one woman who is extremely disciplined about her budget, but the volatility of her income kept tripping her up. She is a tax preparer, which means she earns half her income in the first three months of the year. She has a spreadsheet where she runs all her expenses, down to every taxi she thinks she might need to take. She budgets really explicitly and when she spends a little more on food one week, she goes back and looks at her budget, and changes it for the next few weeks to compensate. Her system requires extreme focus and discipline, but it’s still not enough to make her feel financially secure. Traditional personal finance advice just isn’t workable for most families because it doesn’t start with the actual problems that families face.

What can the financial services industry do to better serve low- and moderate-income families?
The financial services industry has a big job in figuring out how to deal with cash flow volatility at the household level, because most of the products they have generated are based on an underlying belief that households have a regular and predictable income. So their challenge is to develop new products and services—and improve existing ones—that are designed to help people manage their ongoing cash flow needs and get the right money at the right time.

There are a few examples of innovative products that are trying to help households meet the challenges of volatility and instability. Even is a new company that helps people smooth out their income by helping them automatically save spikes, or get a short-term “boost” to cover dips. Digit analyzes earning and spending patterns to find times when someone has a little extra on hand and put it aside, again automatically. Propel is looking to make it much easier and faster for people to get access to food stamps when they need them. There are a number of organizations trying to bring savings groups or lending circles, a way of saving and borrowing with friends and family common everywhere in the developing world, to more people in the United States.

There is lots of scope for innovation to meet the needs of households—the biggest challenge is seeing what those needs are, and how different they are from the standard way of thinking about financial lives and problems.

Jonathan Morduch is professor of public policy and economics at the New York University Wagner Graduate School of Public Service. He is the coauthor of Portfolios of the Poor (Princeton) and other books. Rachel Schneider is senior vice president at the Center for Financial Services Innovation, an organization dedicated to improving the financial health of Americans.

Kenneth Rogoff: The Compactness of Big Bills

Today in our blog series by Kenneth Rogoff, author of The Curse of Cash:

From Rachel Maddow of MSNBC, comes a video story marvelously explaining why criminals, tax evaders, and corrupt official so love large denomination notes. Here, an apparently corrupt Nigerian official (who pleads innocence) finds $100s very convenient for stashing cash. The story comes at the top of the show.

I am grateful to Larry Kintisch of Blauvelt NY for drawing my attention to this story. Yes, there is a world of difference between a “less-cash society” as my book argues, and a cash-less society that the cash lobby likes to point to as a scare tactic for maintaining the absurd status quo.

The paperback edition of The Curse of Cash: How Large Denomination Bills Aid Tax Evasion and Crime and Constrain Monetary Policy will be coming out early this summer; now with an analysis of Indian demonetization and other issues that have arisen in the past year.

Read other posts in the series here.

Kenneth Rogoff: India’s Currency Exchange and The Curse of Cash

RogoffToday in our blog series by Kenneth Rogoff, author of The Curse of Cash, Rogoff discusses the controversy over India’s currency exchange. Read other posts in the series here.

On the same day that the United States was carrying out its 2016 presidential election, India’s Prime Minister, Narendra Modi, announced on national TV that the country’s two highest-denomination notes, the 500 and 1000 rupee (worth roughly $7.50 and $15.00) would no longer be legal tender by midnight that night, and that citizens would have until the end of the year to surrender their notes for new ones. His stated aim was to fight “black money”: cash used for tax evasion, crime, terror, and corruption. It was a bold, audacious move to radically alter the mindset of an economy where less than 2% of citizens pay income tax, and where official corruption is endemic.


Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely. A central theme of the book is that whereas advanced country citizens still use cash extensively (amounting to about 10% of the value of all transactions in the United States), the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts. Moreover, most of this cash is held in the form of large denomination notes such as the US $100 that are increasingly unimportant in legal, tax-compliant transactions. Ninety-five percent of Americans never hold $100s, yet for every man, woman and child there are 34 of them. Paper currency is also a key driver of illegal immigration and corruption. The European Central Bank recently began phasing out the 500 euro mega-note over these concerns, partly because of the terrorist attacks in Paris.


On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. For example this is how the European swapped out legacy national currencies (e.g the deutschmark and the French franc) during the introduction of the physical euro fifteen years ago. India has given people 50 days, and the notes are of very limited use in the meantime. The idea of taking big notes out of circulation at short notice is hardly new, it was done in Europe after World War II for example, but as a peacetime move it is extremely radical. Back in the 1970s, James Henry suggested an idea like this for the United States (see my October 26 new blog on his early approach to the big bills problem). Here is what I say there about doing a fast swap for the United States instead of the very gradual one I recommend:

 “(A very fast) swap plan absolutely merits serious discussion, but there might be significant problems even if the government only handed out small bills for the old big bills. First, there are formidable logistical problems to doing anything quickly, since at least 40% of U.S. currency is held overseas. Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime. Foreign dollar holders especially would feel this way. Finally, any exchange at short notice would be extremely unfair to people who acquired their big bills completely legally but might not keep tabs on the news.

In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences. One idea, detailed in The Curse of Cash, is to allow people to exchange their expiring large bills relatively conveniently for the first few years (still subject to standard anti-money-laundering reporting requirements), then over time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements.

Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes.


The idea in The Curse of Cash of eliminating large notes and not replacing them is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion. In the United States, the poor do not really rely heavily on $100 bills (virtually no one in the legal economy does) and as long as smaller bills are around, the phase out of large notes should not be too much of a problem, However, the phaseout of large notes is golden opportunity to advance financial inclusion, in the first instance by giving low income individuals access to free basic debt accounts. The government could use these accounts to make transfers, which would in turn be a major cost saving measure. But in the US, only 8% of the population is unbanked. In Colombia, the number is closer to 50% and, by some accounts, it is near 90% in India. Indeed, the 500 rupee note in India is like the $10 or $20 bill in the US and is widely used by all classes, so India’s maneuver is radically different than my plan. (That said, I appreciate that the challenges are both different and greater, and the long-run potential upside also much higher.)

Indeed, developing countries share some of the same problems and the corruption and counterfeiting problem is often worse. Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi’s idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid. And replacing notes is also a good way to fight counterfeiting—as The Curse of Cash explains, it is a constant struggle for governments to stay ahead of counterfeiters, as for example in the case of the infamous North Korean $100 supernote.

Will Modi’s plan work? Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.


In The Curse of Cash, I argue that it will likely be necessary to have a physical currency into the far distant future, but that society should try to better calibrate the use of cash. What is happening in India is an extremely ambitious step in that direction, of a staggering scale that is immediately affecting 1.2 billion people. The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts.

Find Kenneth Rogoff on Twitter: @krogoff